In 2005, after a year of discussions, Israel and the European Union signed an updated free trade agreement. The main demand by the Europeans was a clause stating customs exemptions do not apply to West Bank and East Jerusalem settlement products.

Ehud Olmert, the industry, trade and labor minister at the time, was not thrilled with that clause. Olmert and former Prime Minister Ariel Sharon realized it was tantamount to Israel formally recognizing that settlements were not part of Israeli territory. In the balance was every free trade agreement between Israel and the EU - agreements that were worth billions of shekels to Israel’s economy. Prioritizing the economic benefit to Israel over the settlements, Olmert signed the agreement.

It is doubtful whether such an agreement would be signed in Israel’s political reality of 2013. It’s hard to imagine Economy Minister Naftali Bennett agreeing to be part of an Israeli government that officially recognizes the settlements are not part of its sovereign territory. Deputy Foreign Minister Zeev Elkin said several times since the start of his term that he wouldn't have signed such an agreement. Most of Likud ministers probably agree with him.

If so far the Europeans demanded such a clause only for customs exemptions, now they have tightened the rules. From now on, the EU will demand that in every agreement, Israel recognize the areas over the Green Line in the West Bank and East Jerusalem are occupied territory. The demand will affect all areas of life for the average Israeli — scientific cooperation, youth exchanges, culture, agriculture, sports, tourism. The list goes on.

The stalled peace process, concern over the future of the two-state solution, and most importantly, the sense that the Israeli government was not truly interested in ending the occupation pushed the EU to turn unwritten rules into official, binding and documented ones. Other similar measures are underway, such as marking settlement products sold in supermarkets and even demanding settlers obtain a visa when traveling to the EU.

The Europeans seek to build a “Great Wall of China” between their relations with the legitimate State of Israel and their relations with the illegal settlement state. They claim that by doing so, they are preempting the slippery slope that could lead to a general boycott against Israeli products in Europe, like the one imposed on South Africa’s apartheid regime.

Bennett, who was interviewed on every possible platform since he returned from China some days ago, claims Israel’s international status has never been better. He dismissed the examples of Israel’s isolation in the world as "concoctions" and the warnings of coming boycotts as mere whining. Bennett is wrong. The EU's move shows how low Israel’s status in Europe has sunk and how dangerous the creeping international isolation is.

“No one on earth is interested in the Palestinian issue,” Bennett said last week in an interview with Army Radio. “What interests the world from Beijing to Washington to Brussels is Israeli high-tech... We have a provincial way of thinking that the world revolves around us, but it revolves around the economy.”

Bennett is right. Israeli technology, Israeli films and Israeli Nobel laureates are very much in demand in the world. And it’s true - the world really does revolve around the economy. That’s precisely why the European Union’s latest move proves that the Israeli government’s settlement policy and the continued occupation are a clear and present danger to the economy.

What will settlement advocates in the government do when it’s time to sign the next agreement to bring European investments, scholarships and grants to Israel? What will Bennett do? What will Tourism Minister Uzi Landau do? What will Culture and Sports Minister Limor Livnat and Communications Minister Gilad Erdan do? We must hope that, like Olmert, they will choose the State of Israel over the state of the settlements.

Open gallery view Protesters in France call for a boycott of Israeli products. Credit: AP