The crisis between Israel and the European Union over new economic sanctions against Jewish settlements beyond the Green Line is deepening.

Negotiations between the sides over the last two weeks over the conditions for signing the Horizon 2020 scientific cooperation initiative have all but hit an impasse, after the EU rejected most of Israel's compromise proposals concerning European ban on funding entities in the West Bank settlements.

In July, the European Commission issued new guidelines regarding funding of entities in the West Bank settlements by EU funds. The new guidelines prohibit funds and agencies from giving grants, scholarships, or prizes to Israeli entities in the settlements or to activities in the settlements. In some cases, the guidelines forbid giving loans to Israeli entities that operate directly or indirectly beyond the 1967 lines.

The guidelines also stress that every agreement between Israel and EU has to include a territorial clause that will stipulate that the agreement does not include the settlements in the West Bank, Jerusalem, and Golan Heights. Due to the new guidelines, the agreement on the scientific cooperation initiative Horizon 2020 has become a point of contention between Israel and the EU.

The Horizon 2020 agreement would provide Israeli research institutes and high-tech companies with hundreds of millions of euros in funding over the next several years. If Israel does not sign, the country’s R&D stands to lose about 500 million euros (roughly NIS 2.5 billion) over the period. The Committee of University Heads and the Council for Higher Education’s Budgeting and Planning Committee have expressed great concern over the damage to Israeli academia if the agreement is not signed.

On November 5, Rafi Barak, the outgoing director general of the Foreign Ministry, wrote to Pierre Vimont, the deputy to EU foreign policy chief Catherine Ashton. Barak proposed a compromise that would let the Horizon 2020 agreement be signed, and gave details in a videoconference the next day.

For the first time, the Israeli side said it was willing to accept the EU’s policy “not to transfer money and funding” to the settlements. Israel asked that a provision be added that Israel did not recognize this funding policy as setting permanent borders in the talks between Israel and the Palestinians.

The Israeli side also demanded that the EU’s new guidelines on the settlements not be stated directly in the agreement.

As opposed to the stipulations in the new guidelines, Israel demanded that Israeli agencies seeking EU funding not be required to state that they are not based or do not operate over the Green Line. Instead, Israel asked that Israeli agencies be required to indicate on the application whether they meet all conditions for receiving EU funding.

Israel also asked that the EU not forbid loans to agencies that operate indirectly in the settlements, and proposed the establishment of a mechanism to address the issue of loans.

Senior Foreign Ministry officials said that on Friday, Vimont sent a response to Barak rejecting most of the proposed compromise. For example, the Europeans turned down Israel’s demand to remove the new guidelines on the settlements. The EU wants the agreement to include an “attachment” stating that the agreement’s conditions do not prevent the European Commission from implementing the guidelines on the settlements.

The Foreign Ministry officials said this clause breaches the oral understandings between the sides and constitutes a withdrawal from the positions that the EU stated during the talks.

The EU also rejected Israel’s demand to remove the clause prohibiting the indirect funding of agencies that operate in the settlements. Regarding loans, EU officials said they feared that no way would be found to ensure that EU funds did not eventually reach the settlements. They said the EU was unwilling to back down on the issue.

Foreign Ministry officials, including Deputy Foreign Minister Zeev Elkin, who is responsible for this issue, see this clause as untenable under any circumstances. They say it harms Israeli firms even if they only have branches in the West Bank, such as fuel companies, energy companies and banks.

The EU also demands that Israel’s recognition of its policy on the settlements not just focus on EU funding. The EU now demands Israel’s consent to the following clause:

“In accordance with EU policy this agreement shall not apply to the geographic areas that came under the administration of the state of Israel after 5th of June 1967. This position should not be construed as prejudging Israel’s principled position on this matter. Accordingly the parties agree that the application of this agreement is without prejudice to the status of those areas.”

The EU granted Israel’s demand that Israeli companies not be required to state that they are not located in or do not operate in the settlements. It also accepted Israel’s proposal that Israeli agencies only indicate that they will abide by the grant’s conditions.

The Europeans’ answer stoked anger at the Foreign Ministry. Foreign Ministry officials said they were shocked that the EU was unwilling to compromise, even though Israel had shown flexibility and a willingness to recognize the EU’s policy against funding the settlements.

“The response shows the built-in intransigence of the EU’s bureaucracy in Brussels,” a senior Foreign Ministry official said. “They told us that they wanted to find a solution to the crisis, that Ashton had ordered them to fix it and that they wanted us in the agreement. But then they sent us an answer they knew perfectly well we couldn’t accept.”

Israel has not yet sent an official reply to the Europeans; it has only two weeks to decide whether to sign the Horizon 2020 agreement. The senior Foreign Ministry official said the EU’s answer was unsatisfactory and would not let Israel sign the agreement. “The first impression is that this is not acceptable,” he said.

Israeli officials admit that if Israel does not sign the agreement within a week it could lose European R&D grants for its universities. But senior Foreign Ministry officials say Israel can join later on.

In any case, Jerusalem intends to keep trying to soften the EU stance; it will ask European countries that support its position to put pressure on Brussels. “The game isn’t over yet,” a senior Foreign Ministry official said.