Is the EU getting tough on Israel at last?

If nothing else, the decision by EU foreign ministers in Brussels yesterday to proscribe the military wing of Hezbollah will be welcome to Benjamin Netanyahu. "If Hezbollah isn't a terrorist organisation, I don't know what is..." the Israeli Prime Minister told the EU's High Representative, Baroness Ashton at a recent meeting in Jerusalem.

What's less clear is how far the decision will offset, in Israeli government minds, an unrelated move which was anything but welcome to Netanyahu, but which could, in the long run, mark a more significant turning point in the EU's relations with Israel. New guidelines, aimed at ensuring that EU funding does not go to projects or institutions in Jewish settlements in the occupied West Bank, have met with unremitting rage and hostility on the Israeli right.

And while the pro-settler forces, so well represented in the Netanyahu coalition, may exaggerate the guidelines' impact, they are correct to be worried. For though the guidelines are largely meant to reinforce existing policy, their publication is a start in narrowing the embarrassing gap between rhetoric and reality which has too long hobbled the European approach to the Israeli-Palestinian conflict. By issuing them at all – especially in a period when Washington is laying the basis for negotiations between the two sides, and when there is all too often a taboo on European pronouncements of any kind – the EU reminded Israel that its tolerance for the relentless growth of settlements, illegal in international law, has its limits.

What's more, the EU may even be tentatively, and almost accidentally, groping towards the possibility of a role it has long denied itself. The EU has always had a locus in the conflict – not least but not only the €300m (£260m) a year it provides in direct support to the Palestinian Authority. Its conventional wisdom has long been that because the US has the central role in diplomacy, the EU has none.

The EU guidelines were greeted with immediate protests in Jerusalem that they would obstruct US efforts to bring the two sides together. If anything, the opposite is the case. Despite the progress made by the US State Secretary John Kerry towards "talks about talks", and Netanyahu's decision to yield to a demand that Palestinian President Mahmoud Abbas has been making for more than a decade and release dozens of the Palestinians prisoners who have been languishing in Israeli gaols since before the Oslo Accords 20 years ago, Abbas has been under severe pressure not to join talks that many of his allies, as well as his Palestinian opponents, fear will lead nowhere. All the signs are that the EU guidelines encouraged him to do so – evidence of what Daniel Levy of the European Council of Foreign Relations says has the potential to be a "European role alongside the United States – a division of labour – in the resolution of the Israeli-Palestinian conflict."

The Israeli right claims that if the Palestinians think the EU is going to put its own pressure on Israel, then it has no incentive to negotiate. In fact, the more pressure Palestinians think that the EU is prepared to exert – in accordance, after all, with a half century of European opposition to the occupation and settlement building – the more incentive they have not to alienate their potential European allies by refusing to come to the table.

For this leverage to have a real impact, however, it has to be more than a mere spasm. Moves afoot deep in Brussels, for example, to extend the British regime under which agricultural goods from West Bank Jewish settlements have to be properly labelled in supermarkets have yet to be completed. This has had some success in Britain, where several big chains have stopped stocking such produce as a result. But that should be extended not only across the EU but to wine and manufactured goods. And the EU needs to do more to enforce the EU-Israel treaty provisions which exclude settlement goods from the tariff exemptions applied to goods from Israel proper. All this is without any actual move to ban imports of settlement goods, which an expert opinion by an eminent British QC last year argued would indeed be legal.

But the EU has leverage on Israel too. Although you would not know it from the furious reaction of the Netanyahu coalition last week, nothing in the guidelines would mean a boycott of Israel, or anything like it. If anything, robust efforts by the EU not to support settlement activity would help to fill a space that otherwise stands to be filled by campaigns for just such a boycott.

Many Israelis – perhaps even a majority – can see that a boycott of settlements is not the same as a boycott of Israel. Either way, the chances are that a tougher EU line on settlements has every chance of increasing – rather than reducing – public Israeli interest in a deal with the Palestinians, over time. Yesterday the mass circulation Israeli daily Yedioth Ahronot published an eloquent article ridiculing the outcry against the justified EU guidelines, blaming Netanyahu for "diplomatic inaction" and adding: " How much more writing on the wall does the government need in order to understand the urgent need for a peace arrangement?" The author was not some leftist peacenik, but Dov Weisglass, Ariel Sharon's closest lieutenant throughout his premiership.