JERUSALEM — Israel's finance minister has warned that the country could be targeted by an economically costly boycott if peace talks with the Palestinians fail, signaling that concerns about growing international isolation have moved center stage in Israel's public discourse.
The minister, Yair Lapid, said the Treasury has examined various threat scenarios. Even in the case of a limited boycott that reduces Israeli exports to the European Union by 20 percent, the damage would amount to about 20 billion shekels ($5.7 billion) in exports annually, he said.
Israel's GDP — just under $260 billion in 2011, according to the World Bank — would lose about $3 billion each year, he said in a speech to a high profile security conference in Tel Aviv late Wednesday.
Responding to Lapid, Intelligence Minister Yuval Steinitz from Prime Minister Benjamin Netanyahu's hard-line Likud Party played down the risks, saying Israel "has the tools to prevent boycotts." He did not elaborate.
Steinitz, a former finance minister, told Israel Radio Thursday that any deal that endangers Israel's security would do far more economic damage than a boycott.
European officials have recently warned that Israel could face deepening economic isolation if it presses forward with the construction of Jewish settlements. A small but growing number of European businesses and pension funds have begun to drop investments or limit trade recently with Israeli firms involved in West Bank settlements.
The European Union is Israel's largest trading partner. Lapid said Israel's economy was more vulnerable than its security and that even a limited boycott would raise the cost of living and lead to a cutback in government services.
Without a diplomatic solution to the conflict, he said Israel could lose major markets in Europe. "When you say to Israelis 'European boycott,' they think it means that this year they won't get Camembert cheese on time ... That is not the case," Lapid said.
"If the negotiations with the Palestinians get stuck or break down and we enter a reality of a European boycott, even a very partial one, Israel's economy will retreat backward and every Israeli citizen will feel it straight in the pocket."
Lapid, who heads the centrist Yesh Atid party, said he was working off a "medium-range scenario" presented by Treasury researchers and refrained from exposing more for fear of providing ammunition to Israel's enemies.
After years of dismissing the boycott threat as a tool of fringe extremists, Israel appears to be genuinely concerned. A high-profile government meeting is expected to take place in the coming days to address the recent European measures.
Steinitz said his office is preparing a campaign "against the boycotts and de-legitimization of Israel" but did not elaborate.
He said a peace deal that does not address Israel's security concerns would pose a greater risk to the economy.
He cited the example of Gaza from which Israel withdrew unilaterally in 2005. Hamas militants overran the territory two year later and it has become a staging ground for rocket attacks against Israel.
"If heaven forbid there will be an agreement without the settlement blocs and the Jordan Valley under our full control and all security arrangements in our hands ... then the danger of fighting, of rockets, of suicide bombers is large and will damage Israel's economy much more," he said.
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The comments come as Israel copes with an increasingly heated domestic debate over whether it should accept U.S. Secretary of State John Kerry's anticipated framework for the terms of a Palestinian state in most of the West Bank, Gaza and east Jerusalem.
Kerry has not revealed his ideas, but is expected to propose an Israeli withdrawal from most of the West Bank and parts of east Jerusalem, coupled with stringent security arrangements to shield Israel against attack.
Mustafa Barghouti, a former Palestinian legislator, praised the boycott efforts.
"It's a very effective way in pressuring the Israeli occupation, because it touches two sensitive points in Israel: the economy and the moral challenge," he said.