* EU and Israel at odds over scientific research programme
* Relations at their most fractious in years, diplomats say
* EU to spend 70 billion euros on research between 2014-2020
By Luke Baker
BRUSSELS, Nov 6 (Reuters) - As Israel looks warily west inthe hope that the United States has its back in any conflictwith Iran, it might do well to glance north and consider itsrelations with Europe too.
Over the past four years, ties between the European Unionand Israel have grown increasingly fractious, with Brusselsseldom missing an opportunity to lambaste Benjamin Netanyahu'sgovernment for building settlements on occupied Palestinian landand restricting access to large portions of the West Bank.
In a series of statements since June 2009, soon afterNetanyahu came to power and settlement expansion began, EUforeign ministers have steadily sharpened their tone, leading tothe publication in July this year of strict new rules on how EUfunds can be distributed to Israeli organisations.
The funding guidelines, which effectively ban EU money beingallotted to Israeli research institutes and other entities thathave operations in the West Bank and East Jerusalem, are asource of great aggravation to Israel.
From Europe's point of view, they merely put down on paperwhat has been a long-held position: that the occupation ofPalestinian land is illegal under international law and EUgovernments don't want to finance activities there.
Either way, it has brought relations to a tense pass, one ofthe worst periods diplomats can recall in the past decade, andthe situation may well get worse.
"There has been a steady downward trend in relations,although perhaps not as bad as sometimes portrayed in theIsraeli media," said Mattia Toaldo, a specialist on Israel andthe Middle East at the European Council on Foreign Relations.
"The guidelines are part of a political trend that has beenpart of EU policy since the 1970s but has become more explicitsince 2009, and has been stepped up since last December."
While the EU, which provides more than 450 million euros ayear to the Palestinians, is regarded by Israel as a lesssubstantial ally than the United States, it still matters agreat deal, especially in terms of trade and investment.
The EU is Israel's largest trading partner, supplying nearly35 percent of Israel's imports, the largest share, while morethan a quarter of its exports go to the EU.
In 2000, the EU granted the country preferential tradeterms, mainly for agricultural and industrial goods, and therehas been a steady rise in cooperation on scientific research andtechnology too, which is where the guidelines come in.
From next year until the end of the decade, the EU willspend 70 billion euros - 10 billion a year - on scientificresearch and development, a programme called Horizon 2020.
Israel is the only non-EU country invited to take part andwill contribute some of the funding, around 600 million euros.In return, its top-notch scientists and researchers will gainaccess to the wider funding pot, with the expectation that theywill secure far more financing than the country puts in.
And there's the rub. The EU's guidelines proscribe any ofthe money going to entities in the West Bank or East Jerusalem,even though some of the financing ultimately comes from Israel.
"As it stands, we cannot sign Horizon 2020," Deputy ForeignMinister Ze'ev Elkin told Reuters last month. "It would force usto discriminate against our own institutions."
When the guidelines were published in July there waswidespread finger-pointing by Israel over whether the EU hadkept it informed of the plans. Some Israeli officials suggestedthe EU had been less than transparent.
Records show Israel was in fact briefed by the EU five timesbefore the publication, although it had essentially no say inshaping the language drafted by the European Commission.
Since then, senior officials have met in Brussels andJerusalem to try to work out a way of interpreting theguidelines that is acceptable to both sides. There has beenlittle progress so far. Another meeting is due before the end ofthe month to try to strike a deal in time for Horizon 2020 tobegin as planned from January 1, 2014.
While EU and Israeli officials are reasonably hopeful that acompromise can be reached in time, others are not so sure.Toaldo of the European Council on Foreign Relations expectsHorizon 2020 to start without Israel, but with the door leftopen for them to join at some point in the coming years.
That would mark a further decline in ties, although not anirreparable break. However, another set of EU proposals, thistime on the labelling of goods made by Israel at factories orfarms on the West Bank, is in the pipeline and is likely to beeven more sensitive for Israel and disruptive to relations.
Asked when rules on labelling would be published, a seniorEU official said: "These are discussions that take some time.They are proceeding and they are rather sensitive ones, so Ithink one can expect that it may take some more time."
In the past, the EU and Israel have always managed to patchup their differences. A similar outcome is likely now - no oneexpects a fundamental breakdown in diplomatic relations.
But the EU, which wants Israel to change policy onsettlement building and loosen restrictions in the West Bank,specifically Area C that makes up 60 percent of the territoryand is controlled by Israeli security, does not appear minded tosoften its approach. It thinks the pressure is working.
Toaldo agrees that the EU's approach is having an impact,whether intentional or not, for example in helping to shunt theIsraelis and Palestinians back to talks. But he also warnsagainst seeing such an attitude as a workable policy.
"I would say one step at a time. You can strain EU-Israelrelations too much and too quickly," he said, adding that whileEurope matters to Israel, the reverse is also true.
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