An internal report by the European Union has come down hard on Israel’s decision to continue settlement construction in occupied East Jerusalem, threatening to end economic projects that involve the Jewish settlements.

The harshly worded 15-page report provides recommendations to the 27 member-states for responding to Israel’s activities in the occupied territories – which the document described as“systematic, deliberate and provocative” – and endorses a strategy that aims at “making it impossible for Jerusalem to become the capital of two states.”

Seven of the report’s 10 recommendations propose slapping tough economic sanctions on organizations directly involved in construction projects in the Jewish settlements, Israeli daily Haaretz reported. The report also called on the EU’s 27 member-states to “prevent, discourage and raise awareness” about doing business with companies that work in the disputed settlement zones.

It advised EU states to work to ensure that products exported from the settlements not receive an unfair advantage through “preferential tariffs,” and to give consumers an opportunity to make an“informed choice” through clear labeling of products’ origins.

The report advocated “closer supervision” of technological research and development programs between the EU and Israel. The measures would work to ensure that “no research grants, scholarships or other technological investments assist settlements, either directly or indirectly,” or be provided to agencies working in the settlements.

Haaretz, which obtained a copy of the report, called the sanctions “particularly severe” compared to earlier EU reports.

The annual report, compiled by EU consuls in Jerusalem and Ramallah, does not require member-states to implement the measures – the document’s recommendations serve as a guidepost for individual EU states in dealing with the ongoing Israeli-Palestinian conflict.

In December, several EU countries, including the UK, France and Sweden, summoned their Israeli ambassadors to voice disapproval of the ongoing construction projects.

Children wave Palestinian flags in front of Israeli security forces as Palestinians set up a new camp to protest against Jewish settlements near the West Bank village of Burin on February 2, 2013. (AFP Photo / Jaafar Ashtiyeh)

Settlement constructions and the two-state solution

The report expressed frustration with Israel for its late-November announcement of new settlement construction projects, shortly after the UN General Assembly voted to recognize Palestine as a non-member observer state – a move strongly condemned by Israel and the US.

The implementation of the Israeli government’s so-called E-1 project “would effectively divide the West Bank into separate northern and southern parts,” the report explained, adding that it would also “prevent Palestinians in East Jerusalem from further urban development and cut off East Jerusalem from the rest of the West Bank.”

Israel is “systematically undermining the Palestinian presence” in East Jerusalem through controversial strategies, including “restrictive zoning and planning, demolitions and evacuations, discriminatory access to religious sites, an inequitable education policy, difficult access to health care, the inadequate provision of resources,” the report said.

Political analysts have said that any attempt to separate East Jerusalem – which the Palestinians declared to be the capital of their future state – from the West Bank, home to some 2 million Palestinians, would effectively terminate any chance of a two-state solution to the decades-old Israeli-Palestinian conflict.

Israel captured East Jerusalem during the 1967 Six-Day War and later annexed the territory; the international community, however, does not recognize the annexation as legitimate.

In January, Israeli Prime Minister Benjamin Netanyahu defended settlement construction in the West Bank, declaring that “Jerusalem will forever be the united capital of our land.”

The Palestinians have refused to participate in peace talks with Netanyahu unless he halts all settlement construction.

• A Permanent Economic Emergency