Justice Minister Tzipi Livni warned on Monday that Israel runs the risk of a European economic boycott if it fails to advance peace talks with the Palestinian Authority.
"You cannot deal only with economic issues and ignore the political issue and the importance of a two-state solution," she told delegates at an accountancy conference in Eilat, according to AFP.
"Europe is boycotting products. And, true, it is starting with the settlements but their problem is with Israel, which is perceived as a colonial state, so it won't only stop with the settlements, but will (reach) Israel as a whole," warned Livni.
Livni was referring to plans by the European Union to start separately labelling products from Jewish communities in Judea, Samaria and eastern Jerusalem.
In February, the EU formally recommended that its 27 member states “prevent” Israeli activity in Judea and Samaria through an economic boycott of Jewish industry in those regions. Tens of thousands of Palestinian Arabs are employed in Jewish-owned industry in the area.
The EU's boycott recommendation came to light in the publication of the EU’s Jerusalem Report 2012, in which the European body recommends that its members avoid financial transactions with Israeli communities in Judea and Samaria.
EU foreign ministers, including Britain’s William Hague and Laurent Fabius of France, have indicated they would back the labeling initiative.
Signatories also included the chief diplomats of Austria, Belgium, Denmark, Finland, Ireland, Luxembourg, Malta, the Netherlands, Portugal, Slovenia and Spain.
Reports in May indicated that the EU had postponed the plans to introduce separate labeling for products from Judea and Samaria after U.S. Secretary of State John Kerry intervened.
The EU rejected the reports, saying that “work on the effective enforcement of EU legislation with regard to the labelling of settlement products has not been delayed. Nor has the EU been asked to postpone such work.”
Livni said Europe did not understand the rationale behind Israeli construction in Judea and Samaria, claiming it was harming Israel's relations with the now 28-member bloc.
"In Israel, most people believe in the two-state solution, but with suitable security arrangements. By contrast there is a group that doesn't believe (in it)... that believes that seizing another hilltop is the way to prevent us from reaching an arrangement," she said, in remarks communicated by a spokesman and quoted by AFP.
"So the political issue is inseparable from both security and the economy," added Livni.
Kerry on Sunday wrapped up four days of intensive talks with Israeli and PA leaders, which ended without visible signs of progress.
Livni, who participated in some of the talks, said Israel needed to help Kerry's effort succeed.
Kerry "cares about what happens here. There are other hotspots in the world, and the U.S. secretary of state is making huge efforts to be here. Our role is to help him,” she claimed.
"There are some who breathed a sigh of relief when he left, as if everything was over. People, we are still here with the problem and we will continue to make efforts to resolve it."