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When Israel’s security cabinet decided to take control of Gaza City, relocate up to a million people, and install a new administration that is “neither Hamas nor the Palestinian Authority,” the world’s reaction was furious.

Germany, once one of Israel’s staunchest defenders in Europe, suspended arms exports that could be used in Gaza.

The UK, Australia, Italy, and New Zealand issued a joint statement warning the plan would “aggravate” a humanitarian crisis already at famine’s edge.

France and Canada joined in condemnation, Turkey called it an attempt to “forcibly displace Palestinians from their own land” and China bluntly stated that “Gaza belongs to the Palestinian people.”

The UN human rights chief warned of “atrocity crimes” if the plan went ahead.

This is no ordinary diplomatic spat.

Israel is on a collision course with its allies — a trajectory with political, economic, and strategic costs that could last decades.

Crossing red lines

The Israeli government’s stated five “principles” for ending the war include disarming Hamas, returning all hostages, demilitarising Gaza, taking security control of the territory, and creating a new civil administration.

But the exclusion of the Palestinian Authority — the internationally recognised representative of the Palestinian people — is a sharp departure from the two-state solution many allies still see as the only viable endgame.

Reports in Israeli media say the first phase will be to take full control of Gaza City, move its residents further south, and occupy refugee camps where hostages may be held.

A second offensive would follow, coupled with an increase in humanitarian aid — after the displacement has already happened.

The scope of the planned relocations and the rejection of both Hamas and the PA make this more than a military manoeuvre; it is a political project to reshape Gaza’s governance entirely on Israel’s terms.

Allies push back — and act

Germany’s suspension of arms exports is not symbolic theatre.

Israel has long depended on European suppliers for advanced components that supplement US-made weaponry.

Chancellor Friedrich Merz has also signalled that Berlin could revisit the EU-Israel Association Agreement — a deal underpinning billions in trade — if the Gaza operation escalates further.

The UK’s prime minister, Keir Starmer, has called the move “wrong” and “likely to bring more bloodshed.”

Australia’s foreign minister Penny Wong warned that it would “worsen the humanitarian catastrophe.”

This is no longer a question of quiet, behind-the-scenes disapproval; it is open political dissent from capitals that have historically defended Israel on the world stage.

Internal dissent: the hostage question

Inside Israel, the decision has fractured opinion.

The Hostages Families Forum, representing relatives of around 20 hostages who are believed to be still alive, called the move “a colossal catastrophe for both the hostages and our soldiers.”

Some military officials have privately echoed these fears, concerned that a full-scale assault on Gaza City will kill the very people the government claims it is trying to rescue.

By pressing ahead, Prime Minister Benjamin Netanyahu risks alienating not only foreign governments but a growing bloc of domestic voices who see the plan as abandoning the hostages for political goals.

The economic reality: a war eating itself

The war is already costing Israel an estimated $67 billion by 2025, according to the Bank of Israel.

Even with a $14.5 billion US aid package, the fiscal strain is enormous.

The economy shrank 5.2 per cent in late 2023, labour shortages cost $600 million a week, and 300,000 reservists pulled from their jobs have added to the drag.

Daily mobilisation costs — salaries, fuel, ammunition — run to around 1 billion NIS (£210 million).

For context, this is equivalent to roughly half of Israel’s pre-war health budget — spent every single week.

And this is before factoring in tourism collapse, reduced shipping through the Red Sea, and spiking energy prices.

Germany’s suspension of arms sales may not cripple Israel militarily overnight, but it signals the potential for broader sanctions or trade restrictions that would magnify the economic pain.

Geopolitical drift: losing the middle ground

While Europe hardens its stance, the US — under President Donald Trump — has been far less critical, saying it is “pretty much up to Israel” whether to fully occupy Gaza.

That gap is itself politically toxic: Washington’s cover might shield Israel at the UN, but it will deepen EU frustration and accelerate moves toward recognising Palestinian statehood.

Historically, allies have broken over prolonged occupations before: the US in Vietnam, the USSR in Afghanistan, NATO over Iraq.

In each case, the longer the war dragged on, the narrower the coalition became — until isolation forced a policy change.

Economic theories in play: war, debt, and reconstruction

From a Keynesian economic perspective, war spending can stimulate an economy — but only if followed by productive investment. Occupation is pure cost; reconstruction can be an investment.

Modern Monetary Theory (MMT) would argue that Israel, as a sovereign currency issuer, can finance the war without immediate revenue — but only at the risk of inflation and currency instability, especially if imports (like fuel and arms) must be paid in foreign currency.

Neoliberal orthodoxy would push for rapid privatisation of any reconstruction effort — an approach that has often led to profiteering, inequality, and further instability, as seen in Iraq post-2003.

Fiscal rule advocates will warn of credit downgrades if debt levels spike — and Israel’s pre-war deficit was already rising.

What resolution would require

A genuine turnaround would mean:

• An immediate ceasefire to stop the displacement and humanitarian collapse.

• A hostage deal — possibly via Qatar or Egypt — to secure releases before further military action.

• Humanitarian corridors with unimpeded access for NGOs, reversing Israel’s recent restrictions.

• Political reintegration of the Palestinian Authority into Gaza’s governance — aligning with allies’ two-state frameworks; and

• An international reconstruction fund — perhaps modelled on the Marshall Plan — to rebuild without bankrupting Israel or deepening Gaza’s dependency.

The risk of becoming a pariah

If Israel pushes ahead, it will gamble that military control of Gaza outweighs the cost of losing parts of its alliance network.

But history suggests otherwise: prolonged occupations tend to bleed treasuries, fracture alliances, and erode legitimacy.

Every step now brings Tel Aviv closer to that point of no return.

As the Hostages Families Forum put it, this is a “colossal catastrophe” in the making.

The question is whether Israel will change course — or plough on until it has alienated not only its allies, but its own people.

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