BRUSSELS/JERUSALEM/RAMALLAH (EJP) --- EU foreign policy chief Catherine Ashton welcomed this week’s announcement of an Israeli-Palestinian bilateral trade and tax agreement as an essential mechanism to “further improve economic relations between Israel and the Palestinian Authority” (PA).

The agreement, the result of months of private negotiations between Israeli Finance Minister Yuval Steinitz and PA Prime Minister Salam Fayyad, is designed to increase bilateral trade between the two neighbours, whilst strengthening the PA tax system by minimising tax evasion and propping up the PA’s ailing economy.

The accord, which will come into effect on January 1, 2013, was confirmed by Israeli Premier Benjamin Netanyahu who described it as “part of our overall stated policy to support the Palestinian society and to strengthen their economy”. He further expressed hope that one such cooperation might breathe life into suspended peace talks, saying it would “hopefully further our relations with the Palestinians in other areas as well”.

The EU has increasingly appealed to Israel and the international community to offer more financial support to the near-bankrupt Palestinian economy, serving as it does as the PA’s largest individual donor, and Ashton spoke triumphantly Wednesday of having “urged both parties to conclude their discussions on how to improve the mechanisms through which Israel collects certain customs and taxation revenues on behalf of the PA”.

In June, the foreign policy chief addressed a Middle East debate at the European Parliament in Strasbourg, where she spoke of the “precarious state of the PA finances (as) as issue I have been engaged with from the very beginning”, heralding the parliament for “its principled and constructive position with regard to the EU’s budget as I continue to urge countries in the region and others to share the burden and increase their support”.

A World Bank report last week claimed that the Palestinian economy would not be able to sustain the unilateral statehood the PA seeks in its current form, because it is overly-reliant on foreign aid. According to the study’s author, John Nasir, the Palestinian economy has been propped up by billions of dollars worth of foreign aid over the past two decades. “Economic sustainability cannot be based on foreign aid, so it is critical for the PA to increase trade and spur private sector growth,” he advised.

Fayyad, for his part, spoke in measured terms of the initiative saying it would “improve the economic relations between the Palestinian Authority and Israel”.

The EU donates approximately €500 million a year in aid to the PA. The EU is Israel’s principle trading partner, to the value of €20 billion a year.