As Israel and Hamas begin implementing the first phase of a US-brokered Gaza peace deal, new battle lines are drawn — not over territory and ceasefires, but over money and control.
The European Union is expected to pour billions into Gaza’s reconstruction. But much of that will be channelled through the Palestinian Authority (PA), a cash-strapped body lacking in popular support, accused of corruption, and beholden to Israeli restrictions.
Here lies much of the tension. Brussels insists its funding must be tied to sweeping governance reforms such as democratic renewal and greater transparency. As it stands, Palestinian President Mahmoud Abbas has been in power since 2005 and has not called elections in nearly two decades. Yet critics warn that this conditionality risks to only prop up a political order that has been failing Palestine for decades.
The ceasefire itself, meanwhile, only started moving in earnest this week. It follows a 20-point peace plan negotiated by US President Donald Trump and Prime Minister Benjamin Netanyahu. Under its terms, Hamas has agreed to return all remaining hostages in exchange for the release of Palestinian prisoners and Gaza detainees.
The governance of Gaza will shift too: administration of the bombed-out territory will pass to Palestinian technocrats and “international experts,” until the (PA) — the body that exercises limited self-rule in parts of the Israeli-occupied West Bank — completes its reforms. Hamas, which ruled the Gaza Strip until Israel’s 2023 campaign weakened its grip, will have no formal rule.
The EU already plays a significant role in sustaining Palestinian institutions, particularly the PA, and — despite being virtually absent from the US-led peace deal — the EU is positioning itself as a major player in the construction phase.
In a press release ahead of the summit in Egypt on Monday, European Council President António Costa expressed the bloc’s commitment. In other words, the wallets are open, even if the strategy remains unclear.
The need is clear: estimates by the United Nations suggest some 83% of structures in Gaza are damaged or destroyed. Healthcare, water, sanitation and hygiene systems have collapsed, and UN-backed experts say there is famine in Gaza City.
Yet the PA — still the likely channel for much of European aid — stands on shaky legs. Expanding Israeli settlements, surging violence in the West Bank, and Israeli-imposed funding cuts have deepened its financial and political crisis. That fragility could severely undercut any EU-led reconstruction efforts.
How EU money reaches Palestine
EU support is primarily channelled through the Neighbourhood and Development Cooperation Instrument, its main financing instrument for Palestine in force until 2027. In terms of foreign aid, the EU is the largest donor to Palestinians, trailed by the US.
Much of this support flows directly to the PA through PEGASE, a financing mechanism that helps cover salaries and pensions of civil servants in the West Bank. Additional funds fill fiscal gaps, supports infrastructure, education and governance reform, or are disbursed as loans through the European Investment Bank.
The EU also funds humanitarian operations. Since 7 October, it has given over €1 billion in aid via agencies like UNWRA. Another 1.6-billion package, allotted for 2025-2027, splits funding between direct budget support for the PA and other projects in Gaza and the West Bank, when conditions on the ground allow.
In return for funding the PA, Brussels demands reforms: greater transparency, institutional modernisation, stronger rule of law, an overhauled social security system, and fighting corruption.
For the EU, these requirements aren't merely technical. As Ghassan Khatib, a Palestinian politician, said: the EU sees its role as helping to “support state institutions” and “develop the state apparatus in Palestine.”
Brussels also believes that a reformed PA would carry more diplomatic weight. “We want them to reform themselves,” Dubravka Šuica, European Commissioner for Mediterranean, told Reuters back in April. “Because without reforming, they won't be strong enough and credible in order to be an interlocutor — not only for us, but also for Israel.”
But critics argue this approach misreads political reality. By linking funding to state-building under current conditions, they say, the EU is clinging to a defunct two-state paradigm. “Everything the PA is able, or unable, to do depends on the occupying power: Israel," Michelle Pace, a Chatham House associate specialising in European approaches to the Middle East told The Parliament. "EU funding of the PA continues to pay for the entrenched occupation of Palestinian land.”
Israel’s grip on public finances
Under the Oslo Accords of the 1990s, Israel collects taxes from the Palestinians and makes monthly transfers to the PA pending the approval of the Israeli Ministry of Finance.
But according to the UN, Israel often withholds tax revenues it collects on behalf of the Palestinian Authority — a practice that predates 7 October. The freezes disrupt salary payments and wreak havoc on the PA’s liquidity, with knock-on effects on basic services such as healthcare, education, and policing. Since the Hamas attacks, Israel has justified new withholdings by claiming the money could reach Hamas.
“The EU has provided money to the PA which is structurally bankrupt. But Israeli authorities — the occupying force — withholds the revenues of the PA,” Schams El Ghoneimi, a former adviser to the European Parliament on the Middle East told The Parliament.
In March, the Palestinian Ministry of Finance — part of the PA — said in a statement that since 2019, Israel has withheld 7 billion shekels (1.8 billion euros) from the PA. Media reports since suggest the figure is much higher.
This puts the PA “on the edge of collapse,” said Khatib. It has also “encouraged European countries and Arab countries, mainly Saudi Arabia, to think of a new line of funding,” he added.
Reform or repackaging EU funds?
At the UN General Assembly in September, European Commission President Ursula von der Leyen announced a new financial mechanism — a so-called “Palestine Donor Group” for Gaza’s recovery, though the drive was originally unveiled last year.
But critics say it’s just a rebrand of existing aid — and a performative one at that. Speaking to Euractiv in September, former Prime Minister of Palestine Mohammad Shtayyeh said: “I don’t think we need new funds, there are already existing funds,” and encouraged the bloc to keep supporting the PA through its existing programme, PEGASE.
The donor group has also struggled to attract backing from Arab and Gulf partners, with these states sceptical of the PA’s corruption records. Abbas has pledged to call elections as soon as the war in Gaza is officially over, but trust remains low.
Among Arab donors, said former adviser El Ghoneimi, funding the PA is "highly unpopular" — often viewed as tantamount to funding Israel’s occupation. This ‘donor group’ merely represents the EU’s existing formula of funnelling money into the PA in return for ‘promises of reform,’” adds Pace. “In this way the EU continues not to address the root causes of the real issue: apartheid, occupation, settler colonialism — decades before 7 Oct 2023 — and now genocide.”
Numbers suggest the PA’s domestic standing is also deteriorating. A poll by the Palestinian Center for Policy and Survey Research (PCPSR) — which is partly funded by the EU — found that nearly half of Palestinians favoured dissolving the PA, in part due to its failure to secure statehood.
“The PA has been losing credibility not only diplomatically but also among the Palestinian people,” said Pace. “Hamas rushed to fill the subsequent vacuum in ideas, politics, and security.”
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