As Israel makes its first incursions into Gaza, the world is holding its breath in anticipation of a full ground offensive. 

But while most eyes are focused on the unfolding humanitarian disaster, policymakers and business leaders are growing increasingly concerned about the economic impact of a lasting conflict between Israel, Hamas and others in the region.

While German exports to Israel make up just 0.4% of the country's total exports — ranging from vehicles, auto parts, machinery, renewable energy, chemicals and pharmaceuticals — the Mediterranean country has long been a key economic partner.

"Trade and foreign direct investment between the two countries is small, but for technology transfer and cooperation in research in natural science and physics, Israel is extremely important and has been since the 1960s," Rolf Langhammer, a senior research staffer at the Kiel Institute for the World Economy (IfW Kiel), told DW.

In recent years, German firms have also built strong relations with many of Israel's tech startups. According to the German government website, major companies like Merck and Siemens recruit top-class engineers from Israel, while Deutsche Telekom, Bosch, Daimler, Volkswagen and BMW have research and development centers in Israel or have invested in fledgling firms.

Some German-Israel collaborations on hold for now

Industry leaders expect cooperation between the two countries to remain strong, especially as Israel is a leader in cybersecurity, biotech, health and renewable energy as well as innovating in the food sector. But, in the short term, many projects could be put on hold as uncertainty reigns over the direction of the Israel-Hamas conflict.

"There's a big fear [among German companies] of an escalation, especially if Iran or others get involved," Charme Rykower, deputy managing director of the German-Israel Chamber of Industry and Commerce, told DW. "I don't want to imagine the outcome if we have a long, bloody conflict ahead of us."

Rykower said German firms operating in Israel are, for now, taking a wait-and-see approach, but noted how the Israeli economy is already suffering from the effects of the Hamas attacks on October 7.

The shekel has fallen to multiyear lows against the dollar, and hundreds of thousands of Israelis have been called up to the army, leaving many firms without adequate staff cover. Thousands more employees have been placed on unpaid leave temporarily as customers stay at home due to the security threat.

"We have to be patient and hope that this conflict does not escalate and that things will recover in a few weeks," Rykower added.

Germany's balancing act 

The German government has emphatically thrown its support behind Israel's right to defend itself. But at the same time, Germany must perform a delicate balancing act as other Middle Eastern countries have denounced Israel's military tactics in the fight against the Hamas militant group, which has been identified as a terrorist organization by the EU, the US, Germany and many other countries. Many of these nations are, or have the potential to be, even more important economic partners for Germany.

Qatar, for example, is playing an intermediary role in helping to secure the release of some 220 hostages captured by Hamas in Israel during the October 7 attacks. The Gulf Arab nation has also fiercely criticized Israel's fight against Hamas, which has so far left more than 7,000 people dead, according to Gaza's Hamas-run Health Ministry.

This week, Qatari Emir Sheikh Tamim bin Hamad Al-Thani said "Israel shouldn't be granted an unconditional green light and unrestricted authorization to kill" Palestinians.

IfW Kiel's Langhammer told DW that: "Qatar stands out as the most important Middle East investor in Germany. It has stakes in companies like Volkswagen, Deutsche Bank and Siemens." He noted how last year, amid the European energy crisis that saw natural gas prices skyrocket, Germany also signed a deal with Qatar to secure supplies of liquified natural gas (LNG), which will begin in 2026.

"Any sort of escalating crisis would hit Germany hard because of its dependence on energy from the region. But at the same time, a country like Qatar doesn't want to see its investments in top German companies go down the drain," Langhammer added. "The bigger threat is, of course, Iran."

Iran, which backs Hamas and the Lebanese militant group Hezbollah — which has also been fighting Israel — has previously threatened to block the Strait of Hormuz in ongoing tensions with Israel and the West. The strait is the world's most important oil chokepoint because of the large volumes of oil that are shipped through the waterway.

Iran is mostly decoupled from trade with the West over its disputed nuclear program, which is subject to US and EU sanctions.

Other countries in the region, including Egypt and Saudi Arabia with their respective populations of 109 million and 36 million, are also of growing interest to German exporters.

"Economic ties with the Middle East region are of strategic importance," Helene Rang, CEO of the German Near and Middle East Association, told DW. "Among the key factors here are the geographical proximity as well as the growing sales and consumer markets due to large local populations."

Rang spoke of huge upcoming infrastructure projects, including Saudi Arabia's Neom — a huge futuristic city being built along the Red Sea at a cost of half a trillion dollars — which offer opportunities to German businesses.

"We hope it [an escalating conflict] will not have a huge impact on economic cooperation. The situation is difficult ... [but] at the same time, we hope that a solution will be found through international diplomacy. The peace meeting in Egypt was an important first step," Rang said, referring to a summit of world leaders and international envoys on October 21.

Edited by: Ashutosh Pandey

Correction, October 27, 2023: A previous version of this article misspelled the name of Charme Rykower. DW apologizes for the error.