Justice Minister Tzipi Livni and Defense Minister Moshe Ya’alon didn’t sound like they could be serving in the same government.

Addressing an end-of-the-year business conference, Livni warned that Israelis are living in “a bubble,” ignoring the looming economic damage of the unresolved conflict with the Palestinians. “An entire country… is living detached from international realities,” she said. Referring to European Union financial directives, she added that “the international economic and academic boycott of Israel” began with sanctions against settlements but would end up targeting Israel itself, and would “escalate steadily and geometrically.” Livni, it’s worth noting, began her political career in the Likud Party, but ran in the last Israeli election on a platform of pressing for a two-state agreement. Now she is Israel’s chief negotiator with the Palestinians.

Ya’alon, speaking at the same conference, warned of the dangers of a Palestinian state and declared, “If the choice is between a European boycott and rockets [fired] from Nablus and Ramallah at Ben-Gurion Airport, I prefer a European boycott.” It wasn’t an off-the-cuff comment. According to a leaked account of a closed meeting he held with top businesspeople, Ya’alon attacked United States Secretary of State John Kerry’s proposals for security arrangements in a two-state agreement. “Apropos talk of boycotts,” he said, the American plan “would destroy the Israeli economy.” The defense minister, a leading figure in Likud today, has been consistently dismissive of the Israeli-Palestinian peace talks.

Livni and Ya’alon are indeed in the same government, but they showed just how wide the differences are within Prime Minister Benjamin Netanyahu’s patched-together coalition. They also demonstrated the divisions between people once identified as members of the same hawkish political camp. But the two ministers did appear to agree on two points: The EU economic measures, enacted last summer, could be an omen of further sanctions—and tensions with Europe are an issue that Israeli leaders can’t ignore. That’s precisely because Europe is such a close economic and political ally.

At the same time, ties between Jerusalem and Washington have also been publicly strained in recent months. The conversation with Israel’s best friends abroad has turned edgy.

First, there’s the EU. Last July, it issued new budget guidelines on economic cooperation with Israel. Under the directive, EU bodies must make sure that any grants and investments for projects in Israel be used only within the Green Line, the pre-1967 border. Agreements with Israel or Israeli institutions must explicitly acknowledge these conditions, the new rules said. Put differently, not one euro cent can be spent in East Jerusalem or in West Bank settlements. The guidelines put teeth in long-standing EU policy that Israel’s territory is defined by the pre-1967 line and that Israeli settlements over that line are illegal.

This matters because generous European funding and partnerships are essential to Israeli research and development, both academic and commercial. The guidelines came out just as talks were about to begin on Israeli participation in Horizon 2020, an EU-Israel participation in a massive seven-year EU-Israel research and innovation program. Livni managed to negotiate a deal under which Israel would follow the rules while stating its disagreement with them. The immediate crisis is past. But Europe is also Israel’s largest trading partner. The European Union has been steadily tightening rules to make sure products of settlements aren’t imported under its free trade pact with Israel, which dates back to 1975. Again, the European position that the pact applies only to Israel within the Green Line is not new, but the practical measures are.

For now, the European message is: We’re friends, but our opposition to settlements and our support for a two-state agreement are not just talk. The concern in Israel is that if the current peace talks break down, more sanctions could follow, both by the EU and by member states, and that the European measures will legitimize boycotts by other countries or nongovernmental groups of Israel as such, not just of settlements. And if Palestinian Authority President Mahmoud Abbas renews his efforts for recognition of Palestine by international bodies, European countries are likely to be more receptive than in the past.

It was no coincidence that the crisis with Europe erupted when it did, just as Kerry was pushing Israel and the Palestinian Authority to resume negotiations. The secretary of state’s leverage was that Israel and the Palestinian Authority each feared the damage to its international position if it appeared responsible for peace efforts failing. Europe demonstrated the potential price for Israel.

Fear of taking the blame remains a potent reason for Israel and the Palestinians to continue the talks, but hasn’t produced progress toward an agreement. As expected, Kerry has stepped up his effort by presenting American proposals, starting with his plan for security measures.

Whatever his own views, Netanyahu is caught trying to satisfy mutually exclusive demands. Last year’s election, which produced a near-tie between the right and center-left blocs in parliament, forced him to include two-state advocates in his coalition alongside opponents. To satisfy the two-staters, he must keep the talks going. To satisfy hawks in Likud and in other coalition partners, he must oppose American proposals and risk an overt falling-out with Washington. Announcing new settlement construction is a way of placating the hawks—but is a slap in the face to Kerry and President Obama, and could push Abbas to abandon the talks. And if Netanyahu’s coalition collapses, past experience shows that a crisis with Washington does not play well with Israeli swing voters.

Yet, on another issue, Netanyahu himself chose an open clash: the six-power interim agreement with Iran on its nuclear program. “What was achieved…in Geneva is not an historic agreement; it is an historic mistake,” he said before television cameras the morning after the accord was signed, adding that “Israel is not bound by this agreement.” In principle, that was a rebuke not only to the United States, but also to France, Britain, Germany and the European Union, whose foreign policy chief, Catherine Ashton, brokered the deal. But the prime minister had devoted his greatest efforts to swaying American policy, and his wrath appeared aimed at Washington.

The pros and cons of the agreement would be a long discussion in themselves. The bottom line is that the Obama administration and other signatories see it as a significant step toward preventing Iran from gaining nuclear weapons. Netanyahu wanted a total rollback of the Iranian nuclear program. The gap between the positions was known in advance. The question was why Netanyahu decided to express it in such harsh terms in the public arena after the agreement was signed. Some critics at home warned that he was risking Israel’s greatest strategic asset, its alliance with America. That may be hyperbole. But the affair did underline the disquiet in relations with essential friends, the risk of greater isolation.

No one in the Israeli political arena suggests that the country should make its decisions only on the basis of relations with America or Europe. At the same time, no one can leave that factor out of policymaking. Livni’s stance could be translated as, “We need a two-state agreement for many reasons. Now the price of delay is getting higher.” Ya’alon’s remarks could be rewritten as, “We could face isolation, but we must acknowledge that the cost of a deal is higher.” That’s the range of positions within a single government—a government that could be increasingly shaky when it has to make difficult choices in the months ahead.