Support in Europe for sanctioning Israel over its settlement policies is growing and could gain steam if the current Israeli-Palestinian negotiations fail, the outgoing EU envoy to the Middle East said Thursday.

For now, the European Union is dangling incentives before both sides to nudge them toward a deal, rather than threatening punishment.

Earlier this week, EU foreign ministers promised Israelis and Palestinians unprecedented access to the 28-state bloc if they overcome their differences and reach an agreement on the terms of a Palestinian state.

The US-led negotiations resumed in late July, after a five-year diplomatic impasse, and are to last for at least nine months. On Wednesday, the chief Palestinian negotiator, Saeb Erekat, for the first time raised the possibility of an extension if progress is made.

He said that if the two sides reach a framework agreement on all main issues by the end of April, the Palestinians would be prepared to extend the period of negotiations by up to a year to work out the details of a comprehensive deal.

Previously, the Palestinians had said they reserve the right to walk away from the negotiations after nine months and explore other options, such as seeking wider international recognition.

The outgoing EU envoy to the Middle East, Andreas Reinicke, said in a phone interview from Brussels on Thursday that he believes a deal is possible and that the two sides “are starting to bridge the first gaps.”

He did not elaborate. Reinicke, who is leaving his post at the end of the month, said he has been in close touch with US mediators.

The Palestinians want a state in the West Bank, Gaza Strip and east Jerusalem, territories captured in 1967. They are ready for minor land swaps that would enable Israel to keep some of the dozens of settlements it has built on war-won land.

Prime Minister Benjamin Netanyahu has refused to accept the 1967 lines as a starting point for border talks and has rejected a partition of Jerusalem, while Palestinians have been reluctant to accommodate Israel’s demands for security guarantees.

Reinicke said that if negotiations end in failure, he expects a resumption of discussions on possible EU-wide recommendations on labeling Israeli settlement products. Labeling would allow consumers to decide if they want to boycott such goods.

Reinicke said that when he started in his post in February 2012, only two of 28 member states supported the idea of labeling. Now, 14 states are in favor, he said.

“There is movement in this direction,” he said. He said the efforts on labeling were suspended because Europe is working closely with US Secretary of State John Kerry in trying to move the Israeli-Palestinian negotiations forward.

Reinicke said that before the resumption of talks, donor countries, including EU member states, had also been reviewing the level of aid to the Palestinian Authority, the self-rule government in parts of the West Bank.

The aid began in 1994, and was initially intended for five years, to ease Palestinian transition into statehood. Donor countries have since continued paying hundreds of millions of dollars a year, despite the ongoing failure of efforts to set up a Palestinian state through negotiations.

In their discussions before the resumption of this round of talks, donor countries had begun asking “how long will we be able to pay for Palestinian institution-building if there is no chance that these institutions will evolve into a state,” he said.

The debate has been put on hold for now, Reinicke said. “I’m sure that if (Israeli-Palestinian) negotiations will move in a positive way, toward a framework agreement, no one will question” the continuation of aid payments, he said.