Donald Macintyre: The EU should demand more from Israel

Everyone in northern Gaza knows the bridge at the entrance to Beit Hanoun. When Mohammad Shtayyeh, the chairman of the Palestinian Economic Council for Development and Reconstruction, remarked recently that, since the beginning of the intifada in 2000, the bridge had been destroyed three times by Israeli forces and rebuilt each time by the European Union, no one in the Middle East aid world needed to ask what he was talking about.

Mr Shtayyeh's remark came after this month's Paris donors' conference pledged an estimated $7.4bn over the next three years to the emergency Palestinian government set up in the West Bank by President Mahmoud Abbas last June. And it went to the heart of a dilemma rarely discussed aloud by Western politicians, but which has been bothering aid professionals for several years, namely that western handouts may have the unintended effect of subsidizing the conflict, or as its harsher critics contend, the Israeli occupation of the territories it seized in 1967 which they see as prolonging that same conflict.

The dilemma was once summed up by the able UN official David Shearer. Acknowledging that "maintaining stability while the search for a peace agreement continues" was a "laudable aim", he also suggested that with "ever present" funding to prevent humanitarian meltdown, there was "less incentive to address the issues that underlie it. Without donor assistance, for example, Israel's occupation ... would be much more problematic and expensive ... so aid money might also blunt the urgency to seek peace."

It was partly in order to resolve this dilemma that, in 2004, the World Bank proposed conditions for continued aid. The Bank predicted that aid alone would not halt the "serious decline" of the Palestinian economy that was feeding "anti-Israel militancy". It therefore proposed that aid should be conditional on the actions of both sides. The Palestinians would need to show much greater commitment to preventing attacks on Israeli civilians, and to reform of their ramshackle governance. But Israel would also have to start relaxing the ever-intensifying restrictions checkpoints, road closures, and so on that the Bank identified as the immediate cause of the decline.

This is history. The World Bank's proposal was not taken up by the donor community, and much has since changed. The pledges at this month's donor conference were intended to underpin what is publicly held to be, post-Annapolis, a new prospect for a peace agreement by the end of next year between Mr Abbas and the Israeli Prime Minister, Ehud Olmert.

The success of Paris was not wholly unalloyed. Not everything pledged always comes through. More immediately, Mr Abbas's Prime Minister, Salam Fayyad, had warned that he needed $1.4bn a year to cover his deficit as well as investment in the high-profile development projects donors habitually prefer. But more than $300m of the deficit still remains unfunded in 2008, partly because of Saudi Arabia's reluctance to increase its current account contribution.

The EU which has already promised $650m for 2008 will be under pressure to make good the shortfall. Which brings us back to the example of the Beit Hanoun bridge. Mr Shtayyeh suggested that if the EU wants to see some bang for its buck it may need to reconsider the conventional wisdom that only the US has any political role in promoting the peace process.

For not everything has changed since 2004. Before Paris, the World Bank warned once again that without a lifting of the restrictions crippling the West Bank economy let alone that of Gaza no amount of aid would arrest the slump. Tony Blair, who co-chaired the Paris conference, has repeatedly pointed out that a political process, Palestinian advances on security, and lifting of Israeli restrictions, need to go hand in hand. That is a significant advance on Israel's "security first" doctrine that no concessions can be made until, in the memorable phrase of Dov Weisglass, Ariel Sharon's lieutenant, the Palestinians "turn into Finns".

But there is no sign that Israel is yet prepared, for the sake of long-term security, to take the short-term risks that lifting such restrictions might entail. The question is therefore whether the Europeans are prepared wholly to surrender to the US in the teeth of deeply negative evidence to date the task of reminding Israel that its interests may lie in doing just that.

The EU has long been reluctant to increase its political profile in contrast to its money in the Middle East. And nobody denies that the US is paramount. Yet the EU has a locus, both because of its aid to the Palestinians and its role as a major trade partner of Israel. It's hardly outlandish to imagine that an axis of Nicholas Sarkozy, Angela Merkel and Gordon Brown could wield at least some influence on Middle East issues, as much in Washington as Jerusalem.

Any idea of EU sanctions is no doubt unrealistic. Nor will noisy but empty rhetoric much help. But occasional public diplomacy may have a part to play. Two years ago, the EU Consuls General in Jerusalem unanimously signed off on a devastating account of how Israeli-imposed "facts on the ground" in the Arab eastern sector of the city were prejudicing the chances of an agreed end to the conflict. The EU foreign ministers declined to publish it, for fear of upsetting Israel. Yet it is highly questionable whether zealous avoidance of open criticism invariably achieves more than the occasional public demarche.

On one level, this is an inauspicious moment for a peace process, even if, left to themselves, Mr Olmert and Mr Abbas could well do a deal. Hamas, currently in control of Gaza, has been excluded from the negotiations. The only way this strategy could have even a hope of working would be the rapid progress towards a "final status" deal which Mr Olmert is apparently under such pressure from powerful figures in his coalition to resist.

Israel may never deal with a Palestinian more committed to internal reform than the independent Mr Fayyad, who is already angering some jealous figures in Fatah by trying to put its house in order. But confidence-building is a two-way street, as Israel often seems to forget.

In doing more to persuade Israel that time is running out for the two-state solution, the Europeans would be doing little more than reinforcing Mr Olmert himself; he has warned his opponents that the alternative is a single state in which Palestinians would agitate for equal rights spelling the end of Israel as a Jewish and democratic state. And if the Europeans are not ready to use what leverage they can in the interests of Israelis and Palestinians, they might consider those of their own taxpayers.