Donald Macintyre: This is no time to cut Palestinian aid

It's an apt response to the international and Israeli economic blockade on the Hamas-led PA. The EU's foreign ministers are expected to confirm the suspension of direct aid to the authority today. If they do so, they will no doubt say that lifting it is dependent on Hamas meeting demands to recognise Israel, renounce violence and abide by all past agreements between the Authority and Israel. And they will certainly emphasise that the EU does not want to punish the Palestinian people and that "humanitarian aid" will continue.

But this benign distinction between inflicting harm on the Palestinian people and the Authority itself is unsustainable. The main danger is not so much of immediate Palestinian starvation. Rather it's the major shrinking over the year of what is left of the Palestinian economy, and of the basic services on which any civil society depends.

The issue is one of salaries, 140,000 of them, around half of which are normally paid out of duties of $60m collected by Israel on behalf of the PA - and currently being withheld - and half from international donors.

Catastrophically short of other forms of employment, the economy is disproportionately dependent on the salaries. But so too are schools and health care. No international expert believes that NGOs come near having the capacity to deliver these services currently delivered by the PA. And that's before considering what must be the most immediate threat: the non-payment of the already rickety security services, leaving 70,000 angry people with no money and a lot of weapons.

It is little wonder that James Wolfensohn, the outgoing Bush-appointed special representative of the International Quartet, told a US Senate committee last month that such a cut-off would lead to chaos and an "increased radicalisation of Palestinian society".

Partly, of course, he was responding to the idea among US policymakers that as the crisis worsened the Palestinian President, Mahmoud Abbas, would somehow be persuaded to call a fresh election and the Palestinian people, repenting their choice of Hamas, would turn back to Fatah instead.

Even supposing that Mr Abbas were inclined to call such an election, rather than resign, there is every likelihood that the population would blame not Hamas but what it would see as the punitive act of an international community unable to tolerate democracy except when it produced the result it wanted. In any case, the fractured Fatah is in no better shape to win an election than it was in January.

Most Europeans know all this. So they have been casting desperately around for some way of paying the salaries but bypassing the PA itself. One idea is to resort either to Mr Abbas's presidency or to the World Bank. But it isn't clear that the President's office has the capacity to do the job; or that Hamas would let him do it. And it is difficult to see how the World Bank could do it without the sanction of the US government.

Indeed the US's draconian ban on all contacts, at every level, with a Palestinian Authority it now deems to be a "terrorist entity" goes further. Arab banks dealing regularly with the PA, fearing litigation in the US courts, are already showing signs of shying away from doing business with the PA; and the Israeli banks who transfer money between Israeli customers and suppliers and their Palestinian counterparts are seeking to freeze those links, with disastrous potential consequences for the economy and possibly to aid as well.

Maybe Hamas will suddenly decide over the next few weeks to meet Israel's and the international community's demands. But since it was elected partly because Palestinians felt they have nothing to show in return for their leaders' recognition of Israel at Oslo, this is hardly, to put it mildly, bankable. And the problem is that the US did not develop a Plan B. As a result, the progressive collapse of the PA institutions over time can't be ruled out. This would have serious consequences for Israel, which might find that the convenient settlement reached in Oslo, namely that basic services in the Occupied Territories were the Palestinians' responsibility, would no longer hold, and responsibility for providing them might revert to Israel itself.

But the US, according to European diplomats, is now convinced that the unilateral "convergence plan" which the Israeli prime minister designate, Ehud Olmert, said yesterday would be fulfilled by 2008, can fill what would otherwise be a catastrophic political vacuum. Some moderate Palestinian politicians believe that unofficial US endorsement has actually pushed Mr Olmert into unilateralism when he was at least considering serious negotiations with Mr Abbas - something he now appears to have ruled out.

Because they currently seem such an implausible prospect, it is worth recalling that the case for such negotiations is not an empty one. It isn't yet certain that Mr Olmert will be able to command a workable majority for his unilateral plan. But in any case cantonised territory east of a separation barrier which divides a future Palestinian state from itself - not to mention choking off between 30 to 40 per cent of its internal economy - is hardly a recipe for long-term stability, let alone "permanent borders".

Yet a recent poll for the US Institute for Peace indicated that a majority of Israelis and of Palestinians would now support in a referendum a negotiated two-state solution along the lines of the Geneva accords worked out by politicians on both sides three years ago. And while proclaiming their belief they will get nowhere, Hamas has said that it has no objections to Mr Abbas conducting negotiations.

If the EU insists on maintaining the aid boycott of the PA in the slim hope that Hamas will allow itself publicly to buckle under international pressure, it cannot leave it there and somehow pretend to be even-handed. At the very least, it has to call on the US to allow the World Bank or some other agency to liberate the PA salaries. And it has to begin acting in accordance with the rejection expressed last week by its foreign affairs chief, Javier Solana, of unilateralism in favour of negotiations. Otherwise it will be allowing Europe to be driven entirely by a US administration and Congress in the grip of a lobby even more hardline and Likudnik than the emerging Israeli government, not to mention the population of Israel.