I am convinced that it is possible to make real progress through proximity talks, and given the level of mutual mistrust, I even believe it is the preferred means.

I am told by diplomats that I am the only optimist in the Middle East. There are certainly reasons to be pessimistic about the chances for peace, but I will not be dissuaded just because we have failed to reach peace so far. The difficulty in restarting negotiations is, of course, a result of many years of failed talks, an intifada, a war in Gaza and the election of a right-wing religious government in Israel.

It also is the result of a mistaken strategy by the new US administration, which fell into the trap of spending most of its first year negotiating about negotiations. The Israeli-Palestinian issue was far from having priority on the table of President Barack Obama during his first year. First was the need to save the global economy from total meltdown, health care reform, wars in Iraq and Afghanistan, Iran, and global climate change. Obama’s decision to appoint George Mitchell on his second day in office, and Mitchell’s appearance in Jerusalem and Ramallah on day four created an illusion that the administration would be quick to act. It has taken a full year, but now the show is on the road.

Two weeks ago, I had the privilege of meeting senior administration officials in the White House, the State Department and the Pentagon. I had similar talks in November. At that time I came back quite convinced that the administration was not prepared to deal with the difficulties that Israelis and Palestinians had placed in the path to peace.

THE SITUATION is quite different now. As evidenced by the long-awaited announcements from Jerusalem and Ramallah on the launching of proximity talks, Mitchell is no longer willing to take no for an answer.

In Washington, I learned that the administration is busy defining its “diplomatic tool box” – that inventory of incentives and disincentives (called “carrots” and “sticks” in less diplomatic language). Aside from taking stock, it was clear to me that it is in the process of assigning possible “price tags.”

I am convinced that various tools were already used to induce both the Israelis and Palestinians to agree to the proximity talks.

Now the process has begun. We all have a pretty good idea of what the endgame looks like.

Both Prime Minister Binyamin Netanyahu and Palestinian Authority President Mahmoud Abbas know what compromises they will be required to make.

They may not want to acknowledge that out loud or with their domestic political partners, but there is no doubt that when they think seriously about the agreement, they both know that Jerusalem will be the capital of both states and that the return of Palestinian refugees will be to the Palestinian state only. They both know there will be a need for a significant international presence, led by the US, that will provide security and other guarantees of implementation in the forms of mechanisms for monitoring, verifying and assurance of compliance with treaty commitments.

They both know that neither Israel nor the Palestinians has any strategic option other than reaching peace on the basis of two states for two peoples. There is no Israeli option of status quo or of annexation of the territories without the people. There is no Palestinian option of one state based on one person, one vote.

There is no one-state solution. This is primarily a territorial conflict. If, at some time, there will no longer be a viable two-state option, the conflict will transform from a territorial conflict to a conflict over identity. Conflicts over identity pit everyone against everyone for everything. The best example is Bosnia, where 150,000 were killed in four years.

Neither Israel nor Palestine can afford such disaster. Both leaders, with the best interests of their people at heart, must recognize that now is the time, and agreement is possible. Surprising to most, the hardest issue will be the map, not Jerusalem nor refugees. My suggestion is that the territorial discussion begins with Israel identifying areas within the Green Line it is willing to swap for settlement blocs. The quantity and quality of those areas will determine the quantity and quality of areas to be annexed.

My professional assessment is that it will be from 3% to 3.5% of the West Bank (including east Jerusalem), which will include about 75% of the settlers. The remaining 25% will have to choose between staying in the state of Palestine as law-abiding citizens of that state (Israel can allow them to hold dual citizenship and to continue to vote for the Knesset) or repatriating to the State of Israel. In the case of the latter, they can move to the annexed parts of Judea and Samaria or move back to anywhere they like within the State of Israel.

Everyone who agrees to leave should be given a substantial check, and will then decide to live wherever they want. It would be advisable to develop a time-linked financial plan, so that the sooner you decide to leave your home in a settlement that will remain in Palestine, the more money you get.

Likewise, the Knesset should pass a law allowing those settlers outside the settlement blocs to receive compensation even before the permanent-status agreement is reached. Let’s face it, Ariel will not be in the State of Israel, nor will settlements in the Jordan Valley. East Jerusalem settlements (neighborhoods), most of Gush Etzion, the Modi’in Illit bloc settlements and those settlements along the Green Line will be annexed.

FOLLOWING MY Washington meetings, I prepared seven pages of recommendations for the US peace team on how to move the peace process forward. I shared those recommendations with the highest-level decision makers in Jerusalem and Ramallah. I am convinced that it is possible to make real progress through proximity talks, and I even believe that, given the level of mutual mistrust, it is the preferred means.

Mitchell has a very tough job ahead, but he has all the tools necessary. The success of proximity talks does not have to be in reaching direct negotiations. Success at this stage can be the beginning of the drafting of a peace agreement. That’s how president Jimmy Carter did it in Camp David I – without having Menachem Begin and Anwar Sadat negotiate face-to-face, and Egyptian-Israeli peace has survived every test one could imagine.