With the security situation in the West Bank improving, Benjamin Netanyahu promoted the idea of an “economic peace” with the Palestinians during the last Israeli parliamentary election in 2008 and again in his foreign policy speech to the nation in June 2009, arguing that economics, not politics, is the key to peace. Underlying this talk is the logic that “economic peace will support and bolster the achievement of political settlements down the line.”

For Netanyahu, this was a convenient way of avoiding more contentious issues such as final borders or the status of Jerusalem, which in turn was a necessity for him to be able to form the current Israeli government coalition with the participation of Shas and Yisrael Beiteinu. No tough choices would have to be made in the short- and medium-term as long as economic development in the West Bank was considered the way forward to peace.

Confronted with these realities and reflecting on the experiences of 20 years of negotiations without an end, the PA have adapted their strategy and begun to pursue other roads besides the ongoing US-brokered indirect ‘proximity talks’ between Israel and the PA.

On the one hand, the PA have started to back non-violent initiatives aimed against Israel by the re-emerging, politicized Palestinian civil society in the West Bank, such as boycotts of settlement products. On the other hand, the Palestinians have turned towards the international stage, and in autumn 2009 floated the idea of a UN Security Council resolution which would either outline a final settlement or recognize a Palestinian state within the 1967 borders.

Part of these efforts by the PA to pursue its cause on the international stage is the so-called Fayyad-Plan, named after its promoter, Palestinian Prime Minister Salam Fayyad, which was published in August 2009. This ambitious 65-page plan envisions the establishment of a de facto Palestinian state by August 2011 through the creation of new and the improvement of existing government institutions and the reinforcement of the economic, social and security foundations of the PA.

Amongst other things, it calls for an international airport in the Jordan Valley, new rail links to neighboring states, a unified tax and social security system, and a generous tax regime for foreign investors. By making the governmental institutions more efficient and promoting the private sector, the plan intends to develop a PA government less dependent on external aid and a Palestinian economy independent from Israel. With its focus on economics, it mirrors to a certain degree Netanyahu’s call for bottom-up peace-making through economic development.

However, the rationale behind the Fayyad-Plan is twofold.

Firstly, it is supposed to demonstrate to the international community that the Palestinians follow its rules, indicating that in return it is expected to do its part when the moment comes. It also aims at falsifying claims by the Israeli right that the Palestinians are not ready to establish a state, or that the PA does not constitute a reliable and active partner for a political settlement.

Secondly, it provides the PA with an alternative means of unilaterally advancing Palestinian interests should negotiations with Israel lead nowhere. Even limited success of the plan could enable the Palestinian side to portray Israel to the rest of the world as an unaccommodating country that continues to employ the jaded argument of security in order to deny the Palestinians a state.

In theory, the creation of an integrated Palestinian economy and a transparent government backed by a professional and effective security force will allow the PA to press its case more strongly on the global level, take the PA deeper into international organizations, and thus could potentially make it impossible for Israel to deny Palestinians an independent state in the West Bank.

The proactive, unilateral creation of facts on the ground by the PA and the underlying strategy “to end the occupation, despite the occupation” marks an important departure from the Palestinian policy of the last 20 years and the old western credo that negotiations in themselves already constitute progress.

By trying to create a de facto state, and hence pressuring the international community to live up to its commitment to a two-state solution, Fayyadism intends to achieve a de jure Palestinian state through recognition by the international community, hinting at the possibility of sidelining the negotiations with Israel should no progress be made.

Thus this allegedly non-political plan for economic development and good governance in the PA territories, with its clear deadline, has in fact the potential to change the very dynamics of the deadlocked peace process should it be genuinely supported by the US and the EU.

In the Israeli reading, the plan is at odds with the history of Israeli-PA relations and the paradigm of reaching a settlement through negotiations and reciprocal steps. However, as the Israeli right is unified in its perception of the plan as a legal, political and security threat to Israel, with Israeli Foreign Minister Avigdor Lieberman categorically ruling out the “chance of reaching a Palestinian state before 2012”, others, most prominently Defense Minister Ehud Barak from Labour, see in it an important opportunity.

For obvious reasons, economic peace proponent Netanyahu has thus far voiced only cautious criticism, arguing that any unilateral steps by the PA will entail unilateral steps by Israel. This is important insofar as any meaningful progress of the Fayyad-Plan ultimately depends on the cooperation of the occupying power Israel.

The US stance on the matter is somewhat ambiguous. Officially, the White House still banks on direct negotiations and warns against unilateral steps from either side. Yet, since the split of Hamas and Fatah in 2007, the US has heavily bet on a ‘West Bank first’ approach in its support of the Palestinians.

It seems it is largely US pressure on the Israeli government to improve the daily life of Palestinians in the West Bank through the removal of checkpoints, etc. that has enabled the, albeit very limited, success of the Fayyad-Plan so far. Furthermore, Fayyad, a technocrat with no significant political base, also appears to have gained a reputation as a harbinger of peace in the West due to his efforts, thereby becoming the desired candidate of the US for PA presidency in the post-Abbas phase.

Astoundingly, the Middle East Quartet (MEQ) - consisting of the US, Russia, the EU and the UN - the position of which is traditionally strongly shaped by Washington, goes out of its way to back the Fayyad-Plan. On 19 March this year, the Quartet stated that it “continues to support the PA’s plan of August 2009 for building the Palestinian state within 24 months” and fully endorses “the efforts of the Quartet Representative in support of Prime Minister Fayyad’s state-building and economic development program.”

However, the Quartet has so far left open how it intends to move forward after the 24-month deadline has expired should Fayyad’s efforts prove successful.

The EU, as the largest donor of the PA and the traditional key sponsor of economic development in the Palestinian Territories, also backs Fayyad’s plan as it gives Brussels the chance to demand political improvement from both sides and generally enhances its role in the peace process.

However, given the very different stances on and interests in the peace process of the 27 EU member states, it seems not all have understood how contentious the plan at hand could be should it receive genuine support from the EU. Such credible backing would necessitate EU action against the impediments which prevent an end to the occupation somewhere down the line - most likely a step not all EU states are actually ready to take.

The main stumbling block for economic development in the West Bank is the presence of Israeli settlements. The control of over 42 percent of West Bank land by them and the restrictions their existence imposes on the Palestinians makes sustainable development through Fayyadism almost impossible. Without pressure from the outside, it is rather unlikely that the current Israeli government will shift its position on this issue.

Thus, the MEQ needs to clarify whether it genuinely supports Fayyad’s plan for state-building. If so, public US backing for it has to be secured and the MEQ must integrate it into the framework of the peace process through a comprehensive strategy. With the MEQ no longer insisting on strict reciprocity in the fulfilment of the Roadmap, the Fayyad-Plan with its clear deadlines could, for example, be incorporated into the MEQ’s 2003 plan or become part of an eventual renewed US peace initiative.

The MEQ would also have to openly state where it ultimately intends to go with this plan once its deadline has expired - not only if it proves successful but also should it fail.

Finally, the Israeli government and public must decide whether they want to stop at a fragile economic peace or truly pursue a two-state solution with the tough decisions the latter entails. Whether the current Israeli government coalition would survive such a pursuit remains to be seen.

However, as the door for a two-state solution is quickly closing, the peace process may not be able to afford the luxury of another missed opportunity.