“The Corner of Rothschild and Tahrir,” reads one of the posters at the site where Israel’s summer of social protests began—on Rothschild Boulevard in Tel Aviv, which has become the movement’s tent-city HQ. Few of the protest leaders would flinch at acknowledging the inspiration they drew from the Arab Awakening, but it is a new, challenging and often uncomfortable feeling for many Jewish Israelis to consider the surrounding Arab world as providing a spark worth emulating. Now Israel’s governing coalition has to add a domestic social challenge to the already considerable headache posed by the regional upheavals of 2011.

After decades of near-hegemonic Israeli strategic supremacy in the Middle East, the ground is shifting. For Israel’s leaders, the Arab Awakening and the removal of Mubarak represents the collapse of a key support structure in the edifice that maintains Israel’s regional posture. That edifice had been fraying for some time. Yet with Israel unwilling or unable to relinquish its control over and occupation of Palestine, it was a system of conflict management that had proven to be remarkably resilient. Undemocratic Egypt was that system’s linchpin. In fact, only an undemocratic Egypt could play this role, indifferent and dismissive as the regime was toward public opinion and able to pursue policies, both at home and abroad, widely perceived as being an affront to Egyptian dignity.

Every country needs a strategy for managing its external relations, especially in the near abroad. Israel’s predicament in this respect is especially challenging. Born as an unusual movement combining religious and historical claims to land with modern aspirations of state-building and communal preservation, Zionism was initially branded by most in the region as a colonial project, a sense that Israel has fed with its expansionist and expulsionist approach to the indigenous population. Unfortunately for Israel, that indigenous population has ethnic and religious ties to a large population throughout the surrounding region. Nevertheless, Israel managed to adapt, pursuing whatever great power or regional alliances were available, making itself useful to the United States as a cold war ally.

Long after it became clear that the Oslo peace process would not deliver Palestinian freedom, rights or sovereignty, the structures established by it and the opportunities they have forged for Israel have endured. They were kept afloat by donor assistance, by the difficulties entailed in dismantling the Palestinian Authority and, crucially, by the stamp of legitimacy that only Egypt could confer. The impact of the Arab Awakening on Israel’s leaders must be understood first and foremost against this backdrop.

A mapping of Israel’s geostrategic priorities cannot be reduced exclusively to the Palestinian issue, but it is the pre-eminent feature on that map. The wars of Israel’s founding and early decades were a function of the Palestinian conflict, including the 1982 Lebanon War and Israel’s prolonged occupation of the south of that country. Even the separate peace treaty with Egypt signed in 1979 had to include a “framework” for broader peace, one that provided for Palestinian self-governance, the withdrawal of Israel’s military government and recognition of Palestinians’ “legitimate rights.” Indeed, Israel’s failure to implement those provisions is increasingly being discussed by Egyptians in the context of their own continued adherence to the treaty. When Israel has sought to play an open role in advancing regional alliances opposite Iran, as it did under the government of Prime Minister Ehud Olmert, it could do so only in the context of perceived progress on Palestine. Even the deterioration in Israel’s relations with a once vital strategic ally, Turkey, can be traced primarily to developments on the Palestinian issue, most prominently the Israeli army’s killing last year of nine Turkish nationals on board a ship seeking to break the Gaza blockade. Quite simply, Israel cannot have a strategy for managing its regional posture without having a Palestinian strategy, and today it no longer has one.

Previously, the absence of representative governance, combined with the fiction of a peace process, allowed Arab rulers and Israel to engage in a mutually duplicitous relationship. Arab regimes would claim loyalty to the Palestinian cause as an article of faith while making (often discreet) common cause with Israel across a set of regional issues under the umbrella of a Pax Americana, refraining from challenging Israel in any meaningful way. Examples include hostility toward Iran, support for the closure imposed on Gaza (in which Mubarak’s Egypt was an active partner) and quiescence in the face of Israel’s bombing of Lebanon in 2006. The conservative regimes would alternatively chide Israel or appear alongside it (and the Palestinians) at the various peace-relaunching galas that have punctuated the “peace-processing” of the past two decades.

For its part, Israel would wear its “only democracy in the Middle East” badge with pride and bemoan Arab intransigence, while quietly reaping the rewards that US-aligned Arab autocracies could deliver. This routine is unlikely to survive the fallout from the Arab Awakening. Even if the advance of democratic governance is halting and partial, regimes can be expected to take greater account of public opinion and to go further in attempting to reclaim legitimacy in the eyes of their people, on both domestic and foreign policy. To argue that the Arab or Muslim street is indifferent to the Palestinian issue is to ignore the overwhelming weight of polling evidence as well as the historical record.

Given the challenges of delivering on socioeconomic aspirations at home, scoring public popularity points on Palestine might become a no-brainer for successor Arab governments. That needn’t translate into implacable and irreversible hostility toward Israel (in fact, polling suggests the vast majority of Arabs would accept an Israel that grants Palestinian freedom), but it is likely to generate more robust responses to Israeli mistreatment of the Palestinians. As for the PLO leaders, they have no easy path back to the golden cage of the peace process, which at least in part helps explain the recent twitches of muscle-flexing on their part—conditioning resumption of negotiations on a settlement freeze, pursuing recognition at the United Nations and agreeing to a unity deal with Hamas.

Seen through this lens, it is easier to understand why Israel has been so wrongheaded in responding to regional developments in recent months. Its reactions to the demise of the Mubarak regime provide an interesting case in point. At first, Israel’s leaders appeared to be in denial, both assuming that Mubarak would tough this one out and encouraging him to do so. As Mubarak’s departure became inevitable, Israel’s leaders clung to the hope that their second BFF in Egypt, Gen. Omar Suleiman (briefly appointed vice president), might yet save the day. Then a panicked tone set in, with Israel’s elites going into hunker-down mode and taking a lead in the global scaremongering campaign over a potential Islamist takeover, an Iran Revolution II scenario. The tendency across the range of Israeli media was to blame President Obama for “losing Egypt.” It has now been revealed by a former government minister that Israel even offered Mubarak asylum.

Israel has had to find a new narrative and a new strategy for the region. The former was relatively easily accomplished; the latter, not so much. The new story line is not really so new, focusing as it does on the threat of Islamists and Iran, and the idea that acceptance of Israel is a litmus test for any budding democracy. This is a particularly bizarre notion, given the pace at which the Knesset is legislating antidemocratic measures, for instance on freedom of expression and on housing. Coming up with a new policy is proving far trickier—a difficulty compounded by Israel’s insulation from and impoverished understanding of its own neighborhood. Israel has erected a separation barrier between itself and the Palestinians in the West Bank and Gaza, is proceeding to do the same on the Egyptian border and has long had closed and militarily fortified borders with Lebanon and Syria. Trade with all of its Middle East neighbors, in fact, amounts to less than 5 percent of its total. Israelis rarely visit even those Arab countries it is possible to enter, and the Arab community inside Israel is treated as a fifth column rather than as a bridge to regional relations. Of course, this is a two-way street. Yet when the physical barriers are combined with what is often a striking lack of intellectual, cultural and social curiosity, Israel is in danger of being fundamentally incapable of interpreting developments in its immediate surroundings.

Israel was also uncertain in responding to developments in Syria. The desire to see a member of the resistance axis fall has been tempered by acknowledgment that the Assad regime has maintained a quiet border with Israel and hardly constitutes a formidable foe in either the military or diplomatic arena. Bashar al-Assad and Baath Party rule are “the devil Israel knows,” and the survival of that regime, especially with a more diminished stature, thoroughly discredited in and condemned by the West, could have some advantages for Israel.

Quietly over the past months, Israel’s strategy in the face of the Arab Awakening seems to have coalesced around a set of positions, none of which feature on the democracy-promotion end of the policy spectrum. Israeli leaders have said little in public; partly this is understandable and wise prudence.

In its immediate vicinity, Israel seems to prefer the status quo ante. In this respect, it shares an agenda with counterrevolutionary forces elsewhere in the region, notably in the Gulf. In fact, during the months of the Arab Awakening, Israel and Saudi Arabia more often than not found themselves singing from the same hymn sheet. Both have expressed frustration at the insufficient enthusiasm shown by the Obama administration for the ancien régimes. Of the neighbors experiencing some convulsions, the Hashemite Kingdom of Jordan stands out as the country where regime preservation is still considered possible, and it is also where there has been the most thorough Israeli alignment with the United States and Gulf states in supporting this agenda. While relations with King Abdullah remain frosty, Israel is doing all it can behind the scenes to be supportive.

Israel and the conservative Gulf forces also share common ground on Egypt. Here the focus is on salvaging what is possible (and much seems possible) from the old ruling elite structures, which are Western-oriented and over which Israel may have more leverage. Maintaining a pre-eminent role for the current ruling authority, the Supreme Council of the Armed Forces, is central to this project. The armed forces are interested in sustaining their economic privileges and continued assistance from Washington, again providing Israel with cards to play.

The other component to Israel’s response strategy, one that is fully in sync with Europe and Washington, is actively promoting a set of neoliberal economic policies for the region. This may be more significant for Israel’s positioning and future plans than is often appreciated. It is also ironic, given the social convulsions being felt inside Israel. Despite all the evidence to the contrary, Israel and the West have depicted Egypt’s attempted revolution as the result of an excess of bureaucracy and insufficient market reforms, rather than rejection of the economic liberalization that has stoked inequality and indebtedness, strengthened Egypt’s economic elites and encouraged a kleptocracy. Continued privatization, deregulation and opening to foreign investment would benefit Egypt’s narrow business and military elites, alongside foreign investors, and bind those ruling interests ever more tightly to the Western states and perhaps also to financiers from the Gulf Cooperation Council. Policies that would undermine the possibility of economic democracy would, in turn, suffocate political democracy and would probably be Israel’s best bet for a return to something like Mubarakism without Mubarak.

Overall, a more democratic Arab world will have the effect of narrowing Israel’s room to maneuver for as long as it remains in the business of denying Palestinian freedom. The problem for Israel was astutely defined by President Obama in May: “A just and lasting peace can no longer be forged with one or two Arab leaders. Going forward, millions of Arab citizens have to see that peace is possible for that peace to be sustained.” This will require a fundamentally different approach to the Palestinians. Even if a formula is found to resume negotiations and avoid a September showdown at the UN, turning back the clock will prove ephemeral. The window of Palestinian sustainability for old-school peace-processing will be smaller with every iteration. An image that appeared so natural last September—of an American president flanked by Israeli, Palestinian, Egyptian and Jordanian leaders, again suspending disbelief and lending credence to thoroughly discredited peace talks—will not be repeated.

In this new regional environment, five challenges stand out for Israel. First, conditions for Arab cooperation with Israel, including cooperation by Palestinians, have deteriorated significantly. This will apply even to issues where there is a degree of overlapping interest, such as Iran.

Second, it will be more difficult for Israel’s friends to provide cover for continued Israeli occupation and violations of international law with regard to Palestinians. If freedom and democracy for Arabs is the new mantra, then its inapplicability to Palestinians will be harder to justify. This is relevant for the United States, and probably more so in the short term for European governments, which are more likely to be faced with consumer and other protest actions from their own publics. Jewish communities around the world—already somewhat internally divided over Israel—will face ever more stressful and divisive dilemmas.

Third, Israel will have to recalibrate its military posture in the face of potential new security challenges arising from enhanced instability and uncertainty on what were previously predictable and stable borders (notably with Egypt, as witnessed in the mid-August incident near Eilat and the ensuing tensions between the countries). This comes at a time of increased budgetary pressure on defense expenditures in response to the summer’s social protests and growing inequalities inside Israel.

Fourth, Israel faces the prospect of an invigorated Palestinian turn in priorities and tactics, including nonviolent popular resistance and civil disobedience. Mobilization of this nature has been occurring in West Bank villages for some time and briefly took on a regional component in May, with marches on Israel’s borders to mark Nakba Day. A concerted push in this direction is a distinct possibility, and very much in line with the popular mobilizations of the Arab Awakening. A sustained, nonviolent Palestinian movement probably has the greatest potential as a game changer—it keeps Israel’s military planners up at night.

Finally, the region is likely to witness greater integration of Islamist movements into mainstream politics at a time when Israeli politics and discourse are taking on a more discernibly religious, fundamentalist and even messianic tone.

Israel will need to adjust to these developments, but its changing politics and demographics would appear to leave it ill equipped to do so. While the remaining realists in Israel’s establishment seem to understand that there is a pressing need to reformulate relations with the region and urgently address Palestinian realities in response to the Arab Awakening, they carry less weight in policy-making circles and less traction with the public. Yet even the prescriptions of the traditional moderate Zionist camp may be insufficient in the face of these new challenges.

This is where Israel’s summer protest movement may offer a glimpse of new hope. This would entail successfully drawing the connections in people’s minds between the costs of occupation, settlements and “no peace” and the inadequate provision of social goods. It would also include recognition that the system of social injustice now being opposed by Israeli Jews is rooted in and fed by the prevailing logic of ethnic discrimination against Palestinians in Israel and the occupied territories. That kind of social reset—a twin assault on neoliberal economics and neoliberal Zionism—does not come easily.

The social protests may be a teachable moment, surfacing some of these issues, raising doubts, hinting at new coalitions and seeding a new politics. Perhaps the best indication of the movement’s radical potential is seen in the anxious response from the settlers, described by Israel’s leading commentator, Nahum Barnea, as “overt hostility, almost panic.” Predictably, they have called for massive settlement construction to solve the housing crisis, and they’re backed by most ministers in the government.

The most likely, if exasperating, course for the protest movement is being charted by self-appointed spokespeople of “sensible Zionism” who have launched scathing attacks on the leftist wing of the movement, called to replace its leadership and advocated what amounts to a fortification of Jewish solidarity. That would boil down to a redistributive tweaking of the pie to accommodate and depoliticize middle Israel, ensuring that army reservists remain motivated, their nests refeathered and loyalties girded for future wars. Such a business-as-usual outcome would represent a wasted opportunity, the magnitude of which is dramatically compounded by the challenges induced by the Arab Awakening.

Israel’s last major strategic reorientation was its peace treaty with Egypt. That required a full withdrawal to the 1967 lines, the removal and dismantling of all settlements in the Sinai, an agreement on international arbitration over the small disputed territory of Taba, and security arrangements that included monitoring and deployment by international, rather than Israeli, forces. Ironically, it is change in Egypt that dictates the need to undertake another major strategic reorientation. Worryingly for Israel, the combination of pugnacious nationalists and biblically inspired ideologues currently steering the ship of state seems woefully inadequate for the task at hand.