The economic crisis we are currently experiencing appears to be extreme, largely because it really comprises three major simultaneous and interlocking crises. The first is a complex financial crisis in the American capital market. The second is a prolonged macro-economic crisis in the United States that began several years ago and affects global currency exchange rates. And the third is the extreme rise in oil prices.
Each of these crises is big; together, they create a critical situation. Here we are not going to discuss economic solutions or broad ramifications for the entire world. Rather, we shall sketch several ways in which these economic developments directly and indirectly affect Israeli-Palestinian relations.
The new economic reality will, in the near future, divert the world's attention away from the conflict in our region, as the world focuses on economic problems and their domestic significance for each individual country. The scope of this crisis is so broad that virtually no country will escape its effects with the exception of the oil producing states that benefit from a huge income windfall thanks to the rise in oil prices.
In the US, President George W. Bush will be busy with economic issues. Even the American elections will focus on the economy. Caught in the eye of the economic storm, Washington will redouble its efforts to find a solution in Iraq (though probably not before 2010) that enables it to withdraw, thereby reducing its defense burden and its budget deficit. This American weakness, however temporary, is of course immediately projected onto the Annapolis process and Washington's allies in the region--first and foremost Palestinian President Mahmoud Abbas (Abu Mazen).
The Middle East is changing in view of this new reality: Saudi Arabia and other oil-producing states are accumulating economic clout that the US cannot ignore. They are buying up assets in America, including troubled financial institutions, and enhancing their influence. Egypt and Jordan with their peace treaties with Israel are witnessing their inter-Arab standing slip in favor of the wealthy oil states.
Under these circumstances, the big winner will be Iran. Tehran recognizes that it will soon be relieved of the American presence on its borders. As an energy producer bursting with new oil income, it can easily deliver financial aid to nearby state allies like Syria and to allied extremist movements like Hizballah and Hamas.
The most significant damage will be done to the Palestinian Authority. The readiness and capacity of the western economies to make good on their commitments to donate funds as promised at the December 2007 Paris donors conference will be reduced. And while the oil-rich Arab economies could easily transfer funds to the Palestinians and make up the difference, it is not clear how eager they will be to do so.
Economic aid to the Palestinians is a factor in the emerging struggle between the Sunni and Shi'ite axes in the Middle East. In view of the riches accumulating in the region, it is possible with relatively small sums to influence Palestinian political decisions. At this point in time it is the Iranian axis that appears to be the more activist, as it buys influence even beyond Gaza and Hamas--in the West Bank and among additional Palestinian movements--while the Sunni axis is less resolute in its support for Abu Mazen.
Israel with its export-oriented economy and international economic profile will also be hurt by the global drop in growth that follows the American crisis. The extent of the slowdown will depend in part on the economic policies adopted by the government of Israel. The Palestinian economy, with its links to Israel, will also be affected--but to a relatively limited extent, insofar as the Palestinian economy has over the past seven years reduced its ties to the Israeli economy in the wake of the violence of the second intifada and Israel's economic and security response. The Palestinian economy is weak (not only in Gaza but in many parts of the West Bank as well) and cut off from many of the economic links and developments related to Israel and the West. Thus the emerging economic situation is more likely to influence extremist elements.
There are still many unanswered questions with regard to longer-term developments in the global economy and their effect on the Middle East. Conceivably, the world will recover relatively quickly from the economic crisis. But in the short term, the moderate Israeli-Palestinian track will be weakened vis-a-vis the extremists. In the near future, irreversible developments are liable to confront Israel with extremist forces and a deteriorating political reality.
As always in these situations, time works in favor of those actors who know how best to exploit it.
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