I have asked quite a number of Arabs the following question: "Let's say you are Sharon, what do you do?"
The answer is always "kill myself".
Then I ask "well, lets say you are Arafat, what do you do?"
The answer is usually a variant on "roll over and die".
Then we all smile, some of us more sincerely than others, and I say "more seriously, you are in charge of the state of Israel, what do you do?"
The answer is often "give in to the Palestinians".
Here is what you get if you ask why:
There are two arguments: In the case of a stalemate, such as the one in which the Israelis and Palestinians are stuck in the first step should be taken by Israel. In other words, where Israel needs terrorism to stop, or desires that whatever body that speaks for the people acknowledge Israel's right to be secure, and where the Palestinians need autonomy, or a cessation of settlement building, the first move should be made by Israel. Why? Well the argument is often that 1) the Palestinians are right and Israel is wrong, and 2) that Israel is stronger, therefore it can afford it.
Argument 1 is silly. Clearly both sides think that they are right.
Argument 2 is mistaken as well. First, it is not incumbent on the stronger to be nice. That is an axiom of 1960's liberal thinking, a la John Rawls. That is, that the sacrifice always has to be made by the stronger regardless of all other historical circumstances. This generally makes sense to old balding people with pony tails.
Keep in mind that Israel, like the US in the "war on terror" is employing the following reasoning. In response to all the Lefties (political, not handedness) who assert that there is a good reason why the world hates the US, namely because our foreign policies and other such excuses, the US argues that there are two ways to get the world to be nice to us. We can either be very nice to them, and sacrifice a lot of our own resources and quality of life, or we can be mean to them and sacrifice their quality of life and stuff. We would much rather do the latter. That is not to say that anyone may exploit anyone else, but say in Israel's case, where Israel can either be nice to the Palestinians and risk their own security, or be harsh and have a smaller risk to their security, what reason does Israel have to be nice?
So there is nothing for Israel to gain by being nice and making the first move toward cooperative behavior. As a matter of fact in light of any ongoing conflict it is generally irrational to make the first cooperative move, especially if you are already stronger. After all, if the other side is fighting you when you are stronger then what incentive would they have to stop if you expose yourself and offer the first cooperative move.
I would like to offer a new peace proposal which I dub "The Alternative Saudi Plan". The Saudis seem to be the dominant player in Arab politics these days. Moreover the Saudis know that they really are the strongest players in the region. Despite the fact that from a military perspective they rely on others for protection, they know that they have little to worry about. The US will protect out oil interests there. Israel knows that as well.
Why not have the Saudis take the first step? What step can the Saudis take that will both recognize the complex reality of Israel's existence and generate an immense amount of goodwill? The Saudis can unilaterally, or with the cooperation of other Arab states come out, travel to Tel Aviv and declare their unconditional acceptance of pre-1967 Israel as a sovereign state with intentions to establish an embassy as soon as there is a state of Palestine.
That would put everyone in very precarious positions. It would force Israel to confront the reality that peace is within arm's reach. There would be tremendous pressure to abandon as much of the territories as possible and really work toward a peace settlement. Even a Sharon government cannot avoid this.
It would also put the Palestinians in a very precarious position. They would be forced to either side with the Saudies or not. I suspect that they all will. That means that the next thing is that they have to prepare to take charge of a state, and have to acknowledge Israel, and have formal dealings with them.
This of course will never happen. Why? Because, of the three groups involved here, the one who would have to do something is the only one who loses from a peace deal. The Israelis would gain, the Palestinians will gain. The Saudis will loose. How do the Saudis loose from a peace deal? Simple.
It is a function of Arab politics. This is evident especially in places like Lebanon, though you can see it clearly in the politics surrounding Arafat too. In the Arab world it seems like there is an odd system of beliefs about who ought to be in power. It is not the least corrupt, or the one doing the most for the people. It is generally the one doing the best job holding the enemy at bay. This translates in today's politics - to the one fighting Israel.
Currently the Saudis are under little pressure to reform their own government. Why? Because they are fighting Israel. You have the same story in Lebanon. Government corruption is rampant. Arafat's government is merely a system for a few people to scam money from countries honestly trying to help needy refugees. In all the other Arab countries the notion of a citizen who is under the protection of a government is foreign. Rather people believe themselves to be ruled by a government. Rights are western ideas that have not trickled in to the Arab lexicon, as are the notions of freedom, liberty, private property, free market, or secularism (whose word in Arabic is usually "la dini", no religion, and has very pejorative connotations).
(The fact that all the Arab countries exploit the Palestinians like this is old, and was made famous mostly by the Palestinian cartoonist Naji al-Ali, who it seems was killed by the PLO some 20 years ago for criticizing Arafat too.)
The Saudis know that in the absence of the Zionist enemy the people's anger will be turned toward their own government. Their people will no longer be able to say "of course out government is oppressive, but at least they are fighting Israel". As George Orwell pointed out, nothing makes people believe in their own government more than an enemy that needs the government to fight it.
So the clear option for the US is to pressure the influential Arab states, like Saudi Arabia to making the tough concessions that will force Israel and the Palestinians toward a rapid settlement, and let the Saudis deal with their internal problems by starting their own subtle political reforms.