The alert level was officially lowered here the other day, since Saddam is now permanently defunct and his Scuds no longer a serious threat. The major issues facing Israel right now have returned to the security situation in general and the long term post-war diplomatic maneuvering that's going on as we speak.

PM Sharon gave an interview to the very-Left wing paper Haaretz the other day where he pretty much said outright that he's willing to dismantle some settlements. Everyone is falling all over themselves trying to figure out if this is a Nixon-goes-to-China moment or if Arik is just posing for the Americans. I personally think he's quite serious, and if not its irrelevant because he's now effectively painted himself into a corner on the issue. He's got too much riding on his relationship with Bush to jeopardize it over a couple of outposts in Gaza that nobody wants to spend lives and money defending anyways. I'm personally against most of the settlements, mainly because they are militarily useless and cause immense dissension in the Israeli public. Young reserve soldiers dont want to risk death defending three lunatics on a hill in the West Bank and I agree with them. On the other hand, the notion that the settlements are the major cause of terror and violence in this situation is ludicrous. The Palestinian leadership made a political decision to use terror against Israel, it has nothing to do with the settlers. Ideologically, they consider all the Israelis settlers anyways.
Which brings us to the Mahmud Abbas, the new almost-Prime Minister of the Palestinian Authority. The guy is a terrorist scumbag, but so is everyone else in the Palestinian Authority, and we have to deal with somebody. The big question is whether he's a genocidal racist like Arafat and Shiek Yassin (the leader of Hamas), or a begrudging advocate of compromise like Muhammad Dahlan. If he's the latter, then there is ample reason for optimism, especially since Sharon has already indicated his willingness to sit down with Abbas in an official capacity, something he never did with Arafat. I can see two possible outcomes here: 1) Abbas and Sharon, with a lot of American prodding, negotiate something like a cease fire and we finally get some quiet around here for awhile. In this case, what will probably happen is a gradual Israeli withdrawel matched with the byuilding of hopefully legitimate, semi-democratic - that's the best I'm hoping for - institutions. In the end, a de facto Palestinian State will exist even before its declared. In other words, the institutions of state will be built before the state even comes into existence. This strikes me as a very likely scenario, but it depends on two things, American involvement and Palestinian willigness. Which leads me to, 2) the Palestinians return to violence, in which case I think Sharon will have even more political leeway with the Bush administration, since they wont like being let down by another irredentionist Palestinian leader.
I cant say with any certainty which of these two scenarios will occur, perhaps there will be a combination of both. The important factor is whether there is a change in the Palestinian political culture. First, away from the desire the annihilate Israel in a catastrophic confrontation and second, away from their dependance on ayuthoritarian, terroristic forms of governance and leadership. So far, their track record on both these points is not good. But there is the possiblity that the devastation suffered by Palestinian society in the last few years, coupled with the shock of Saddam Hussein's fall and, particularily, his own people's joy at his fall, may have shocked the Palestinian's into at least the willingness to try another approach. Like all Zionists I, at least, live in hope.

Alongside the security issue is the economic one. Bibi Netanyahu's economic plan is the source of much consternation at the moment. The Right thinks its long overdue and the Left thinks its Armageddon. The economy is actually beginning to show signs of an upswing at thr moment, with the end of the war in Iraq and the growing success the IDF has shown in interdicting terrorists. This Pesach weekend was a particularly good sign, the stores and hotels were packed and people were out and spending money. The tourists are not coming of course, but if things stay calm here (and there is no guarantee of that) this may change in the near future as well.
Bibi's plan is a drastic reworking of the economic system in Israel, and it is long overdue. It is basically a semi-Thatcherite reduction of the public sector combined with a tax break for the investing classes. Keep in mind that Israel was founded as a Socialist state and the effects of this are still keenly felt across the economic spectrum. The beaurocratic mess that is the Israeli government is daunting to anyone trying to start a business, and taxes here are unthinkably high by American standards. Cars, for instance, are taxed at 100% of their value. In other words, you pay double.
Of course, this is a major social change in the country and dislocations are inevitable. In my opinion, however, Israel's possible economic dynamism has been stifled for decades by its beaurocracy and this is the best chance its ever had to emerge from its shell. There's no reason why what's worked in Ireland or Britain can't work here.