FEW architectural sites in East Jerusalem, the side of the city that Palestinians see as their future capital, capture the flavour of Palestine's British Mandate more acutely than the Shepherd Hotel. It was where British officers hobnobbed with Palestinian high society before the territory was partitioned in 1948. General Sir Evelyn Barker, in command of British troops under the mandate, dallied there with a celebrated Arab hostess, Katy Antonius.

But on January 9th the Israeli authorities, who argue that all of Jerusalem is theirs, and rarely license Arabs in the city to add so much as a balcony to their homes, gave the go-ahead for bulldozers to flatten a wing of the hotel to enable Jewish homes to be erected in its place. European governments sound ever more eager to assure the Palestinians they will have a state of their own, yet cannot manage to save an historic building on Palestinian land bang next to their own diplomatic missions.

Israel's prime minister, Binyamin Netanyahu, derisively calls the site just another “private house”, saying it would be wrong to make certain districts of Jerusalem out of bounds for Jews. Besides, a recent poll suggests that many Palestinian residents of East Jerusalem would like to become Israeli citizens. But the new settlement to be built on the rubble forms the missing link in a tongue of land acquired by Jewish settlers that rolls down from the outer hilltops to the heart of the city's Arab part. Three years ago, an Israeli government body expropriated an adjacent olive grove for “agricultural cultivation”, awarding it to Ateret Cohanim, a zealous settler group with no known farming skills.

The location means a lot in other ways. It is in East Jerusalem's diplomatic quarter, beside the British consulate and offices of European governments accredited to the Palestinian Authority (PA), which is supposed to run the emerging Palestinian state, thus highlighting foreign impotence over the erosion of Palestinian areas.

European officials in Brussels, unable to stop such actions, have charged Israel with illegality and obstructing peace. A statement by foreign ministers of the European Union (EU) even seemed to equate the recognition of Israel with that of Palestine. One inference was that, if the Palestinians failed to secure a state, Israelis might forfeit theirs too. Not so long ago Germany, racked by guilt over the Holocaust, would have rushed to quash such chidings by the EU, but no longer. The Dutch have been readier to take Israel's part but, overall, the narrative used by pro-Palestinian lobbies is becoming the standard discourse among Europe's leading governments, Germany included. That will feed the fear in Israel that it is being “delegitimised” abroad.

Will such protests have an effect? A leaked internal report on Jerusalem approved by the EU's heads of mission recommends tougher permit requirements for Israelis who have settled on the Palestinian side of the 1967 border and who want to travel to Europe. It also says that products made in the West Bank settlements should be labelled as such, so that European shoppers can refuse to buy them. Most Palestinians want European governments to discourage investment in Israel and to impose economic sanctions on it, arguing that Europe took such steps against South Africa under apartheid.

German officials now toy with the idea of following Britain's lead in discouraging the import of produce from sources that are deemed illegal. “We say settlements are illegal, so how can we trade in illegal goods?” asks one. DB International, a subsidiary of Deutsche Bahn, a railway company owned by the German state, is under pressure to withdraw from a contract to help build the high-speed railway between Jerusalem and Tel Aviv, part of which runs through Palestinian territory, otherwise pro-boycott lobbies say they will prod Qatar into cancelling the company's deal to build a railway in the Gulf.

Yet few diplomats expect a sea change. The EU Commission has shelved its Jerusalem report without a formal discussion. The only divestment European diplomats have discussed in private is the possibility of reducing the €1 billion ($1.3 billion) European governments and the EU give every year to the PA, on the ground that this merely makes it easier for Israel to deal with its occupation of Palestinian land.

The Palestinians are looking elsewhere. Despairing of getting a state with the co-operation of Mr Netanyahu, they are urging the UN to vote one into being instead. But there too they face a lot of sceptics. Some European countries have upgraded the status of Palestinian diplomatic missions to them, but EU foreign ministers have so far avoided copying the growing number of South American governments that now fully recognise a Palestinian state.

The Europeans say they must wait for the right moment. Hitherto some had marked the end of a two-year preparatory period, spelt out by the PA prime minister, Salam Fayyad, who set August 26th this year as the date for completion. But most Europeans now contemplate a fudge. Recognising a Palestinian state forthwith, they say, would only paint Israel into a corner, bolster its siege mentality and provoke its ruling right-wingers to gobble up more Palestinian land. And others question the sense in recognising a phantom; even the Palestinian foreign minister, Riad Malki, admits that “on the ground, [recognition] won't make any difference.”

Above all the Europeans fear their credibility would be drained. Amal Nashashibi, scion of a Palestinian family whose ancestors once danced at the Shepherd Hotel, asks how foreigners can think of creating a whole state when they cannot stop Israel demolishing a house on their doorstep.