With much of his time and energy being consumed by the enormous challenges of rebuilding the American economy and fighting wars in Iraq and Afghanistan, President Obama is discovering that Washington may be constrained in its ability to engage in unilateral peacemaking in the Holy Land. Indeed, the erosion in US global power in the aftermath of the Bush administration's military and diplomatic mis-steps, coupled with the dramatic loss of American economic status, demonstrates the need for Washington to invite another group of players, the Europeans, to share more of the diplomatic and military burden of Middle East peace processing.

To put it bluntly, Washington should try to end the EU's free-riding on American policy in the region, a system under which the Europeans benefit from the US political-military role, including its responsibility for pressing the Israelis and the Palestinians to make peace, while distancing themselves from the aspects of American policy that run contrary to their interests.

In fact, the EU's interests are even more exposed than those of America to political instability in the Middle East, Europe's strategic backyard. The region is not only the source of 40% of the EU's oil imports (compared to less than 20% of US oil imports) – if and when Iran arms itself with nuclear weapons, its missiles would be able to strike Paris and Rome before they could reach New York and Washington.

Hence, a failure to resolve the Israeli-Palestinian conflict poses more of a direct threat to the Europeans than to the Americans. By offering Israel and Palestine an incentive to make peace in the form of eventual membership in the EU, Europe could proactively help to reverse current negative trends.

The EU is already the most important trading partner and source of capital to Israel and the Palestinian Authority, which are also members of the Euro-Mediterranean Partnership, aka Barcelona Process, which the EU launched in 1995 as part of an effort to strengthen its relations with the countries in the eastern Mediterranean and North Africa. In 2008, the French president, Nicolas Sarkozy, tried to energise the Barcelona Process by initiating the formation of a Union for the Mediterranean, bringing together EU members with non-EU countries that border the Mediterranean, including Israel and the PA.

These two interconnected forums could help facilitate an activist European diplomacy to be pursued together with US initiatives to resolve the Israeli-Palestinian conflict. The EU strategy should involve more than just the application of its "soft power", in the form of economic and other non-military assistance. In fact, the EU would be in a position to use its evolving combined military force to serve in peacekeeping operations along the borders between Israel and Palestine.

But the main European contribution to inducing the two sides to make peace – and to eventually sustain it – would be the offer of EU membership to Israel and Palestine. Joining the EU would not only fulfil the deepest economic, cultural and political aspirations of many Israelis and Palestinians, it would also provide a framework for economic co-operation between the two intertwined states as well as laws, rules and norms of behaviour that would protect both from succumbing to their worst instincts. Indeed, the process of accession into the EU would help tip the balance of power among both Israelis and Palestinians in the direction of the more westernised and secular elements in both societies.

In a way, turning towards Europe would complete an historical cycle for both the Zionism that gave birth to Israel and the Arab nationalist opposition it ignited. If European antisemitism and imperialism helped set the stage for the current conflict in Israel/Palestine, there is an element of historical justice in having Europe play a central role in resolving the clash between Zionism and Arab nationalism.

For the Israelis, a diplomatic package deal that reinforces the benefits of peace with the Palestinians through membership in the EU would help end Israel's unhealthy dependence on the US. Conditioning Israel's entry into the EU on its agreement to withdraw from the occupied territories and dismantle the Jewish settlements there would strengthen the hands of those Israelis who envision their state not as a militarised Jewish ghetto but as a normal state and a liberal and economically prosperous community.

For the Palestinians, the choice is between the vision of peace with Israel as part of a partnership with the EU, of a Palestine as a Middle Eastern Hong Kong, as opposed to the alternative of continuing Israeli occupation and the growing power of radical Islamist forces.

A new Palestinian leadership working with the EU would have to pursue a reform-orientated programme as part of negotiations on accession. This would involve the economic reconstruction of the West Bank and Gaza through investment and aid and the creation of Palestinian-Israeli-EU business partnerships. In the same way that the establishment of Nafta produced pressure for reforms in Mexico, the evolution of trade and institutional ties between the EU, Israel, and eventually Jordan, Syria, and Lebanon, could lay the foundations for movement towards peace and economic and political change in the entire Levant.

A key benefit of stronger institutional ties between the EU, Israel, Palestine and neighbouring countries would be a stronger framework for the protection of minority rights. Israel risks becoming an apartheid state with pariah status abroad unless it can find a way to provide its non-Jewish citizens with full civil, political and economic rights. Conversely it will be difficult for the Palestinians to realise the benefits of peaceful co-existence with Israel unless Jews can live and work in a new Palestinian state without fear for their safety or property. Integration of both Israel and Palestine into the EU framework, including EU rules with respect to the protection of minority rights, would make these requirements much easier to fulfil.

Many Americans might resent the idea of losing their dominant role in the peace process. But the non-strategy pursued by several US administrations and based on the notion that the Americans do the driving in the Middle East while asking the Europeans to change the oil and check the tyres has become unfeasible, which explains why Obama needs to ask the Europeans to start taking an active part – and do some driving – in steering an effort to bring peace to the Middle East.

• William Nitze is an adjunct fellow at the Centre for Strategic & International Studies, the chairman of the board of advisers of the European Institute and the president of the Committee for the Republic. Leon Hadar is a research fellow in foreign policy studies at the Cato Institute and the author of Sandstorm: Policy Failure in the Middle East (Palgrave Macmillan, 2005).

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