Cover story in Issue 1, April 27, 2009 of The Jerusalem Report. To subscribe to The Jerusalem Report click here. On the last two days of March, some of the most powerful politicians in the country cooled their heels outside about-to-be-installed Prime Minister Benjamin (Bibi) Netanyahu's Knesset office, like supplicant schoolchildren waiting for an interview with the headmaster. There was a constant procession, in and out of the room, as Netanyahu informed the Likud party hopefuls which ministries they would be getting in his new government. In typical Netanyahu fashion, the new leader, in full view of the attendant media, was showing off who was boss. Almost a decade after leaving the prime minister's office, Bibi was back and enjoying every minute. In the small hours of the next morning, shortly after the new government was sworn in, Netanyahu received further confirmation of his return to center stage. U.S. President Barack Obama called to say he wanted to be the first foreign leader to congratulate him on his second coming. Netanyahu ended his first term in 1999 under a cloud, widely seen as one of Israel's worst prime ministers and drummed out of office by a landslide. The question pundits are now asking is whether 10 years older, chastened and vastly more experienced, Netanyahu will, like Yitzhak Rabin in the early 1990s, do significantly better second time round. The prologue has not been auspicious. Israel's 32nd government is the largest and potentially the most unwieldy in its history. There are 30 ministers and eight deputy ministers: In other words, nearly one third of the 120 Knesset members and half the 74 coalition members are in the government. That does not augur well for the workings of the government or the Knesset. Moreover, some of the coalition partners have been bickering for years. For example, there are fundamental differences between Netanyahu's two main coalition partners, Labor and Yisrael Beiteinu, on approaches to the Palestinians, Israeli Arabs and the Supreme Court, and, against that background, there is bad blood between their two leaders, Ehud Barak and Avigdor Lieberman. Netanyahu also made some "creative appointments" which could cause turf wars: Moshe (Bogey) Ya'alon as minister for strategic threats and Dan Meridor as minister for the secret services and the atomic energy agency could have trouble with Defense Minister Barak; and Silvan Shalom as minister for regional development could clash with Foreign Minister Lieberman, as could Barak, who has also been promised a say in shaping and directing Israel's peace policies. Likud spokesmen blame the proportional election system which leads to a plethora of parties for the size of the coalition and its inherent contradictions. The smaller the representation of individual parties in the Knesset, the more parties there have to be in the coalition and the more promises the prime minister has to make, they say. Critics, like Kadima leader Tzipi Livni, say Netanyahu could nevertheless have built a smaller and more coherent coalition based on the 68 seats garnered by Likud, Kadima and Labor in the February election. And she argues that Netanyahu himself is to blame for creating a cluster of superfluous portfolios and appointing "ministers of nothing" and "deputy ministers of zilch." Be that as it may, the government of Netanyahu's making is the one that will have to face some of the most acute challenges in Israel's history: Iran's nuclear weapons' drive, Israel's tarnished international standing after the Gaza war, its relations with the Arab world and the Palestinians in that context, and all this in the throes of the worst global economic crisis since the 1930s. In his first policy speech in the Knesset, Netanyahu made it clear that dealing with the Iranian threat would be his top security priority. Indeed, for Netanyahu, preventing Iran from acquiring nuclear weapons is almost a sacred mission. He sees a nuclear bomb in the hands of radical Islamists dedicated to Israel's destruction as an existential threat and speaks in terms of preventing a second Holocaust. In public he says it doesn't matter how Iran is stopped, but privately admits he has little faith in diplomacy or sanctions. Confidants say he sees himself as a key player in Jewish history charged at a crucial hour with the responsibility of saving his people, and some contend that, as a result, he has already made up his mind to use force to set the Iranian nuclear program back several years. Others in his inner circle, however, expect him to be far more cautious, pointing out that he would not have undivided backing from the defense establishment for a strike. On the contrary, some key military officials argue that taking out key Iranian nuclear facilities is not something Israel should contemplate doing on its own. For one, they argue, an Israeli attack on Iran would almost certainly spark a major war with Tehran and its proxies, Hizballah in Lebanon, Hamas in Gaza and possibly Syria as well. Even more importantly, the officials say, Israel would be ill-advised to act without an American green light. So far American leaders have been loath to encourage Israel. Last year the Bush administration turned down an Israeli request for heavy bunker-buster bombs for fear that Israel was planning to use them against strongly fortified Iranian nuclear installations. U.S. Defense Secretary Robert Gates has been strongly opposed to any Israeli attack, and in early April told the London-based Financial Times that he "would be surprised" if Israel "did act this year." Nevertheless, the Americans are taking the possibility of an Israeli strike very seriously. In early April, General David Petraeus, the top American commander in the Middle East, told Congress that "the Israeli government may ultimately see itself so threatened by the prospect of an Iranian nuclear weapon that it would take preemptive military action to derail or delay it." Obviously, Netanyahu would prefer the Americans to do the job themselves. "The Obama presidency has two great missions: fixing the economy, and preventing Iran from gaining nuclear weapons," he told The Atlantic monthly in a late March interview. The Iranian nuclear challenge, he said, constituted a "hinge of history" and he added that "Western civilization" will have failed if Iran is allowed to go nuclear. The $64,000 question though is whether, if the U.S. fails to take effective action, Netanyahu will. Alon Pinkas, a former Israeli consul general in New York, who has been advising Netanyahu on U.S.-related issues, is convinced Netanyahu will not want to act alone, and will seek maximum cooperation and coordination with the Americans. So much so that Pinkas thinks the Obama administration might use Israeli concerns about Iran as a lever to press Israel on the Palestinian track. "I think the Americans may well try to link the level of cooperation on Iran to progress with the Palestinians," he tells The Report. When Netanyahu meets Obama in Washington - probably in early May - Iran will almost certainly top the agenda. The meeting could be crucial in formulating a time frame for American diplomacy, and where Israel fits in if it fails. Although the American estimate is that Iran is still a year to three years away from producing a bomb, Israel believes time is fast running out: Military Intelligence Chief Amos Yadlin reckons Iran is already in a position to produce a bomb, and that it is only a question of political decision. And with this in mind, Netanyahu has already made contingency preparations for a military showdown with Iran a top IDF priority. The second major foreign policy-security issue on Netanyahu's desk is how to deal with his predecessor's peacemaking efforts with the Arab world, especially Syria and the Palestinians. Outgoing prime minister Ehud Olmert claims he was on the verge of direct negotiations with the Syrians and close to a final peace deal with the Palestinians. Early indications are that Netanyahu will want to restart both tracks from scratch. According to Pinkas, Netanyahu's attitude to negotiations with Syria will depend in the first instance on the outcome of the Obama administration's current feelers to Damascus. Both Israel and the U.S. are well aware of the strategic advantage of detaching Syria from the Iranian axis as part of a peace deal with Israel, and, says Pinkas, "If the Americans are convinced that Syria is a worthy interlocutor, ready to consider moving away from Iran, Hizballah and Hamas, then I think Netanyahu will be willing to explore that as well. And I don't think it will have to come at the expense of a Palestinian process." So far Netanyahu seems unwilling to pay the price of a deal with Syria - complete Israeli withdrawal from the strategic Golan Heights. Both he and Foreign Minister Lieberman say they are prepared to discuss "peace in return for peace," with Israel remaining on the Golan. Nevertheless, there seems to be a degree of ambivalence in the Netanyahu position. Despite his tough talk, he conducted a secret peace negotiation with Syria in the late 1990s, which on the face of it, seemed to entail a readiness for withdrawal. A ten-point document dated 29 August 1998, which his emissary, (the cosmetics magnate Ron Lauder, a former U.S. ambassador to Austria and a close personal friend of Netanyahu's), later presented to the Clinton administration, talks about "land for peace," and withdrawal in three stages "to a commonly agreed border based on the international line of 1923." Since then Netanyahu has consistently denied making a commitment to give up the Golan. Dore Gold, then a close foreign policy adviser and now a leading candidate to serve as Netanyahu's ambassador to Washington, argues that the Lauder document was misunderstood. "My judgment is that it was merely an effort to encapsulate what might make a workable Israeli-Syrian arrangement, but it was never an approved document or even a negotiating document written under the Netanyahu government," he tells The Report. Moreover, even if Netanyahu wanted to lead a new move to withdraw from the Golan in return for peace, he would likely encounter strong opposition in the Knesset and in his own Likud party. In the last Knesset, the Likud's Yisrael Katz mobilized a majority of around 70 Knesset members against withdrawal. In today's far more hawkish Knesset, the number would probably be much higher. Nevertheless, despite the heavy ideological baggage, pundits believe Netanyahu may well make a Syria move - especially if talks with the Palestinians are deadlocked and if Obama presses for dialogue with Damascus in the overall Iranian context. At the very least, it would be a way of gaining points in the international arena. Netanyahu aides, however, insist that, more than on Syria, Netanyahu's peacemaking focus will be on the Palestinians. "We do not wish to rule another people. We do not want to rule the Palestiniansâ€¦ Under the permanent-status agreement, the Palestinians will have all the authority they need to rule themselves," Netanyahu declared in the Knesset, promising a bona fide negotiation for a final peace deal on three parallel tracks, economic, security and diplomatic, but stopping short of commitment to the two-state model accepted by previous Israeli governments, the Palestinian Authority and the international community. Retreat from the two-state solution could cause major diplomatic problems for the Netanyahu government. Already there are signs of impatience in Europe. "Let me say very clearly that the way the European Union will relate with (sic) a government that is not committed to the two-state solution will be very, very different. And they know it, and we have to keep on saying that," EU foreign policy chief Javier Solana warned in mid-March. Already there is talk in some European capitals of freezing the significant upgrading of Israel's ties with the EU, launched last year as part of Israel's 60th anniversary celebrations. Even more serious in the longer term is the potential for serious damage to Israeli trade with Europe if boycott initiatives in the wake of the December-January Gaza war gather steam over rejection of the two-state model. Indeed, Olmert's parting shot as he left office was a warning to Netanyahu along these lines. "Anyone who thinks he can ignore this (international acceptance of the two-state model) doesn't understand what prices Israel may have to pay if that is the policy," Olmert declared. Netanyahu argues that he is not offering the Palestinians any less than previous prime ministers, only he is being more honest about what is actually on the table. "He believes that most Israeli negotiators who dealt with this issue, after making the concession on Palestinian statehood up front, began subtracting powers in the course of the negotiations, like the airspace, the armed forces or the right to make treaties with neighboring countries, such as Iran. So the new prime minister is being intellectually honest when he says look, I want to tell you, these are our concerns," a member of Netanyahu's inner circle told The Report. Explaining such delicate nuances, however, will be much harder in the face of Foreign Minister Lieberman's peremptory rejection of previous peace moves with the Palestinians and his bellicosity towards the rest of the Arab world. "If you want peace, prepare for war," the hawkish Yisrael Beiteinu leader declared on his first day in office. And while he said he accepted the 2003 "road map" to peace with the Palestinians, he rejected the subsequent Annapolis process in which Olmert and Livni had spent months negotiating the minutiae of a final peace deal with the Palestinians. "In 20 seconds" Lieberman had "wiped out a year of painstaking work" on the Palestinian track, Livni complained. The swaggering foreign minister has also alienated the Arab world, especially the Egyptians. Egyptian Foreign Minister Ahmed Aboul Gheit vowed not to shake hands with him, and the opposition Muslim Brotherhood introduced a motion in the Egyptian parliament to have Lieberman declared a persona non grata, barred from setting foot on Egyptian soil. On the Israeli left, too, Lieberman is anathema. Dovish New Meretz leader Haim Oron accuses him of courting disaster by deliberately turning his back on the Palestinians and the wider Arab world. In the first instance, Oron argues, this will unify the Palestinians and enable them to mobilize international support against Israel. Then a long stalemate could eventually erupt in Palestinian violence with a degree of international backing and maybe wider Arab involvement. "I do not share the illusion that the peace treaty with Egypt will withstand any crisis," Oron warns. In Oron's view, all this adds up to a threat at least as serious as the Iranian bomb. "Lieberman is closing all the doors to the Arab world, and I don't know of anything more dangerous for Israel's future," he tells The Report. For his part, Netanyahu hopes his plans for economic development of the West Bank will keep the Palestinians interested and international criticism at bay. He has already outlined his approach to Tony Blair, the international Quartet's special Middle East envoy, U.S. Secretary of State Hillary Clinton and U.S. special envoy, George Mitchell. While critics argue that the plan is simply a cover for Netanyahu's reluctance to talk peace, supporters say Netanyahu should be taken at his word when he says he intends to hold parallel economic, security and political talks. "He doesn't intend simply to invest money in the West Bank and never negotiate a political settlement," Pinkas insists. Some of Netanyahu's close advisers are suggesting that he supplement his "economic peace" with the Palestinians with a major Israeli regional peace initiative. This could serve as a counterweight to the Arab League's 2002 peace plan, help soften Arab and world opinion towards Israel and, in a best case scenario, get wider Arab world backing for Palestinian peace concessions. If Netanyahu fails to make such a move, he could be preempted by the Americans. They are reportedly considering putting a refined version of the Arab peace plan on the table, partly as a way of pressuring Israel. According to well-informed Israeli sources, the idea is to confront Netanyahu with his skepticism about bilateral processes with the Palestinians and Syria and his regional concerns on terror and the Iranian bomb, and to suggest a more comprehensive approach linking all the elements. In other words, to use Netanyahu's regional concerns to put him on the spot, at least with regard to the Palestinians. Netanyahu's most urgent order of business though is not Iran or the Palestinians, but coming to grips with the impact on Israel of the global economic crisis. The main challenge will be to find the right balance between government spending to save jobs and encourage economic activity, and keeping the budget deficit within manageable proportions. Netanyahu talks about saving 100,000 jobs (although saving jobs was only added to the government guidelines at the insistence of Histadrut Trade Union boss Ofer Eini), and getting credit moving again to accelerate economic activity. But so far, besides rumors of a freeze on wages in the public sector and cancellation of a tax exemption on apartment rent, the details of the Netanyahu emergency economic package, now being worked on round the clock in the finance ministry, remain hazy. Hebrew University economics professor Avi Ben Bassat explains that the problem the economic planners face is especially acute since the budget deficit is already a whopping 78 percent of GNP, compared to the 57 percent average in the OECD. Moreover, tax revenues are down because of the economic slowdown, and Netanyahu's coalition promises, especially to the ultra-Orthodox, will take a large chunk out of what could otherwise have been spent on recovery moves. Therefore, says Ben Bassat, a former director general of the finance ministry, the leeway the government has for spending towards economic recovery is extremely limited, and it is imperative that what money there is, be spent on a small number of carefully selected programs that will best see Israel through the crisis. His fiscal advice to Netanyahu would be to increase unemployment benefits, invest in hi-tech R&D, plan infrastructure projects (but not carry them out yet because that would only provide jobs for foreign workers), cut back drastically on the number of foreign workers to create jobs for Israelis, and raise revenues by cutting the defense budget and canceling tax exemptions. As for monetary moves, Ben Bassat says he would save only companies that are productive and considered viable in the long term, in return for a government share in company ownership. "Companies that want to be saved must be prepared to sell the government shares. There can be no free rides," he tells The Report. The package Netanyahu eventually comes up with will likely not be very different from Ben Bassat's. The general contours of the former director general's thinking are echoed by today's finance ministry incumbents. However, Ben Bassat believes Netanyahu has already made a number of political mistakes that will cost him on the economic front. "Why should we support yeshiva students or people with large families who don't want to work? A major economic crisis is not the time to give in to blackmailing coalition partners," he fumes. Ben Bassat is also critical of Netanyahu's decision to work closely with the Histadrut and the Manufacturers' Association in shaping economic policy. "I say the government should listen to the employers and to the Histadrut, but then send them out of the room, and decide on its own. A round table in which you coordinate policy with two interested parties could create obligations that get in the way of an optimal recovery strategy," he warns. The most emphatic criticism economists like Ben Bassat make of Netanyahu's economic moves so far, however, is of the appointment of his close confidant Yuval Steinitz, a man with no formal economic training or experience as finance minister. Ben Bassat argues that Steinitz's initial weakness will hand the bureaucrats in the finance ministry too much power. "I think in a democracy, the input of the finance minister is important, and it is a pity it won't be there. In my view, he won't be effective at all during the first year," Ben Bassat asserts. In early April, as carpenters worked on a new table big enough to accommodate all Netanyahu's new ministers in the Knesset, police were interrogating the new foreign minister on serious allegations of fraud. That bizarre situation reflected two key political facts: On the one hand, the size of the government is likely to lend it stability - the coalition is made up of 61 MKs from Likud and its natural right-wing allies, and 13 Labor MKs, so that even if Barak pulls out of the coalition, it will survive; on the other hand, the one single coalition partner that could bring the government down is Lieberman's 15-member Yisrael Beiteinu. That explains Netanyahu's odd choice of foreign minister. It also means that the first challenge to the government's stability could come not from Iran or the economy, but from the attorney general, if he decides to prosecute the mercurial Yisrael Beiteinu leader. Cover story in Issue 1, April 27, 2009 of The Jerusalem Report. To subscribe to The Jerusalem Report click here.