Not a bad go, mate, but some errors or blind-spots:

(i) Re Arafat: he rejected a deal that arguably wasn't politically sustainable given the territories retained. Leaving aside Israeli spin, the offer rejected allowed for Israelis to retain key settlements. If you don't know the geography, you don't get it. Percentage of total surface area isn't they key, but what lands. Israel, to do a deal, has to accept that its big settlements on the other side of the 67 borders have to go. Palestinians aren't going to go for anything less - not durably at least. But the Israeli government has not accepted that.

Of course, Arafat should have negotiated further, but he always was a moron, a rather Bush like short-term thinker playing to his core base w/o regard to longer-term interest.

But framing this as merely Arafat rejecting fundamentally misunderstands the incentive equation.

(ii) Second, and that ties to this: If others, including the Europeans and their Arab neighbors also respected and supported those objectives [to live in peace] (at least more than merely verbally), there would be no problem. But the Israelis also want to preserve a certain ethnic and cultural character to their state. I think that’s an eminently understandable objective but I honestly do not believe that it’s one that the United States should support.

Well, this statement is simple-minded. Europeans are certainly not against such - the most general analysis in Europe simply differs from the Americans complete imbibing of the Israeli security apparat's view of what that means. As to the Arab neighbours, well, rewinding ten years there was a genuine window of opportunity. Unfortunately, the Israelis contributed to the failure as well as the Arab/Palestinian efforts - in no small part in my opinion from an endemic quasi-racist contempt the Israelis have for the Arabs which while understandable, blinds them to thinking of the Arab neighbours in up-to-date terms, rather conceiving their political action in the same way as in 1948. Then there was, I think, better basis for the framework. Now, much less so, as Arab society, Muslim and Arab has deeply changed from entirely communalist/tribal to rather more modern.

In short, the Israelis tend, in my experience, to view the Arabs -often unconsciously- in terms rather similar to the way 19th century Europeans and Americans viewed "the Natives" - as objects in a sense; that tends to blind them. Mind you, pointing out this is not to say the Arabs are better - Arab blindspots are, however, much discussed.

Hezbollah clearly wants to destroy the state of Israel. They undoubtedly have Islamist motivations but I also believe that they want increased power within Islam itself. In my view this shouldn’t be viewed solely as a connivance of Iran’s but more in the context of the KSA’s advancing over the years of their own version of Islam.

Eh?

This is simply silly.

Hezbullah clearly doesn't consider Israel a legitimate state. Wants to destroy, well, in some theoretical sense. However they've shown a willingness to do deals, even sustained ones.

Their competition for power, however, is a Lebanese political one, not really "in Islam" as such. The Shia-Sunni tensions are not something the Saudis either created or even are the drivers behind. Contributors, certainly, of course. And backers, more importantly, in the Lebanese context, of the Sunni parties.

Given that system of incentives it’s hard to see why Hezbollah would stop doing what they’re doing.

It's hard to see why they would concede defeat: not hard to see how reaching a cease-fire could be done. Disarming is a fantasy that is not going to happen under the present circumstances. Israel handed Hezbullah a brilliant gift to justify itself.

Non-Hezbollah Lebanese people in all probability just want to be left alone. In the present hostilities we’re being treated to the surreal spectacle of the Lebanese government declaring themselves non-belligerents in a war going on within their borders.

Not quite, the Lebanese government has declared itself unable to effectively intervene, but in Arabic comm to its own population, the government has taken to celebrating / thanking Hezbullah for defending the nation.

Brilliant that, rather the exact opposite of what the US and the Israelis intended.

Own-goal as the phrase goes.

The prospects for the Lebanese allying themselves with Israel to de-fang Hezbollah which, in my view, actually might have stood a chance of promoting democracy and stability within Lebanon—always a long shot—become fainter with each kilometer farther north the Israelis strike.

Long shot?

Bloody magical thinking even before the conflict started. Alliance with the Israelis was always a kiss-of-death since the wind-up of the occupation and the fine example of the SLA.

Integrating Hezbullah and disarming was a long-shot but possible w a Chebaa Farms resolution.

Now, not even that is likely.

Iran is clearly quite content to let events proceed as they may. It’s hard to see how they can lose. Hezbollah is opposing Israel for them and raising Shi’ite stock in the Muslim world. They have their own missile production facilities and, no doubt from their viewpoint, unlimited resources. Direct military confrontation between Iran and Israel is IMO farfetched and might indeed be the pretext the Iranians are looking for.

Fair enough, although I do not believe anyone outside the magical world of blog-land actually believes either can whack the other directly in any effective manner - although those innocent of geography certainly love to use the Iraqi example.

I find the motivations of the Europeans extremely puzzling. They clearly have more to lose by instability in the Middle East than anyone except possibly the people who live there. I don’t see how demonizing Israel promotes greater stability in the region unless you believe that it’s possible to completely eradicate the state of Israel. That, IMO, would create more instability in the region than either the European or we could deal with.
There is nothing puzzling about EU ex-UK policy (and what would be UK policy ex-Blair and his dog-like devotion to Bush).

All that is required to understand is to not adopt an uncritical acceptance of the Israeli POV and look at a largeer picture.

First, writing blank checks to 'allies' is rarely if ever a wise idea. As the Bush Administration is rapidly learning.

As the Israelis have a penchant for believing that they can impose solutions on the natives that do not take into account in any way the other side (see supra), the European point of view largely revolves around the position that this has to be restrained and some attention paid to the other guys' perceptions. (Of course this oversimplifies, as in many ways speaking of European position is rather facile).

A final deal is not going to be 100 percent pleasing to either. The give-ups on the Palestinian side are well-discussed among Americans. However, rarely are those of the Israelis.

Europe continues to view terrorist groups in the Middle East as fighting a war of national liberation and Israelis as being the vanguard of fascism. I don’t think that’s quite as sophisticated an understanding of affairs as the Europeans themselves do.

The above is a cartoonish fun-house mirror distortion that seems to afflict American commentary.

Of course, some 'terror groups' are indeed 'national liberation' groups at the same time, and as such face (as they have in Europe itself) different incentives than say, messianic apocalyptic type groups as in al-Qaeda (which while not precisely apocalyptic is certainly messianic in a wide sense of the term).

That is the point of difference. Americans tend to have all the understanding of such different incentives of a bull in a China shop.

The scare words 'terror group' having a different meaning to Americans than Europeans.

In any case, it is more than slightly rich for you to write about the complexity of American position, society etc while so fundamentally and comically reducing the Europeans to a fun-house mirror usually seen in Bolshy Right circles commentary. I presume you may know better.

As for the final question, the incentives have to be changed incrementally.

First, Israel and its neighbours are not going to be chums.

However, even neighbours who literally despise each other can get along in a cold peace if certain basic compromises are made to get the ball rolling. The core compromise is something Scrowcroft highlights but Americans don't quite seem to get in re 67 borders. Perhaps one has to know the climate and geography of the territories to appreciate the importance of what looks on abstract maps like smallish pieces of land. If one looks at the hydrology, and rainfall, then it becomes far clearer where the real incentives are behind the posturing. I'd add the same remains true for Golan and Chebaa. It's not just square meters, it's key hydrological facts.