Israel and Palestine: What's the Strategy?

I have argued before (and I'm not the only one) that it is impossible for a conflict to be settled if one side thinks it would do better to continue the conflict. My previous example was Afghanistan, in which all Afghans, including the Taliban, know that the US will not remain forever (see post). The Taliban know that time is on their side. Whenever a disagreement seems intractable, something like this probably lies behind the scenes.

Take the long fight between the Israeli government and authorities representing the Palestinians. There seems to be no ending this fight. But why? It is easy to see why Palestinians believe time is on their side, if for none other than demographic reasons: the Palestinian population of the region, including inside of Israel proper, is increasing more quickly than the Israeli population. Beyond that, there seems to be a general, but gradual, shift in world politics away from unquestioning support of Israel. This has a couple reasons, among them a relative decline of the "West" along with the slow slippage of the Holocaust into something only read about in history books.

In this environment, it would seem wise for Israel to talk tough but to try to find a solution as quickly as possible, allowing it time to mend relations with antagonistic neighbors. Instead, Israel's Prime Minister Benjamin Netanyahu has announced that Israel will not accept a path to peace that his predecessor had already essentially agreed upon. In effect holding up hopes, then changing the terms at the last minute. There seems to be no rush for peace. What is going on here? There are a few possible explanations:

1. Israelis, too, feel that time is on their side and that the Palestinians will eventually give up hoping for a better solution. This may also fit in with creating "facts on the ground" by continuing settlements on the West Bank, making their eventual removal politically all but impossible in the future. This is like a game of chicken.
2. Another possibility, and this is one that I seem to hear coming from Israel, is the one I call the panic strategy. Israelis are well aware that time is not on their side. Furthermore, they do not believe that even a two-state solution will convince their hostile neighbors to leave them alone. Better, then, to try to push for all concessions they can, now, while they still have clout This, too, is a somewhat different game of chicken.

One of the most important concessions for Israel, and one that is entirely understandable, is that Hamas renounce the use of violence and recognize Israel's right to exist before it even begins to negotiate with it. Ironically, diminished US and European support for Israel might actually end up helping Israel in this regard: as long as the US was seen to be 100% behind Israel, the Palestinians did not feel there was any way to be sure that their concessions would be met with real concessions from Israel. With President Obama putting public pressure on Israel, while still leaving no doubt as to his support for Israel's security, Palestinians may become less uncomfortable with making concessions, while still seeing that Israel is not about to be weakened to the point of making more concessions than it has hinted at in the past.

In such an unstable place, a little more trust could go a long way.