Netanyahu's right-wing government has pushed an "economic peace" instead of a two-state solution but both Palestinians and the Israeli left are resisting the ploy.
'Economic peace' betrays the hand of a grasping Israeli right
The peace process between Israel and the Palestinians was widely pronounced dead last week as hundreds of official documents leaked to Al Jazeera television showed Palestinian negotiators had agreed to make major concessions on Jerusalem, refugees and borders.
But there were few indications that Israel's leaders are in mourning. In fact, as the US-sponsored peace talks have gradually faded from view over recent months, Benjamin Netanyahu, the country's prime minister, has been happily reverting to his default position on solving the conflict: "economic peace".
Mr Netanyahu's policy applies in practice only to some Palestinians - Gaza's population of 1.5 million continues to struggle under a still-oppressive, although marginally eased, blockade. But in the West Bank, Israeli officials say, life is looking up: the sparser checkpoints mean freedom of movement and trade is being restored, and economic growth is climbing steadily as a result.
Spin aside, however, the goal of economic peace is more concerned with Israel's diplomatic advantage than the welfare of Palestinians. It is a stalling tactic to evade a peace deal that would require the drawing of borders between two states, Israel and Palestine. Mr Netanyahu hopes that with economic peace he can buy a few more years to entrench his vision of a one-state solution - Greater Israel.
The response of the international community, and more importantly of the Americans, to his alternative "peace" is not yet clear. But in the meantime both Palestinians and ordinary Israelis are stepping into the breach to expose the contradictions inherent in Mr Netanyahu's approach.
Last week, two separate episodes - both relating to a boycott of the settlements - suggested that the Israeli right's policy is opening a can of worms Mr Netanyahu and his supporters will find hard to digest.
The first was the decision last month by 155 leading academics - including three winners of the country's most prestigious award, the Israel Prize - to refuse to cooperate with a newly upgraded university in the settlement of Ariel, some 15 kilometres inside the narrow West Bank.
The professors' "boycott" - as it has been termed, and denounced, by the Israeli government - follows a similar announcement by some of the country's best-known actors, who have refused to perform in Ariel's theatre as part of national tours.
The government has brought these matters to a head by seeking to cement Ariel's place in the Israeli public consensus as an indivisible part of Israel, even though the settlement is located almost as deeply in the West Bank as the Palestinian city of Nablus. Ariel's population of 18,000 barely qualifies it as a town, and yet ministers have made it a priority to build a national theatre and upgrade its college into a university. There are now half as many students as residents in Ariel.
The other notable incident was a demand made by a wealthy Palestinian-American businessman, Bashar al Masri. He has required all contractors helping to build a new Palestinian city in the West Bank called Rawabi to sign an agreement refusing to use Israeli products originating from the settlements or work in the settlements themselves.
Rawabi, which is being funded by Qatar and will eventually be home to 40,000 Palestinians, is one of the visible fruits of Mr Netanyahu's economic peace. But the news that at least a dozen Israeli firms, keen to be included in the project, had already signed up to the boycott clause was greeted with shock in Israel.
The Palestinian businessman, who points out that he is simply enforcing the Palestinian Authority's policy to boycott the settlements, expects many more Israeli companies to follow suit.
Israeli government ministers and hawkish members of the parliament are calling for a counter-boycott of the companies that have accepted Mr al Masri's condition. Aryeh Eldad, of the right-wing National Union party, summed up the mood: "Anyone building Rawabi should know that they won't build Tel Aviv."
But it has been the Israeli right's very refusal to pursue any kind of peace process that is breathing life into the boycott campaign for both Palestinians and Israelis, whether through conscience or necessity. Mr Netanyahu's economic peace has created the space for Israelis to join Palestinians in defining the borders Mr Netanyahu refuses to concede.
The boycott is a weapon that the Israeli right genuinely fears. Its adoption by Palestinians, and the fledgling support it is winning from the Israeli left, will spur on the boycott and sanctions campaign already being promoted by international activists, including Jews in the diaspora.
Mr Netanyahu's "peace policy" is only magnifying these troubles. He needs to intimidate the Israeli left and tarnish its reputation in the eyes of the Israeli public to stop the boycott campaign from spreading domestically.
That is one of the goals of the witch-hunt committee approved by the Israeli parliament last month to investigate human rights organisations and their funding. It has also fuelled the comparison recently made by Avigdor Lieberman, the far-right foreign minister, between the left and terrorists. These and other assaults have finally awakened the Israeli left to protest in the thousands.
Mr Netanyahu's aim has been to persuade the international community that the issue of the settlements and their expansion can be divorced from the threat they pose to Palestinian statehood and a peace deal. But in reality, his economic peace has thrust the problem of the settlements' legitimacy sharply back into the spotlight.
As he is starting to learn, the more the right represses the left, the more it proves the value and need of the boycott. This is a battle Mr Netanyahu cannot win.
Jonathan Cook is The National's correspondent in Nazareth, Israel, and the author of Disappearing Palestine