If Israel goes ahead with the annexation of the West Bank it must either offer the Palestinians citizenship and wait for a non-Jewish majority to emerge in Greater Israel; or deny them citizenship and face pariah status as an apartheid state.
If settlements are 'legal', the ground is laid for annexation
The recently published report by an Israeli judge concluding that Israel is not in fact occupying the Palestinian territories - despite an international consensus to the contrary - has provoked mostly incredulity or mirth in Israel and abroad.
Left-wing websites in Israel used comically captioned photographs to highlight Justice Edmond Levy's preposterous finding. One shows an Israeli soldier pressing the barrel of a rifle to the forehead of a Palestinian pinned to the ground, saying: "You see - I told you there's no occupation."
Even Benjamin Netanyahu, Israel's prime minister, seemed a little discomfited by the coverage last week. He was handed the report more than a fortnight earlier but was apparently reluctant to make it public.
Downplaying the Levy report's significance may prove unwise, however. If Mr Netanyahu is embarrassed, it is only because of the timing of the report's publication rather than its substance.
It was, after all, the Israeli prime minister himself who established the committee earlier this year to assess the legality of the Jewish settlers' "outposts", ostensibly unauthorised by the government, that have spread across the West Bank.
He hand-picked its three members, all diehard supporters of the settlements, and received the verdict he expected - that the settlements are legal. Certainly, Justice Levy's opinion should have come as no surprise. In 2005, he was the only Supreme Court judge to oppose the decision to withdraw the settlers from Gaza.
Legal commentators too have been dismissive of the report. They have concentrated more on Justice Levy's dubious reasoning than on the report's political significance.
Under international law, Israel's rule in the West Bank and Gaza is considered "belligerent occupation" and, therefore, its actions must be justified by military necessity only. If there is no occupation, Israel has no military grounds to hold on to the territories. In that case, it must either return the land to the Palestinians, and move out the settlers, or defy international law by annexing the territories, as it did earlier with East Jerusalem, and establish a state of Greater Israel.
Annexation, however, poses its own dangers. Israel must either offer the Palestinians citizenship and wait for a non-Jewish majority to emerge in Greater Israel; or deny them citizenship and face pariah status as an apartheid state.
Just such concerns were raised on Sunday by 40 Jewish leaders in the United States, who called on Mr Netanyahu to reject "legal manoeuvrings" that threatened Israel's "future as a Jewish and democratic state". But from Israel's point of view, there may, in fact, be a way out of this conundrum.
In a 2003 interview, one of the other Levy committee members, Alan Baker, a settler who advised the foreign ministry for many years, explained Israel's heterodox interpretation of the Oslo Accords, signed a decade earlier.
The agreements were not, as most assumed, the basis for the creation of a Palestinian state in the territories, but a route to establish the legitimacy of the settlements. "We are no longer an occupying power, but we are instead present in the territories with their [Palestinians'] consent."
By this view, Oslo redesignated the 62 per cent of the West Bank assigned to Israel's control - so-called Area C - from "occupied" to "disputed" territory. That explains why every Israeli administration since the mid-1990s has indulged in an orgy of settlement-building there.
According to Jeff Halper, head of the Israeli Committee Against House Demolitions, the Levy report is preparing the legal ground for Israel's annexation of Area C. His disquiet is shared by others.
Recent European Union reports have used unprecedented language to criticise Israel for the "forced transfer" - diplomat-speak for ethnic cleansing - of Palestinians out of Area C into the West Bank's cities, which fall under Palestinian control.
The EU notes that the numbers of Palestinians in Area C has shrunk dramatically under Israeli rule to fewer than 150,000, or 6 per cent of the Palestinian population of the West Bank. Settlers now outnumber Palestinians more than two-to-one in Area C.
Israel could annex nearly two-thirds of the West Bank and still safely confer citizenship on Palestinians there. Adding 150,000 to the existing 1.5 million Palestinian citizens of Israel, a fifth of the population, would not erode the Jewish majority's dominance.
If Mr Netanyahu is hesitant, it is only because the time is not yet ripe for implementation. But over the weekend, there were indications of Israel's next moves to strengthen its hold on Area C.
It was reported that Israel's immigration police had been authorised to expel foreign activists from the West Bank. The new powers were on show the same day as the army arrested foreigners, including a New York Times reporter, at one of the regular Palestinian anti-wall protests in Area C.
And on Sunday, it emerged that Israel had begun a campaign against OCHA, the UN agency that focuses on humanitarian harm to Palestinians in Area C from Israeli military and settlement activity. Israel has demanded details of where OCHA's staff work and what projects it is planning.
There is a problem, nonetheless. If Israel takes Area C, it needs someone else responsible for the other 38 per cent of the West Bank - little more than 8 per cent of historic Palestine - to "fill the vacuum", as Israeli commentators phrased it last week.
The obvious candidate is the Palestinian Authority, the Ramallah government-in-waiting. But the PA's weakness is evident on all fronts: it has lost credibility with ordinary Palestinians, it is impotent in international forums and it is mired in a financial crisis.
If the PA refuses to, or cannot, take on these remaining fragments of the West Bank, Israel may simply opt to turn back the clock and once again cultivate weak and isolated local leaders for each Palestinian city.
The question is whether the international community can first be made to swallow Justice Levy's absurd conclusion.
Jonathan Cook is a journalist based in Nazareth and the recipient of the 2011 Martha Gellhorn Prize for Journalism