EXECUTIVE SUMMARY: The Prime Minister responded to President Obama's Cairo speech by endorsing a circumscribed Palestinian state. The conditions he imposed on acceptance of that state were those endorsed by the overwhelming majority of the Israeli public, as well as, by the parties to the left of the Likud. In the short term, the speech represents a political success for Netanyahu, as he managed to improve relations with the U.S. while simultaneously keeping his governing coalition intact. However, relatively soon Netanyahu will have to make a decision regarding the actual dismantling of illegal outposts that will probably require him to make a choice between the stability of his government and the quality of Israel's relations with the United States. The most obvious way around this dilemma is the creation of a national unity government in Israel, which Netanyahu called for in his speech.

The Prime Minister opened his speech at the Begin-Sadat Center for Strategic Studies last night by referring to the threat posed by a nuclear Iran, not only to Israel, but to the U.S. and its pragmatic Arab allies in the Middle East. As such, Netanyahu indicated clearly what Israel regards as the most important strategic issue in the region. However, he did not comment extensively on the issue, perhaps because Iran's newly re-elected extremist President, Ahmadinejad, might have used Netanyahu's statement to delegitimize the Iranian opposition's demonstrations against him.  

Netanyahu's message to the Americans: I am Pragmatic
The Obama administration has been demanding from day one that Netanyahu accept a two-state solution. In his speech, Netanyahu formally endorsed this position. This was not an entirely new position. Netanyahu stated several times in the late 1990s that he would be willing to accept a Palestinian state under certain conditions, but this was the first time that he formally adopted this position. In response, the Obama administration welcomed the speech as positive and a step forward. As such, Netanyahu achieved a major objective – avoiding a major crisis in U.S.-Israeli relations.
Between the lines, Netanyahu also sent three other important messages to the United States. First, the Prime Minister chose to speak at the Begin-Sadat Center and he referred in his speech to the first Israeli-Arab peace treaty forged by Likud leader Menachem Begin and Egyptian President Anwar Sadat. In doing so he reminded the U.S., that the Likud can be a partner for peace.
Second, on settlements, Netanyahu indicated his desire to reach a quiet understanding with the Americans. In this vein, he not only reiterated his promise not to build new settlements or expropriate additional land for existing settlements, but more significantly he did not refer to the term "natural growth", which the Americans have rejected. Instead, he spoke about allowing the settlers to maintain a 'normal life'.
Third, Netanyahu clearly rejected the contention made by Obama in his Cairo speech that Israel's right to exist rests on anti-Semitism and the Holocaust. Instead, he emphasized that the Jewish people's right to a homeland rests on its deep historical connection to the land.
Simultaneously, the Prime Minster sent Obama a political message concerning American pressure on Israel. Obama has emphasized the issues of a Palestinian state and freezing settlements. These are issues on which his position is supported by the majority of Americans, the majority of Congress and over which American Jews are divided. However, American public opinion, American Jewry and Congress are overwhelming supportive of the two major conditions for Palestinian statehood that Netanyahu raised: recognition of Israel as the state of the Jewish people and Israel's security concerns. If the Palestinians do not indicate a willingness to ultimately acquiesce to these positions, Obama will find it harder to pressure the Netanyahu government.

Netanyahu's message to the Israeli public: I am a Centrist
The core positions Netanyahu adopted in the speech reflect the Israeli consensus. For many years now, Israeli public opinion has consistently been willing to accept a Palestinian state. At the same time, the public's core political value is the existence of Israel as Jewish state and its main demands from the Palestinians are security and opposition to the immigration of Palestinian refugees and their descendents into Israel. In emphasizing these particular conditions for Palestinian statehood, Netanyahu is adopting similar positions to the parties to the left of the Likud, most notably Kadima head Tzippi Livni who has also emphasized that the refugee issue must be resolved outside of Israel.
At the same time Netanyahu shored up his right flank by referring to the Palestinian population, not the Palestinian nation, by making positive comments about the character of the settler community, by not accepting the American demand for a full settlement freeze, and by not announcing any practical measures that require implementation, such as dismantling outposts.
 
Netanyahu's message to the Palestinians: Test me
Netanyahu's main message to the Palestinians was this: You may not like everything I said, but I am willing to make compromises. If you want a state, don't expect American pressure to deliver it for you, while you sit back passively. You too will have to make compromises - so why not test me out in negotiations.
Although Netanyahu put conditions on accepting Palestinian statehood, he did not put conditions on opening diplomatic negotiations. In fact, even while he called on Palestinians and Arab states to work together to help develop the economic foundations of peace, he emphasized that this was a complement to diplomatic talks not a substitute for them. The Prime Minister also sent a very subtle message to Abu Mazen. Netanyahu differentiated his absolute conditions for Palestinian statehood from his "well known positions" on permanent status issues, including a united Jerusalem as the capital of Israel. These positions differ from the more dovish stance of Kadima and Labor. By stating them clearly, he drew a very negative reaction from the Palestinians. However, it is worth noting that Netanyahu did not present these "well known positions" as absolute conditions.

Conclusion
In the short term, Netanyahu speech succeeded in securing its strategic objectives. The Americans expressed support, the coalition remained intact, and the Palestinians were forced to answer questions concerning their willingness to make compromises.
However, Netanyahu will not be able to avoid difficult choices for long. In order to retain credibility with the Americans and the Israeli center, Netanyahu will have to demonstrate in practice his willingness to compromise. This means not only entering negotiations but also fulfilling prior Israeli commitments – most notably removing the illegal settlement outposts. But if he does this, there will be a crisis with the Israel right and his coalition may become destabilized.
The only way to shore up his position would then be to add Kadima (or part of Kadima) to the coalition. Against this background, it is significant that Netanyahu called again for a national unity government, while mentioning the word "unity" several other times as well. Without a national unity government it will prove difficult for Netanyahu to maintain the successful the balancing act embodied in his address at the Begin-Sadat Center.

Jonathan Rynhold is senior lecturer of political studies at Bar-Ilan University and a senior research associate at the Begin-Sadat (BESA) Center for Strategic Studies.