Israel discovers more leverage in negotiations with Arafat's Clique
This article in Slate has the info.
For those of you who follow the Middle East, in 2000 Arafat rejected a peace deal that would have given him shared control of Jerusalem, a city that is holy to three religions, but not the right of return, a demand Arafat knew would be the deal breaker. Jack Kemp phrased his tactics as "peace through other means, those means being violence and terror." Probably the calculation was that given Israel's reliance on the tourism industry Arafat could cripple its economy, damage its reputation, and get more of what he wanted by waging a campaign of terror. Basically, Arafat said give me what I want or get screwed.

In large part he was right. Israel's economy has been in tatters, and anti-Israeli feelings are at an all time high with the citizens of many countries feeling that is a greater threat to world peace than North Korea.

Now things seem to have changed ever so slightly - as the article from slate makes clear
[E]ver since Sharon's landmark speech last month when he said Israel will take steps to disengage unilaterally if the Palestinians don't come to the table, the parameters have changed. He's no longer just offering carrots to tempt the Palestinians and the world. Now he's waving a stick that has sent the Palestinians into a panic.

Why?

Read on in the slate article...

Sharon didn't ask the Palestinians to sign off on the route he chose for the fence, and they are rightly outraged by the steep price it exacts. But their outrage should be aimed at the Palestinian Authority, not at Israel. If Arafat would crack down on terror, there would be no need for the fence.

The barrier seems to be paying off. In 2003, "only" 213 Israelis were killed in terror attacks, down from 451 in 2002. The defense minister attributes much of the fall-off to the effect of the fence.

Israel's talk of unilateral moves has forced Palestinians to confront what many Israelis have suspected for months: that the fence may become Israel's unilateral withdrawal line. Last week, PA Prime Minister Ahmed Qurei said that if Israel makes good on its threats to disengage unilaterally, the Palestinian Authority may seek to merge Israel and the territories into a single Jewish-Arab state.

One puzzling thing - why would the PA want to merge Israel with Palestine in an apparent change of tactics? Keep reading the article -

The West Bank and Gaza are home to some 3.5 million Palestinians. Of Israel's 6.5 million citizens, some 1.2 million are Arabs. Do the math, and you'll see that in the territory between the Jordan River and the Mediterranean Sea there are 4.7 million Arabs and 5.3 million Jews. Each time a Palestinian mother gives birth to her sixth, seventh, eighth, or ninth child, the demographic balance shifts a little more. Unless a huge number of Jews decides to move to Israel in the next decade (it's not out of the question; think of the million immigrants from the former Soviet Union in the 1990s), at current rates of increase, it's only a matter of time - not all that much time - until Arabs constitute a majority in the area.

And there is the final reason for the leverage - Sharon no longer believes it is in his country's interest to retain the "occupied territories" because he is fearful that the Jewish majority will be voted out of office in the future. His logic is apparent, his threat is therefore believable, increasing his leverage because the Palestinians don't believe he is bluffing. Worse for them, he is giving them pressure to make a deal, for if they don't he will dictate the terms of the new border between the two states, which will be more manageable than the old one, and will, suffice it to say, not be the best border for the Palestinians. So now the pressure is on them. Make a deal, or get screwed. How the tables seem to be turning.