For Brown, Money is Key to the Middle East

Britain is giving full support to the new Palestinian emergency government and wants to help it make a success of running the West Bank despite the uncertainty following Hamas's armed takeover of the Gaza Strip, one of Gordon Brown's closest aides said today.

Ed Balls, economic secretary to the Treasury, warmly endorsed the interim independent prime minister, Salam Fayyad — a former World Bank official — as he surveyed prospects for economic development in the Palestinian territories. "What's happening in Gaza is terrible but this is a moment of opportunity in the West Bank," he told the Royal Institute for International Affairs in London.

Mr Balls is tipped for a senior ministerial post when Mr Brown takes over from Tony Blair on June 27. "Achieving lasting stability and security in the Middle East will be a high priority for the next prime minister," he said. "The shocking violence we saw in Gaza highlights the need to address its root causes."

In late 2005 he was asked to conduct a study for the finance ministers of the G8 on how to rebuild the economy of the region. That was after Israel's unilateral withdrawal from the Gaza Strip but before Hamas won the Palestinian elections, triggering a controversial international financial boycott to force the Islamist movement to change policy.

The Quartet of Middle East peacemakers demanded Hamas recognize Israel, end violence and respect existing peace agreements between Israel and the PLO and refused to deal with it when it failed to do so explicitly. Quartet policy did not change when Hamas joined a Saudi-backed national unity government with the secular Fatah movement.

"If you have an administration in the West Bank that will meet the Quartet principles then the test will be the way the international community and Israel respond," Mr Balls said.

"Economic development can only ever play a supporting role in the politics of the road map, and ... significant economic steps forward are unrealistic without political progress and progress on security," he added

But the overall impression of a keenly awaited speech was that a Brown government will see the world's most intractable conflict primarily through the prism of economic development, when in fact several fundamental political issues — settlements, borders, refugees and Jerusalem — have to be tackled. The G8 project was co-led by the Treasury's Jon Cunliffe, who is to be Mr Brown's adviser on international economics and EU issues.

In a related move, the international development secretary, Hilary Benn, announced that the UK was donating £1m for emergency aid to be distributed in Gaza by UNRWA, the UN agency dealing with Palestinian refugees, to be used for healthcare, food, and rebuilding water and sanitation facilities.

Mr Balls focused on the "staggering disparity" between Israel's high-tech, innovative and globally linked economy, and a Palestinian one that is still dependent on agriculture and low-value goods with "bleak" prospects for development

Despite $10bn in international aid since the Israel-PLO Oslo agreement in 1993, 65% of Palestinians now live below the poverty line compared with 20% in 1998. A macro-economic crisis can only be averted through a credible Palestinian Authority-led budget plan, he said, calling for both a lowering of the wage bill and for Israel to release withheld tax revenues.

"The Palestinian economy had to diversify and reduce its dependence on Israel, though there is no medium-term solution to Israeli security without a Palestinian economic relationship with Israel," he said. "The access and mobility this requires will require a degree of trust and cooperation between the Israeli and Palestinian governments which today looks remote and which will require great leadership to secure."

Mr Balls acknowledged the threat Israel faces from Palestinian terrorist attacks but added: "Security restrictions seriously constrain Palestinian economic development and are a big obstacle to prosperity. And although targeted at extremists who seek to undermine peace, the restrictions impact equally on the majority of moderate Palestinians who seek a negotiated settlement."