Reaction to Israeli Prime Minister Netanyahu?s major policy address yesterday is running the full gamut from rage and dismay to adulation and relief. The extremes aside, the question really is whether to see Netanyahu’s glass as half full or half empty.

In Israel, the extreme right was divided on its reaction to the speech. Those most concerned about maintaining the categorical opposition to any form of Palestinian statehood were generally dismayed by Netanyahu’s muted concession on this point, albeit in theory and with many unworkable caveats and restrictions. The settlers and their supporters, however, focused on his assertion that “natural growth,” which he did not define in any meaningful way, would continue. Supporters of the settlement movement have taken this as an endorsement of their plans to expand and extend the settlement project. Settlers were also heartened by his warm words about them being simply the “brothers and sisters” of the general Israeli public. The Israeli left and most of the center was generally dismayed by Netanyahu’s belligerence and his complete lack of recognition of any aspect of the Palestinian narrative or perspective, although some of these observers have emphasized that Netanyahu’s acceptance of Palestinian statehood in theory, however couched, represents a breakthrough for him and for Likud.

The range of Palestinian opinion runs the gamut from outrage to horror. The Palestinian Authority has called on the international community to isolate and shun Netanyahu’s government, with many harsh words from numerous Palestinian officials. While understandable, the Palestinian reaction is, predictably, strategically unwise. As I observed yesterday, Netanyahu’s recalcitrance opens significant diplomatic opportunities for Palestinians to exploit the continuing gap between the Obama administration’s firm position, especially on the settlement issue, and Netanyahu’s continued refusal to accommodate American requirements and existing Israeli commitments. A preferable stratagem would emphasize Palestinian alignment with Obama’s goals and methods, isolating Netanyahu, and drawing a contrast between his obduracy and their own willingness to take concrete, practical measures to advance the American approach to pursuing a peace agreement. The danger of digging in their own heels while Netanyahu digs in his is that this response encourages a perspective in the United States that regards progress on Middle East peace as essentially unattainable under the present circumstances, and instead urges the administration to focus on other foreign policy goals such as ongoing tensions with Iran and even the prospect of an Israeli-Syrian peace track at the expense of the Palestinian track.

Most observers acknowledged that Netanyahu’s primary audience was, in fact, President Obama himself. The White House naturally welcomed the Prime Minister?s movements on the question of Palestinian statehood, and accentuated the positive. However, there is little question that the administration must have been disappointed by Netanyahu’s continued refusal to cooperate on the question of settlements. Obviously, there is a proper appreciation of the political difficulties that Netanyahu faces from his right-wing coalition on any concession on settlements and a strong disinclination to push him too far too fast. However, over the coming weeks is likely that American insistence on a change in the Israeli position on settlements, especially “natural growth,” will resume. The inclination to devote more time, energy and political capital on shifting Netanyahu on this issue by Washington would be greatly enhanced if the Palestinians and the Arab states moved quickly to support Obama’s position rather than focusing on their justifiable unhappiness with the substance of Netanyahu’s remarks.

The “half-full” element of the speech — a tepid acceptance of the potential of Palestinian statehood and an acknowledgment that no new settlements would be created in the West Bank — was the easy part for Netanyahu, in spite of the fact that some on the Israeli right didn’t want him to make even these rather limited gestures. The “half empty” part is far more substantial, particularly Netanyahu?s ongoing refusal to accept that Israel’s commitments under the Roadmap requires a freeze to all settlement activity, including “natural growth,” as the Obama administration has repeatedly emphasized. In fact, the settlement issue, as things stand right now, is the crux of the entire matter. Without a meaningful settlement freeze, progress on other aspects essential to peace is virtually impossible. With it, enormous diplomatic and political spaces suddenly open up, and a return to the Annapolis principle that permanent status issue negotiations should be conducted simultaneously with the implementation of Roadmap Phase One commitments on settlements and security will be possible. In other words, a settlement freeze makes it possible to move quickly into substantive discussions about issues like borders, Jerusalem, refugees and security. It is the sine qua non of progress towards a peace agreement, and, as things stand, the veritable whole ball of wax.

Therefore, while it’s entirely reasonable to point out that Netanyahu?s speech leaves the glass both half-full, on Palestinian statehood, and half empty, on settlements, it is the half empty part that is far more significant. The most important thing to recognize this stage is that Netanyahu has moved from his original electoral and post-election positions in a way which he would have preferred to avoid. His speech yesterday, while entirely unsatisfactory, must not be his final word on these matters, and, if the other parties play their cards properly, it should not be. The likelihood is that the Obama administration will pocket the gains they have made thus far, and push for more. But they cannot get very far in this without significant Arab and Palestinian support to bolster the sense that at least one party in this situation other than President Obama is playing a sincere, constructive and politically courageous role.

It is absolutely essential that Arab reaction avoids the perception that all parties are simply reactive, defensive and uncooperative. The Palestinians and the Arabs will not strengthen their hands by focusing entirely on what’s wrong with Netanyahu’s positions. Instead, they must draw attention to what is useful and constructive about their own stances. This is the best way to isolate the Israeli Prime Minister and to make it clear that the fundamental barrier at the moment to progress towards peace are the positions he laid out in his speech. The glass they bring to the table needs to be full, and not also half-empty.