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Israeli Settlements - What's wrong with this picture?

I believe that Jews and Palestinian Arabs should be free to live anywhere in the Holy land.

I also know that Israel has not annexed any of the territories it won in the Six Days War except Jerusalem, and I have been asking myself for sometime now, why so? Was it a grand strategy to negotiate land for peace, or just a way to mitigate a de facto annexation? And hence my confusion about 'settlements'. I recently came close to signing a petition denouncing settlements that is being circulated in the US, reflecting the opinion of a bloc of over 10,000 people. I fell short of signing, because of some of the petition's unsubstantiated claims. Therefore, I went out of my way to read some pros and cons that have already been debated on the subject of settlements; from a legal and international point of view, as well as the emotional and economic perspectives for both sides of the issue. Are they illegal? Are they prohibited by the Geneva Convention? On and on, a drone of legalese that loses the main points and couches them in terminology that dehumanizes the issue and its core problems. It is after all, about people and aspirations.

To combat a Judenrein Palestine, do we need to sanction settlements that are enclaves, that segregate Jews from the rest of the local population and call that an integrated society? Upscale Jewish Ghettos of the 21st century! Is the notion of Jews living in Palestine, and Arabs living in Israel, steeped in segregation and division? Is that all we can hope for the future, 'separate but equal' as we once called it in the US; only to wake up to the rioting of the 60's and to the civil right movement to redress the basic flaws in the original status quo assumptions.

Settlements are legally permitted as security zones for self defense purposes. I am no military strategist. I cannot understand how a mile wide area, of beach front property, in Gaza, that is encircled by a million Arabs can be called a defensive settlement or a security zone. Apparently a hawk such as Prime Minister Sharon does not agree with such an assessment either, and sees it as a drain on defensive resources and not the other way around.

How many more lives do we need to lose before we come to our senses and understand that neither segregated settlements, nor the outright annexation of all the territories, are the answer to peace in  the Holy Land. And yet we, as Jews, should still have the right to live anywhere we wish to in the Holy land.