The official explained to Bibi Netanyahu that if there was a peace settlement, extra investment would push Israel’s long-term growth rate from 5% a year to 7%. The Israeli prime minister responded that if the country had 5% growth, it did not need peace.

Netanyahu was joking, according to the official who recounted the story – but the quip highlights a serious point. There is no prospect of a settlement between Israelis and Palestinians, and many Israelis are fairly relaxed about that. During a recent visit to Israel, I met very few people who were optimistic about the peace process.

Netanyahu says he supports the creation of a Palestinian state. But the terms he is offering – with much of the hypothetical state’s security under Israeli control – would not be acceptable to any Palestinian leader. Netanyahu’s coalition government shows no signs of offering the Palestinians the kinds of concession – such as freezing settlements – that would make a peace deal possible.

Nor do the Palestinians seem ready for peace: recent attempts to bring both Fatah and Hamas into a national unity government came to nothing. Whether Mahmoud Abbas, the president of the Palestinian Authority, will carry out his recent threat to resign is unclear.

Within Israel, there is very little pressure for a peace settlement. Israelis are getting on with their lives, without – for now – the threat of suicide bombers. There are virtually no rocket attacks from the areas controlled by Hamas and Hezbollah. The barrier that snakes through the West Bank makes Israelis feel safer – and also less interested in what happens on the other side.

As for the Gaza strip, most Israelis do not want to think or talk about it. The only people I met who seemed worried about the situation there were foreign journalists, plus a few Israeli liberals – and Tony Blair, who as a peace envoy keeps telling the Israelis that the people of Gaza need to be “given a way forward”. If pressed, moderate Israelis admit to being uncomfortable that their government (like Egypt) will not allow exports out of Gaza or building supplies in (on the grounds that Hamas would profit from any trade).

In Gaza, 40% of adults are unemployed and most of the rest are in government jobs. The West Bank is doing better, with only 20% unemployment and economic growth likely to be 7% this year – partly because Tony Blair and others have persuaded Israel to lift some of the restrictions on movement. Israelis hope that when Gazans see the brightening prospects of the West Bank they will turn against Hamas. In fact Hamas’s popularity has waned to some degree since the last Israel-Hamas war, according to people who spend time in Gaza.

Can international pressure kick-start the peace process? Earlier this autumn Barack Obama pushed Netanyahu to accept a freeze on expanding West Bank settlements, but failed. Liberal Israelis say Obama made the mistake of demanding that the freeze should apply to the suburbs of East Jerusalem, which most Israelis do not regard as settlements. Netanyahu’s successful resistance to US pressure has made him more popular. Many Israelis view Obama as both hostile and weak; his approval rating is below 10%.

Could the EU, Israel’s top trading partner, and the biggest provider of aid to the Palestinian Authority, put pressure on Israel? It was planning to offer an “enhanced agreement” that would establish regular EU-Israel summits, and give Israel the right to take part in a range of EU programmes. But earlier this year the EU said it would hold up the agreement until Israel did more to alleviate the plight of Gaza. This conditionality, which annoys Israel’s leaders, might be more effective if the EU increased its offer. Why not tell the Israelis that if they forge a peace deal with the Palestinians, they could join the European Economic Area, giving Israel – like Norway and Iceland – full access to the EU’s single market?