That was a fantastic speech. Quite literally, fantastic. George Bush's address on the Middle East, delivered outside the White House on Monday evening, consisted, from beginning to end, of fantasy.

It bore so little relation to reality that diplomats around the world spent yesterday shaking their heads in disbelief, before sinking into gloom and despair. Our own Foreign Office tried gamely to spot the odd nugget of sense in the Bush text - but, they admitted, it was an uphill struggle. Israelis committed to a political resolution of the conflict were heartbroken. Even Shimon Peres, foreign minister in Ariel Sharon's coalition, reportedly called the speech "a fatal mistake", warning: "A bloodbath can be expected."

The core of the president's message was that the Palestinians must embark on a sweeping process of internal reform before they can even think about getting back to the negotiating table. They must transform themselves into a democratic market economy, free of corruption and with a separate judiciary and legislature if they are to be considered eligible for statehood - which, when it comes, will be merely provisional.

Shall we count the ways in which this is completely absurd? George Bush is demanding that Palestine become Sweden before it can become Palestine: it must be stable, prosperous and boast constitutional arrangements which still elude Britain - our judiciary and legislature are not separate - let alone the Arab world before it can become even a state-in-waiting.

This would be laughable if Palestine were in tranquil Scandinavia. Even there it would count as putting the cart before the horse, asking a nation to create the institutions of a highly developed country before it becomes a state. But this, remember, is being demanded of the Palestinians - statebuilders with every possible obstacle in their way.

Like the fact that they are under military occupation. As the New York Times noted yesterday: "How the Palestinians can be expected to carry out elections or reform themselves while in a total lockdown by the Israeli military remains something of a mystery." Palestinian ministers complain they cannot visit a village 10 minutes away; they can pass laws but not implement them. They are Potemkin ministers, existing on paper only. Yet now they are to build the Switzerland of the Levant, where the streets are clean and government functions like clockwork. This is George in Wonderland stuff.

Monday's speech even had a touch of black comedy. The president said the new Palestine should be taught good governance, nominating the Arab states for the role. Imagine it: democracy lessons from Saudi Arabia, a masterclass in liberty from Kuwait.

But that is not the president's greatest fantasy. Yasser Arafat must go, he says, though without naming him. It may be refreshing to hear a US president come clean in his conviction that he has the right to pick other nations' leaders, but this demand exposes fully the vacuousness of Bush's thinking.

For who does he imagine might replace Arafat? Does he not realize that Palestinians are angry with their leader not because he has been insufficiently pro-American but because they see him as too moderate, too willing to do Israel's bidding. The Palestinian street is not clamoring for a man who will crack down harder on Islamist militants or sing a western song about free trade and local elections.

So if elections go ahead, here's what will happen. Either Palestinians will deliberately defy Washington and re-elect Arafat or they will choose someone more hardline. Any leader who has the Israeli or US stamp of approval will immediately be discredited as a puppet and promptly rejected.

Also, for all his flaws, Arafat has an asset none of his rivals can match. He is still, thanks to his long history, Mr Palestine: his signature on a compromise deal is the only one that could persuade his people to accept it. By rushing his exit now, Bush is depriving any future peace agreement of the only Palestinian who could deliver it.

S o the president's speech shows a man unconnected to Middle Eastern reality. But it is worse than unhinged; it is dangerous. First, Bush has given a green light to Sharon to continue his policy of military force coupled with a refusal to freeze settlement building on the West Bank. Monday's wording implied that Sharon is only obliged to pull back from Palestinian cities or freeze settlements once the Palestinians have worked their way through the US wishlist. So long as violence goes on, or Arafat remains in place, the Israeli PM can do what he likes.

Given that the president refused to specify what the final settlement might look like - delaying that and other questions to later talks - he has supplied Sharon with an incentive to get busy now, building settlements, putting up fences and carving new borders. If Bush had declared that the eventual Palestinian state would be on the other side of Israel's 1967 borders, there would be no point in Israel trying to redraw the map. But now Sharon has every motive to create his notorious "facts on the ground".

There is danger on the Palestinian side too. The only people celebrating yesterday were the Islamist extremists of Hamas and Jihad, chiding moderate Palestinians for ever believing that politics, rather than violence, might bring results. Bush has not dangled any serious carrot before the Palestinians: no promises on Jerusalem or refugees or final borders. Even Colin Powell's planned international conference seems to have vanished. All Palestinians will get if they comply with Washington's demands is a provisional state on 42% of the West Bank. Maybe. Few will consider that a prize worth the sacrifice of their own leader and a national transformation.

So this new plan of Bush's is a flight of errant, irresponsible fancy that can only fail, bringing more bloodshed and ruin to the peoples of the Middle East who are desperate for something better.

But it will reverberate far beyond. It will damage the international standing of the US president and America along with it. Muslim and Arab nations will be antagonized by this plan of inaction, while chancelleries from London to Moscow will realize they are dealing with a leader who pays no lip-service to them - or to basic reality.

This is a foreign policy failure for George Bush. If he were a Democrat, both the Washington press corps and Congress would already be racking it up alongside the unextinguished threat from al-Qaida and the continued freedom from captivity of Osama bin Laden. Those failures, and now the guarantee of further slaughter in the Middle East, should be prompting hard questions about Bush and his war on terror. America needs to snap out of its post-9/11 torpor of consensus and realize there is a leadership problem in the US - and his name is George Bush.

© Guardian Newspapers Limited 2002

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