It is a city celebrated by poets, a city that everyone wants to possess. Set amid the Judean hills, on the east it starts its steep descent to the Dead Sea. From the west comes the landscape of the Mediterranean. The pinkish-yellow hue of its building stones changes with every passing hour as the sun dips into the surrounding canyons.

It is a city that has been besieged and conquered 37 times. At various points in its 4,000-year history Jews, Babylonians, Ptolemies, Romans, Persians, Arabs, Turks, and Britons have been its victorious rulers. During that time it has become a sacred city for more than a billion people, with shrines venerated by the three monotheistic religions.

But the physical beauty of Jerusalem, the holy city, city of peace, contrasts sharply with the ethnic tension in its streets. Its 12,000 to 15,000 Christians , 100,000 Muslims, and 300,000 Jews live in their own inward-looking ghettos, back to back. Their contact is limited to commercial relationships.

They worship separately, live in separate neighborhoods, speak their separate languages, go to separate schools. In the absence of a spirit of public cooperation, every municipal problem, from traffic lights to garbage collection, becomes a political issue.

The Christian Quarter, the Old City

It is the last week in January, a Wednesday, but all the shops in east Jerusalem are shut tight, on strike. They are protesting a 12 percent value-added tax imposed by the Israeli government as part of its strict new economic program to arrest Israel's runaway inflation.

When a group of Palestinian merchants refused to pay the substantial sums requested, they were taken to prison. The other shops in east Jerusalem closed down in protest.

In a store on Christian Quarter Road, two young Christian Arabs -- a Roman Catholic and a Greek Orthodox -- sit in the back of a darkened shop, talking about the strike.

"We are under occupation," says one student at Bir Zeit, the Arab university near Ramallah. "Why should we pay high taxes to support the Israeli Army?"

"Don't use my name," he asked. "If I talk about the Arabs they will call me a traitor. If I talk about the Jews they will call me a revolutionary."

What does he want?

"A Palestinian state. We are under Israeli occupation now. Before we were under occupation by Jordan. King Hussein made it very hard for us."

"But 30 years ago," the Bir Zeit student continues, "the Arabs here had nothing. Now we are educated, and more of us are getting educated. Time is against them [the Israelis]."

It is a lovely Old City -- winding, hidden passages, stone archways, and moss-covered walls. It is as if this ancient city were immune from history, from the passage of time. The eucalyptus trees near David's Tomb and the Cenacle rustle in the breeze.

Everything looks toward the Old City -- Mt. Scopus, Mt. Zion, the Mount of Olives, the Valley of Hinnom.

In this city there is no neutral ground. Everyone stakes out his territory.

Wadi al-Joz

Samir Ghonem works as a mail inspector on French Hill, one of the new Jewish neighborhoods in east Jerusalem, and speaks fluent Hebrew. But he comes back every night to his home in this small Arab village within the Jerusalem municipality.

He grew up here with his six brothers and three sisters in this house that took his father 30 years to complete.

He sits with his family in their comfortable living room. On the wall is a framed map of all of Palestine, showing the different stages of Jewish "encroachment."

"Before the '67 war," Samir says, "things were, let us say, not bad. After ' 67 there were bad feelings, but good work. After '73 there are bad feelings and no work."

"They say there's democracy here but there's no democracy," his brother Jamil says, breaking into the conversation. "Meetings among Arabs are forbidden."

Jamil is an employee in the East Jerusalem Electric Company. The Israelis, he says, have been trying to take over the company and have made it very difficult for the Arabs to provide spare parts for the machines.

To the Israelis, absorbing the company into the Israeli Electric Corporation is merely a way of removing administrative inefficiencies and securing the power supply to West Bank settlements. To the Arabs of east Jerusalem, the takeover attempt is an outrage.

"Why am I forbidden to buy a home on French Hill?" Samir asks bitterly. "Why can't my two brothers in Libya and Iraq come back here to live? Their parents are here. They were born here. How can I live in peace when my brothers can't come home?"

"If you look at history," says Samir's father, sitting in an armchair, "you will see this land is ours."

Sunset on the Temple Mount is a magnificent sight, setting the dome on Omar's Mosque ablaze with gold, playing with the shadows on the ramparts built by Suleiman the Magnificent, warming the stones of the Wailing Wall. The Jewish Quarter, the Old City

On Friday evenings Melamed Shimon, an Israeli customs official, prays at the Wailing Wall with the Yeshiva students and then goes home for dinner to his apartment in the rebuilt Jewish Quarter of the Old City.

Melamed, his wife, Avivah, and their four children were among the first couples to move into the reconstructed quarter after the '67 war. On their shelf they have a large picture book on the history of the quarter before 1948.

Tonight is a special Jewish holiday, Tu Bishvat, and the table is covered with little bowls of nuts and fruits as a special treat for Melamed's three-year-old son, Hod Yehuda (Glory of Judah).

When asked about the future of Jerusalem, Melamed turns pale with emotion.

"History shows that this land is ours. It says so in the Bible. The Arabs have lots of other places they can go. All I have is this one tiny piece of land. Anywhere else I go I am a stranger."

"I want to be good, to lead a just life," Melamed says. But in order to be good I have to be.m Have you ever heard of Safad? And Nahariya, and Country Club Road in Tel Aviv? And Munich?" He refers to Palestinian terrorist raids on Israeli citizens.

"There is blood between us and the Arabs," Melamed says. "It will be a long time before we can live together in peace."

The problem of Jerusalem, the bugbear of every comprehensive Middle East settlement proposed since 1967, has three main elements: sovereignty, municipal government, and the holy places.

In the absence of any political agreement, these responsibilities have been assumed by the Israeli government and the Jerusalem municipality under the leadership of Mayor Teddy Kollek since 1967.

Although the Jerusalem problem has a religious dimension as well, and the Christian clergy have complained recently about serious incidents of vandalism at Christian sites, the question of sovereignty and Jerusalem's overall political conflict is drawn along Jewish-Arab lines.

"There has been a complete repudiation of the system in east Jerusalem," says Meron Benvenisti, former deputy mayor of Jerusalem and author of the book "Jerusalem: The Torn City."

"It's not as if they want a bigger slice of the cake. They don't want good government, they want self-government. The longer the occupation," warns Mr. Benvenisti, "the worse the situation will be. If there is no political agreement, the city will be divided."

In the autonomy talks currently under way between Egypt, Israel, and the US, the problem of Jerusalem has been one of the major stumbling blocks. Under the Egyptian model agreed to by the US, east Jerusalem Arabs are considered an integral part of the West Bank and should participate in elections for the proposed autonomous Palestinian councils.

However, the Israelis, who claim sovereignty over east Jerusalem as Israel's indivisible capital, have proposed an 11-member executive council with limited powers.

With the level of tensions rising with the growing radicalism of the West Bank Palestinians, the current situation in Jerusalem, in the words of one Israeli official, is like "the lid on a pressure cooker."

In a recent interview in an Israeli newspaper, Jerusalem Mayor Kollek suggested a borough system modeled on the boroughs of London, to give Jerusalem's Arab residents a measure of self-government.

"No, it will not satisfy them," he admitted, "but it will satisfy them more than now.

"Jerusalem's Arabs today have no political outlet," he warned. "If they don't get it, one day they will explode."

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