Much to say about this. One objection is that the Pope's story of the dialogue between the Byzantine Emperor Manuel II Paleologus and a Persian interlocutor gives the impression that the tradition from Greek philosophy through medieval Christianity rejected coercion in religion (unlike Islam). The very learned Pope knows better. Leaving aside the specifically Greek Christian tradition (about which I know very little), Plato, Augustine and Aquinas all embraced religious coercion.
Andrew Sullivan wants to pull the Pope into the "civilizational conflict" between Islam and the West. And the Pope does indeed contrast Christianity's tie to a Greek conception of reason (presumptively persuasive) as opposed to Islam's emphasis on God's arbitrary will (presumptively violent). What Sullivan does not remark is how much Western Protestant-derived modernity owes to the Muslim idea of the primacy of will over reason, rather than Platonic-Patristic-Scholastic conception of the reasonableness of the universe. As Benedict hints, the key achievements of the Protestant West -- liberalism and the scientific method -- owe a lot to the dominant trend in medieval Muslim thought.
There are a number of ways of going at this, but I will try meta-ethics. In the Euthyphro, Socrates asks whether an act is pious because the gods command it, or the gods command it because it is pious. Plato's conclusion is that the gods could not make an act good just by commanding it -- rather, because they are benevolent, they command us to do what is good. In other words, the Good can be rationally understood and is prior to the will of personal deities. God cannot help but command what is moral.
At its more metaphysical, Platonism and neo-Platonism emphasized that ordinary human goods "participate" somehow in the Eternal Good and human reason can thereby imperfectly, but in some genuine sense, can understand the Divine. People like Rodney Stark emphasize this rationalization of the cosmos as a source of the scientific worldview.
The dominant trend in Islam rejected this way of thinking. God's power is emphasized so strongly that the idea that God could be bound by some rational good is rejected. What is good is good because God orders it so.
The line goes from medieval Islamic thought through the British nominalist scholastics to Hume and reason being the slave of the passions. Benedict makes this connection:
In contrast with the so-called intellectualism of Augustine and Thomas, there arose with Duns Scotus a voluntarism which ultimately led to the claim that we can only know God's "voluntas ordinata." Beyond this is the realm of God's freedom, in virtue of which he could have done the opposite of everything he has actually done.
This gives rise to positions which clearly approach those of Ibn Hazn and might even lead to the image of a capricious God, who is not even bound to truth and goodness. God's transcendence and otherness are so exalted that our reason, our sense of the true and good, are no longer an authentic mirror of God, whose deepest possibilities remain eternally unattainable and hidden behind his actual decisions.
Looking at the tradition of scholastic theology, the Reformers thought they were confronted with a faith system totally conditioned by philosophy, that is to say an articulation of the faith based on an alien system of thought. As a result, faith no longer appeared as a living historical Word but as one element of an overarching philosophical system.
The principle of "sola scriptura," on the other hand, sought faith in its pure, primordial form, as originally found in the biblical Word. Metaphysics appeared as a premise derived from another source, from which faith had to be liberated in order to become once more fully itself. When Kant stated that he needed to set thinking aside in order to make room for faith, he carried this program forward with a radicalism that the Reformers could never have foreseen. He thus anchored faith exclusively in practical reason, denying it access to reality as a whole.
The rejection of the specifically Greek idea that irrationality was contrary to the divine nature in Islamic thought replays itself in Protestantism and then in the Enlightenment. But, contary to Stark, it is this "irrationalism" which is central to the scientific worldview. Scientific reason purports to be value-neutral -- you can obliterate Hiroshima or electrify Africa with the same technology. Similarly, liberalism reasons about law while being neutral about uses of the will. The will itself is not the subject of reason. So the specifically modern developments arise out of the Muslim rejection or the rationalist content of Greek thought on the grounds that it improperly limited God's freedom and power, a rejection that was influential outside of Islam. (Sola scriptura is also a very Muslim approach to the Christian scriptures.)
Benedict is aware of this, says this. Scientific materialism, liberalism and Islam are all aspects of the same ultimate heresy to him. At the same time, Benedict things he can affirm what is good about these things within the Catholic system because he does not divorce reason from faith or will.
But Benedict's reference to "a living historical Word" raises new issues. If it is impossible and undesirable to strip the Christian message of its Greek inculturation, it follows that the inculturation, the historical process, is part of the Christian truth. As are episodes in Jewish history, like the Babylonian exile, which in Benedict's narrative plays a crucial role in universalizing and making more profound the Jewish conception of their God. But if these historical episodes, these inculturations are part of the story of revelation, why cannot further inculturations be? The end of Benedict's speech shows an oddly Europe-specific vision for a universal Church.
Update: Apparently, Muslim activists have responded to Benedict's speech linking Islam with religious coercion (correctly, of course) by burning him in effigy. So that's all sorted then.
Update 2: Larison, who I trust on this, says there was relatively little religious coercion in the Byzantine Empire, with a few exceptions:
There are exceptional cases: the forcible conversion of Jews and violent repression of monophysites under Heraclius; the persecution of the Montanists under Leo III; executions of a few Paulicians and Athinganoi under Michael I; executions of some Bogomils under Alexios I. There were inter-confessional persecutions, most of which took the form of sending people into exile or deposing them from their sees. It might be of interest to note that one of the worst periods of violent persecution in these internal church disputes was under Michael VIII, who sought to enforce church union with Rome.
But other than that, the Byzantines seem to be better, from a modern religious liberal point-of-view, then either the Latin West or contemporary Islam.