Eurasia Press & News
Helping It Recover Is the Only Way to Save the Two-State Solution
Since April, nine countries—Armenia, the Bahamas, Barbados, Ireland, Jamaica, Norway, Slovenia, Spain, and Trinidad and Tobago—have formally recognized the state of Palestine. Belgium, Luxembourg, and Malta have hinted that they may soon follow suit. So has the United Kingdom’s new prime minister, Keir Starmer; in France, meanwhile, left-wing parties that joined the coalition that won the country’s recent election advocated for recognition. Nearly as many countries now recognize the state of Palestine (149, as well as one disputed territory, Western Sahara) as recognize Israel (165). The accelerating pace of recognitions could soon bring the two countries close to parity—and significantly, the new wave of states recognizing Palestine includes several large Western European countries whose leaders have openly said that they hope the rest of Europe will follow their lead.
The new recognitions of Palestine constitute a symbolic act of frustration with the bloody war in Gaza and Israeli policies in the West Bank. Leaders of the countries now recognizing Palestine have also indicated that they hope diplomatic recognition will have practical effects on the ground, boosting Palestinians’ sovereignty and bargaining power and improving the chances that the war could end with a successful two-state solution. Most of the outside actors trying to broker a long-term cease-fire between Israel and Hamas believe that advancing the creation of a viable Palestinian state must underpin any such deal. Norway’s prime minister, Jonas Gahr Store, called recognizing Palestine “an investment in the only solution that can bring lasting peace in the Middle East.”
But unilaterally recognizing a Palestinian state is the wrong first step, one that could exacerbate the region’s turbulence. Not only would Israel’s leadership and population see it as an unjust reward after Hamas’s October 7 massacre, but the move, taken alone, has no tangible benefits for Palestinians. Even as the need for real Palestinian sovereignty grows more and more acute, the Palestinian Authority (PA)—the putative ruler of a Palestinian state—is closer to collapsing than it has been since the height of the second intifada in 2002–3. The Israeli government’s efforts over the past year to demolish the PA’s finances have driven the body to the brink of outright insolvency; in May, the World Bank warned that the PA could soon be forced into an irreversible fiscal crisis. The PA is nowhere near being ready to govern, and Palestinians neither like nor trust it. These challenging conditions would set a new Palestinian state up to fail from nearly the moment it was founded.
There is a genuine danger in recognizing a Palestinian state and raising expectations for its viability without tangibly helping a ruling authority prepare to govern effectively. Countries that wish to pave the way toward a two-state outcome must take a different, two-pronged approach. First, they must use political, economic, and diplomatic levers such as targeted sanctions on settler leaders and entities, and even on Israeli regional councils in the West Bank, to ensure that Israel ceases to encroach on a future Palestinian state’s land. Second, they must work to strengthen the foundations of a future state before declaring it into being.
Without immediate and targeted help from overseas actors, the PA could soon lose its grip on the West Bank—at which point it would stand no chance of ever resuming effective control over Gaza. And most Palestinians, deeply disillusioned with the PA, are themselves ambivalent about its continued rule; outside actors who wish to see the PA lead a future Palestinian state must first help the organization regain the trust of its constituents and nullify Israel’s objections over its lack of capacity to govern. In other words, anybody with the serious intent to promote a Palestinian state must put their energy—and their money—where their mouth is.
STATE OF FLUX
Recognizing the state of Palestine may appear to have many upsides and few risks. According to the standard definition in international law, a state must assert effective control over a permanent population, a defined territory, and a government, and it must have the capacity to conduct international relations. History shows, however, that decisions to recognize a new state do not always reflect whether the state has met these conditions but rather normative and political motives to support a people’s right to self-determination. A number of countries’ swift recognition of the state of Israel in 1948 illustrated that territorial disputes are not always a barrier to statehood. The United States and other countries recognized the Democratic Republic of the Congo in 1960 while it was still embroiled in a civil war and likewise recognized South Sudan in 2011 even though it did not exercise effective control over large parts of its territory.
The case of Kosovo, for instance, suggests that under the right circumstances, early international recognition can help drive a constructive state-building process. Following Kosovo’s 2008 unilateral declaration of independence, large countries including France, Germany, Italy, the United Kingdom, and the United States quickly recognized its sovereignty. That move granted Kosovo legitimacy, unlocked aid and foreign support, and allowed it admittance into key international institutions.
The right circumstances, however, are not yet present when it comes to the Palestinian state. In some ways, Palestine is indeed transitioning from a state on paper to a real, meaningful actor in the global arena. Since the UN’s 2012 decision to grant Palestine observer status, it has signed on to almost 200 treaties, joined numerous multilateral forums, and engaged in active lawfare against Israel. But international recognition will not help it overcome the biggest barriers to true independence: the fragmentation of Palestinian territories among the West Bank, Gaza, and East Jerusalem; the partial nature of self-rule in the areas nominally allotted to Palestinians; the ongoing expansion of Israeli settlements; and, damningly, the woeful incapacities of the PA itself. The PA, which was already extremely weak, has been rapidly losing its ability to govern since October 7. And although readiness should not be the only criteria for statehood recognition, symbolic Palestinian recognition will not achieve positive outcomes in the absence of strong governing bodies and institutions.
Recognizing the state of Palestine appears to have many upsides and few risks.
The current Israeli government is a chief threat to the health of the PA. Despite superficial efforts to prevent the collapse of the PA, the state of Israel has been seeking, implicitly and explicitly, to weaken the PA’s authority in the West Bank. Even Israeli Defense Minister Yoav Gallant, whom many Washington analysts perceive as a moderate, announced in May that Israelis would be allowed to return to three former West Bank settlements from which Israel withdrew in 2005—violating commitments that Israel made to U.S. President George W. Bush in 2005. The more radical right-wing members of Israel’s current government, led by National Security Minister Itamar Ben-Gvir and Finance Minister Bezalel Smotrich, are more forthright about their intent to undermine the PA. Smotrich created and oversees the Settlements Administration, a new governmental body within the Defense Ministry that is empowered to appropriate land in the West Bank, construct new settlements, and demolish Palestinian buildings constructed without permits. As a leader in the settlement movement, he is using his political position to condone the establishment of illegal outposts, retroactively legalizing them in what he characterizes as a retaliation against other states’ recognition of Palestine.
Unilateral recognition of a Palestinian state outside of negotiations with Israel—and over its objections—could lead to more of this kind of retaliation. Israel’s far right has long desired to retroactively legalize its own illegal construction. But characterizing this activity as the appropriate response to unilateral recognition of Palestine builds broader support for such encroachments into the West Bank beyond the extremist settler flank. Further recognitions of Palestine could legitimize the Israeli right wing’s longtime calls to annex the West Bank by force. In 1948, when Zionist leaders declared the establishment of Israel, war followed. But although the newly independent Israel had the capacity to defend the borders it had established, a Palestinian state would not.
SQUEEZE PLAY
Israeli policies are also steadily ramping up the economic pressure on the PA. Israel collects taxes on goods that pass through Israel into the West Bank on behalf of the PA. It is required under the Oslo accords to transfer these taxes to Ramallah on a monthly basis. In recent years, this tax revenue has composed around 70 percent of the PA’s income. These revenues have dropped from a monthly average of $220 million in the months leading up to October 7 to $55 million now, as a result of the economic slowdown prompted by the war in Gaza. But Israel did not even pay out the diminished revenues it owed the PA between October 7 and early July of this year, when a last-minute deal was achieved to secure partial transfer of payments. Moreover, local tax revenues collected by the PA have dropped by over 50 percent since October 7.
Other Israeli policies—including the revocation of work permits for Palestinians and the extension of the fight against Hamas to the West Bank, which has yielded increased Israel Defense Forces activity and stricter limitations on freedom of movement—have pushed the West Bank’s labor productivity down and the unemployment rate up. In addition, the international donations that have historically contributed substantially to the PA’s revenue have all but vanished thanks to donor fatigue and redirection of existing humanitarian aid toward the crisis in Gaza. These donations are now at their lowest point since 2012.
All in all, the PA’s cash deficit is expected to exceed $2 billion in 2024, up from $740 million in 2023 and $451 million in 2022. The PA’s overall debt could climb to $5 billion by the end of this year. As a result of these financial troubles, the PA has had to slash public-servant salaries by as much as 50 percent and delay payments to private-sector providers. In the West Bank, government ministries now only work three or four days a week. As Israel closes its gates to Palestinians, their needs have grown more acute, but the PA has had to significantly reduce service provision in areas such as education, health, and social welfare. Diminished public spending on social assistance, for example, has resulted in cutbacks and delays to cash payments for the West Bank’s poorest families. Medication for chronic illnesses has run out in public hospitals, forcing ordinary Palestinians to rely on charity or seek expensive private medical referrals; private health care is struggling, too, because some 60 percent of the PA’s private-sector arrears is owed to private and NGO health-care providers. Courts have even stopped issuing printed arrest warrants as a way to save paper and printer ink.
The international donations that contribute substantially to the PA’s revenue have vanished.
On top of these challenges, two new Israeli laws came into effect on June 1 that will further undermine the PA’s fiscal situation. Both laws grant victims of Palestinian terrorist acts automatic compensation from the PA and may apply retroactively to October 7. From the tax revenue it is withholding from the PA, Israel is expected to deduct $1.3 million for each person injured in a terrorist attack and $2.7 million for every Israeli death. Although this legislation is still subject to change and is being challenged in court, its full implementation could bankrupt the PA instantaneously.
Smotrich has made clear his enthusiasm for the PA’s financial demise. “Let it collapse,” he declared in May. He has a powerful personal incentive to keep the PA’s finances in a precarious position: that precarity constitutes valuable leverage. Israel’s Finance Ministry currently indemnifies Israeli banks that transfer money to Palestinian banks, which protects Israeli banks against sanctions or lawsuits for transferring money that may assist terrorist activity. Smotrich has repeatedly threatened to end this indemnity, which would make it impossible for Israelis to conduct any business with companies or individuals holding Palestinian bank accounts and with the PA itself. In return for agreeing to temporarily extend Israeli banks’ indemnity and release portions of the PA’s tax revenues, Smotrich has extorted big concessions, such as approvals for more settlement construction and the revocation of travel permits for PA officials. Indeed, Smotrich has demonstrated his willingness to compromise on economic measures for even more significant territorial concessions—an outcome that would lend further blows to any prospect of meaningful Palestinian statehood.
The Israeli defense establishment has greeted Smotrich’s economic threats with deep alarm, knowing that the disintegration of the PA and the Palestinian economy could destabilize the West Bank. Yet these warnings have gone largely unheeded: Israeli Prime Minister Benjamin Netanyahu is unwilling to do anything that causes his coalition—which depends on Smotrich and Ben-Gvir—to collapse. If Smotrich allows the bank indemnity to lapse when its extension expires in October, that could transform the Palestinian economy overnight into one that relies solely on cash, setting it back decades and further delegitimizing the PA.
ROTTING FROM THE INSIDE
The PA is not only hamstrung by Israel’s policies. Its internal governance is characterized by corruption and authoritarianism. In the areas under its direct control—Areas A and B of the West Bank, comprising 40 percent of the territory—the PA struggles severely to provide services, livelihoods, and dignity to inhabitants. This is only partly due to its budgetary woes; it has also never established a properly functioning West Bank economy. President Mahmoud Abbas, who will turn 90 next year, administers the PA almost exclusively by executive decrees, with little transparency or oversight. Security is a particular problem, as militants from different factions now openly defy the underfunded and undermotivated PA security forces in cities such as Jenin, Nablus, and Tulkarm.
The PA’s poor performance is reflected in its abysmal poll numbers. A Palestinian Center for Policy and Survey Research poll conducted in both the West Bank and Gaza between May 26 and June 1 found that satisfaction with Abbas’s performance stood at a dismal 12 percent. A quarter of Gazans said they would like a reconstructed Palestinian Authority with an elected president, parliament, and local government officers to control Gaza after the war, and ten percent said they would prefer PA rule under a new leader. But in the West Bank, only 11 percent and six percent of respondents in the West Bank said the same, revealing the party’s lack of popularity among the people directly exposed to its rule.
Under pressure to reform, in February, the PA established a new, technocratic government headed by an economist, Mohammad Mustafa, who immediately announced an ambitious reform agenda. He is trying to implement it, for instance by calling for applications for deputy minister positions instead of merely appointing the usual Fatah cronies. But his current capacity to execute a truly broad shift is limited. An overwhelming majority of respondents to the Palestinian Center for Policy and Survey Research poll in late May said they believed that Mustafa’s new government would not succeed in carrying out necessary reforms.
Turning the PA from a transitional authority into a permanent state with the stroke of a pen will not make this litany of problems go away. The risk that the state of Palestine would become a failed state is very real given the PA’s dysfunctional, insolvent status and its dearth of public legitimacy. Further declines in its ability to provide social services and maintain law and order could yield a situation in which warlords and gangs become de facto rulers in some areas of the West Bank—a worse scenario than existed in 2002 and 2003, during the second intifada.
ORDER OF BUSINESS
If international actors are serious about advancing a two-state outcome, the symbolic step of state recognition must be preceded by concrete acts to insist on reforms to the PA, stop Israel’s attempts to undermine a two-state solution, and help the Palestinians with actual state building. Concerning Israel, other states should direct their political, economic, and diplomatic leverage toward stopping the country from degrading the little Palestinian capacity that remains without stoking Israeli fears that their country will be delegitimized outright. This means using a scalpel rather than an ax to force Israel to own the consequences of its behavior in the West Bank without eroding its overall security posture in the face of legitimate and ongoing threats from Iran and its proxies.
Other countries could restrict the ability of Israeli people, projects, and assets based on land designated for a future Palestinian state to access cultural and research and development programs abroad; require Israeli banks to register clients and institutions that operate in the West Bank; use diplomatic tools in international organizations to oppose Israel’s settlement project rather than its broad legitimacy as a state; and sanction umbrella groups that support settlements, settler-movement leaders, and even Israeli municipal entities that abet the building and funding of illegal outposts or settler violence. U.S. President Joe Biden’s February executive order sanctioning some such leaders is a template, but there is space to broaden its impact and encourage other countries to follow suit.
Concerning Palestinian state building, the most urgent step is to find emergency financial assistance to stabilize the PA. Mustafa has asked for $2.7 billion in emergency budget support over the next 12 months, an amount that would essentially restore international funding for the PA to pre-2013 levels. But this stopgap funding would constitute only a temporary Band-Aid, giving the PA a lifeline for merely a few months.
Palestinians’ deep dismay with the PA is legitimate. Yet no other actor could plausibly fill the void if the PA collapses. For all its faults and shortcomings, the PA has managed to create institutions and a bureaucracy that now has three decades of governing experience, which are commodities in very short supply. It also continues to maintain important diplomatic relationships across the world. To make international aid to the PA effective, donors must condition this support on the PA implementing specific reforms—and commit to helping the PA implement them, in the hope that gradually boosting the PA’s legitimacy will encourage even more meaningful reforms.
Instead of merely trying to will a Palestinian state into being, other countries must help the PA become capable.
The PA formed its new government following Biden’s promise to support a “revitalized” PA’s rule over Gaza after the war ends. But such promises will be empty as long as no international actor also helps the PA revitalize itself. It cannot do so on its own, partially but not only because of Israel’s pressure campaign. Indeed, setting high (and currently unrealistic) expectations for PA rule merely risks highlighting the gulf between hope and reality—and lending legitimacy to Israeli claims that Palestinian institutions are too incompetent to govern any territory at all.
To help with longer-term capacity building, key donor countries need to adopt a comprehensive strategy wherein they work jointly toward the same goal but divide up tasks. Division of labor is crucial to avoid overburdening a single international actor with a daunting and politically dangerous task; this concept was envisioned when Salam Fayyad was prime minister in the first decade of this century, but it was never fully implemented. The PA already has an aid-coordination secretariat, which could support collaboration among multiple stakeholders and aid providers.
Countries could take on different and complementary supportive roles. The United States, for instance, could continue training the PA security forces, assist in preparing a force designed to restore law and order in Gaza, and help the new government implement its security-sector reform plans. Germany could lead a comprehensive educational reform effort that both improves educational outcomes and addresses Israel’s concerns that the current Palestinian curriculum incites violence. The United Kingdom could assist the PA to strengthen its municipal governance, and the Netherlands could help it boost the water and energy sector.
Those countries recognizing Palestine or advocating for a two-state outcome must help ensure that the Palestinian state has a fighting chance to dignify its people with proper services and regain the public’s trust. Otherwise, any steps toward realizing two states will be fanciful, built atop a crumbling foundation—and likely to help turn the West Bank into a third front in the current war. Instead of skipping steps and merely trying to will a Palestinian state into being—and idealizing a so-called revitalized PA—the aim must be to help a capable PA emerge, one that can effectively govern the West Bank and potentially soon return to govern Gaza. Then, when political circumstances change and Israel and the Palestinians resume negotiations over a two-state outcome, there will already be a functioning de facto Palestinian state poised for success—one that will have the backing of the world in deed, not only in name.
