Issues of viability and sovereignty surround any discussion of a Palestinian state. Geography raises questions about the viability of any Palestinian polity. Palestine has two population centers, Gaza and the West Bank, which are detached from one another. One population center, Gaza, is an enormously crowded, narrow salient. Its ability to develop a sustainable economy is limited. The West Bank has more possibilities, but even it would be subordinate to a dynamic Israel. If the Palestinian workforce is drawn into the Israeli economy, both territories will become adjuncts to Israel. Within its current borders, a viable Palestine is impossible to imagine.
From the Israeli point of view, creating a Palestine along something resembling the 1967 lines (leaving aside the question of Jerusalem) would give the Palestinians superb targets, namely, Tel Aviv and Haifa. Given its history, Israel is unlikely to take that risk unless it had the right to oversee security in the West Bank in some way. That in turn would undermine Palestinian sovereignty.
As you play out the possibilities in any two-state solution, you run into the problem that any solution one side demanded would be unbearable to the other. Geography simply won’t permit two sovereign states. In this sense, the extremists on both sides are more realistic than the moderates. But that reality encounters other problems.
In other words, even assuming that you can distance the zealots on both sides from power in favor of the “moderates”, you still run into serious problems of national interests.
The Palestinian leadership understands that they actually have more to gain by being stuck in this sort of limbo of semi-statehood, where they are received as foreign dignitaries around the world, given plenty of money (with little oversight) and taken seriously in world capitals, while not being held accountable by anyone. Creating a state on the other hand, one that realistically needs to meet minimalist Israeli security demands, would risk all of what they have now. The world would lose interest in them and the Palestinian cause, the money would partially dry-up, their own people may demand democracy and end to the corruption.
Israel understands that the Palestinians can’t meet its most minimalist security demands, that a Palestinian state would suffer from such internal instability that risks jeopardizing the peace agreement, that the popular radical groups such as Hamas won’t go away, that it’s inconceivable for a Palestinian leader to give up the “right of return”, making all attempts at a peace agreement moot. Even if an agreement was reached it wouldn’t stick.
Obama never really understood any of this. History bends towards justice after all, so why shouldn’t the international community’s efforts bear fruit if they just keep pushing Israel?
The Palestinians have been quite clever and made use of Obama’s naivety to improve their relative position by turning away from negotiations to international institutions, such as the many institutions at the UN. The Palestinian strategy of trying to gain the upper hand by using the international community to force Israel to concessions while not offering any of their own, is obvious. This is also why the US has until recently tried to block these efforts even when it sometimes agrees on principle, since they don’t actually bring a negotiated peace agreement any closer.
At this time both sides are simply playing the waiting-game; waiting for conditions to change in their favor. The Palestinians do what they can internationally, while hoping for anything that would deal them a better hand, even assuming that they are not merely waiting for Israel’s ultimate demise. The campaign of terror that was launched in 2000, a.k.a. the 2nd intifada, aimed to serve the same purpose of improving a weak negotiating position. That Obama eventually rewarded their current campaign of diplomatically isolating Israel is no doubt a victory, but ultimately such “victories” do little. Israel is trying its best to limit the damage the Palestinians can cause, while actively trying to develop economic and strategic ties to countries around the world. By strengthening ties of trade and security cooperation, it hopes to alleviate some of the pressure on the Palestinian issue. Israel’s relative power, both economically and in its value to others as a partner in many fields, is steadily increasing. If Israel can avoid some of the pitfalls that may lie ahead, it may actually keep gaining from the status quo, until such a time as conditions are ripe for some kind of Palestinian state, albeit without full sovereignty, or autonomy within a larger Israeli state. From an Israeli hardliner’s perspective Obama may actually have been a godsend to Israel, allowing it to strengthen its position for 8 full years.