Israeli politics since the 1967 war have been defined by the issue of what to do with the West Bank and Gaza Strip and what to do with the people, the Palestinians, who live there. Debate has circled around a central question: should the territories be made a permanent part of Israel or traded away as part of a peace agreement? When Palestinians collectively rose up in 1987 to challenge Israeli rule, this question was posed anew, with greater diplomatic urgency. The resulting initiatives and events—including the various Oslo Accords of the 1990s, the Camp David summit of 2000, and the second uprising, which started later the same year—stand as the signposts by which Israelis measure the last two decades of their country’s history.

The recent commemorations of the 1967 Arab–Israeli War, in recounting and lamenting the harvest of the past 40 years, have drawn us back to the opening of this chapter in Israeli–Palestinian relations. But this anniversary also seems to mark the closing of a chapter: national debate no longer pivots around the ultimate disposition of the West Bank and Gaza Strip. This reorientation started in 2005 with Israel’s unilateral withdrawal of its settlements from the Gaza Strip and northern West Bank. Yet no sooner had unilateralism tentatively taken root when it was undermined by the Hamas victory in the Palestinian Legislative Council elections in January 2006, the war with Hezbollah and Lebanon the following summer, and Hamas’s routing of Fatah forces in Gaza earlier this summer.

As a result, after nearly 40 years of controversy and diplomacy, Israelis have thrown up their hands. When Israeli Jews look next door to the West Bank and Gaza Strip, they feel that everything has been tried and nothing has worked. Direct occupation and control over the population’s military and civil affairs, sponsorship of a Palestinian quasi-state, and unilateral withdrawal within the occupied territories: 40 years of experimentation with virtually every arrangement—except a complete withdrawal—have yielded bitterness and failure. With Palestinians fighting among themselves and rockets flying out of Gaza, Israelis see only the Palestinians’ uncanny knack, as the late Israeli foreign minister Abba Eban condescendingly phrased it, for never missing an opportunity to miss an opportunity. Diplomacy is stymied, and many traditional proponents of negotiations and land deals now advocate a holding pattern that relies on the use of force.

Today the spectrum of Israeli opinion on the question of Palestine has been telescoped to a point of consensual inaction born of a double absolution. Morally, Israelis feel they have been generous twice over—once with President Bill Clinton at Camp David in 2000 and a second time in Gaza in 2005—and have been rewarded only with Palestinian violence. Practically, Israelis face no pressing need to nurture a diplomatic process, since the recent separation barrier and military action seem to have worked to frustrate suicide bombings.

Relieved of the most immediate moral and practical burdens, Jews in Israeli cities can afford to worry less about the occupation. In Tel Aviv, people pass summer evenings in cafés and glass-front restaurants, where security checks are now increasingly desultory, while in the Israeli city of Sderot, adjacent to the Gaza border, Qassam rockets fall regularly. As last summer’s war showed, only when great swaths of the country are threatened does the national temperature rise. Palestinian rocket attacks may be “unacceptable,” as Israeli Prime Minister Ehud Olmert has called them, but they have become normal.

This sense of calm, as many Israelis recognize, is illusory. Israel faces an array of domestic and regional challenges even beyond its relationship with the occupied Palestinians. Growing Islamist movements in Iran and Lebanon have provoked existential concerns despite Israel’s military dominance and nuclear prowess. Syria is pushing for peace negotiations, and if Israel continues to reject them, hostilities could break out. Debate over the definition of Israel as a Jewish state, seemingly put to rest after initial contestation by Israel’s Palestinian citizens in the late 1950s and early 1960s, has reemerged with a new generation of Israeli-born Palestinians. Moreover, with the recent strife in Gaza, Israelis may be forced to pay greater attention to the occupied territories.

In all of this, the Israeli leadership has shown little evidence of the vision or ingenuity necessary to lead the country out of its predicament. On the contrary, the Israeli political system is mired in scandal and corruption. And the preliminary government report on last summer’s war suggests a dearth of new ideas.

Politics, like nature, abhors a vacuum, and already, with the Israeli government paralyzed, alternate options are creeping into the political mainstream. In Israel, a proponent of involuntary ethnic separation of Jews and Palestinians, Avigdor Lieberman, today serves as a deputy prime minister. As the Gaza Strip and West Bank drift apart under the weight of Israeli occupation and intra-Palestinian conflict, the appeal of finding a solution for the West Bank alone may grow. According to the Israeli media, Olmert himself is putting out feelers to the Syrian government. Among Palestinians, pessimism about the possibility of achieving a two-state solution has encouraged, among some, talk of a single binational state, and, among others, adherence to forms of Islamism far more radical than that of Hamas.

While robust bilateralism may have gone out with the Oslo Accords, a substantial majority of Israelis and Palestinians still grudgingly support a two-state solution. The problem is that Israeli and Palestinian versions of what this would entail do not correspond, despite the progress in negotiations that continued even after the outbreak of the second uprising. A consensus among negotiators developed around enacting certain security measures, financially compensating Palestinian refugees, splitting Jerusalem, allowing Israel to annex most post-1967 Jewish neighborhoods in East Jerusalem, incorporating at least 95 percent of the West Bank into the Palestinian state, and swapping land for any West Bank territory that Israel annexes.

At the same time, disagreement persisted about the sovereignty of the Temple Mount in Jerusalem (known as the “Noble Sanctuary” to Palestinians and Muslims) and the size of the West Bank settlement blocs (such as Ma’ale Adumim and the Etzion bloc) that Israel would annex. As for the right of return, the reports are ambiguous. Some suggest that Israel would acknowledge the Palestinian right of return if Palestinians agreed that this right would not be realized in sovereign Israeli territory. Yet it is not clear that any Palestinian negotiator would be willing to acquiesce to an arrangement that does not provide for settling at least some refugees in Israel itself.

Even if the upper echelons reach agreement, they will need to convince their publics to back and implement the accord. This is not as simple as it sounds. Everyone may be talking about two states, but they are not talking about exactly the same two states. Israelis across much of the political spectrum would be willing to vacate territories to put an end to the conflict, but Palestinians consider their proposals unacceptably stingy.

Meanwhile, Palestinian citizens are more assertively pressuring for an end to Jewish privilege, and as a result they have come to seem as hostile to Israel’s existence as Palestinians in the West Bank and Gaza Strip. Israel’s Palestinian leadership has articulated an increasingly oppositional voice ever since October 2000, when 12 Palestinian citizens of Israel were killed during protests at the outset of the second uprising. More recently, Arab intellectuals have published several documents that question the Jewish nature of the state. Some proposals prescribe radical individual equality for Arabs and Jews, whereas others would preserve group rights. The document that attracted the most attention—and opprobrium—was the December 2006 report “The Future Vision of the Palestinian Arabs in Israel.” The bulk of the report focuses on the quotidian sorts of discrimination faced by Israel’s Palestinian citizens, but reaction centered on the document’s caustic characterization of Zionism, as well as its demand for the recognition of Palestinians as “the indigenous people of the homeland” who have a right to “complete equality in the State on a collective–national basis.”

Such ideological opposition is interpreted as a material threat by the Israeli security apparatus. The director of the domestic security service made headlines in March when he insisted that he would use means that are normally reserved for fighting illegal activity against “elements who wish to harm the character of the State of Israel as a democratic and Jewish state, even if their activity is conducted through democratic means.” This trend reached its apogee with the charges of treason recently filed against Azmi Bishara, a former member of the Knesset, for allegedly assisting Hezbollah during the recent war in Lebanon. Bishara admits to maintaining contacts with certain Lebanese during this period, but he insists that he conducted political conversations that ought not be interpreted as threats to security. Palestinian activists themselves sometime blur this line, as when Sheikh Raad Salah, the leader of the northern branch of the Islamic Movement in Israel, called for an “uprising” to oppose the construction of a new ramp to the Temple Mount.

While internal grievances grow between Israel and its Palestinian citizens, regional tensions are increasing—most immediately, with Hezbollah and with Syria. The Iranian president’s Holocaust denial and belligerent rhetoric against the Jewish state has been met with Israeli threats of massive retaliation and preemptive attack. In 1967, it was fashionable to compare Egyptian President Gamal Abdel Nasser to Hitler; today, the Iranian president has assumed that role.

Regional challenges seem all the more foreboding given the lackluster performance of the Israel Defense Forces in last summer’s war. The war’s inconclusive end resulted in a national malaise and raised questions about the army’s training, morale, and preparedness. The interim report of the commission appointed by the Israeli government to investigate the war, the Winograd Commission, sharply criticized Minister of Defense Amir Peretz, Prime Minister Olmert, and the military chief of staff, Lieutenant General Dan Halutz. National-security insiders have long known that Israel’s still young National Security Council is often left out of major decisions, that political leaders turn to generals rather than diplomats, and that close advisers of the prime minister have disproportionate influence. But the report brought all these issues out into the open.

Whether the revelations about the faulty decision-making process will lead to real change is open to question. As the Israeli government recently considered its response to the rocket fire from Gaza, the prime minister seemed to be using the Winograd Commission’s recommendations as a checklist, ostentatiously reporting broad discussions and consultations with his foreign ministry and others. Time will tell if Olmert is merely trying to rebuild his popular credibility or if he and other politicians are genuinely committed to righting the grave policymaking flaws exposed by the 2006 war.

Either way, the public has declared its discontent with the current government. Even the most capable leadership would be hard pressed to respond to the current difficulties, and Israelis across the political spectrum agree that their leaders have not been up to the task.

The unfavorable public opinion stems not only from Israel’s poor showing in the 2006 war but also from an unprecedented wave of revelations about corruption, mismanagement, and moral turpitude within the government. After the national police commissioner was forced to resign in mid-February, one passerby, interviewed on the nightly news, summed up public sentiment: “The police, the military, the government—it’s all one big racket.” As unsavory revelations proliferated over the following months, the public reacted first in outrage, and later in weariness. The public’s confidence in its officials is at an all-time low: in comparison with Olmert’s single-digit approval ratings, President George W. Bush’s are enviable.

Just when visionary leadership is desperately needed, the Israeli government seems incompetent and incapacitated. The international community, including the United States, has persisted in its support for the two-state solution, but it has become a mantra without a mechanism. Meanwhile, other options are shaping the conversation.

The “Israel Our Home” Party, a member of Israel’s coalition government, has one answer for both the problem of Palestinian citizens of Israel and the problem of the West Bank. The party seeks to take Ariel Sharon’s principle of “separation from the Palestinians,” which referred to Palestinians living in the West Bank and Gaza, and extend it to Israel’s Palestinian citizens as well. Even before the recent flare-ups, the party—along with its head, Avigdor Lieberman, a deputy prime minister and minister of strategic affairs—articulated a two-part plan: deny citizenship to those unwilling to swear a loyalty oath to the Jewish state, and cede Palestinian areas of Israel proper in the context of future political settlement. Like much else about the current conflict, the idea of excising Galilee villages populated by Arabs is not entirely new; Tom Segev, in his book 1967, notes that this “old fantasy” was discussed in 1966. Palestinian citizens of Israel strongly oppose the plan, calling it “stationary transfer” since it would relocate them outside Israel’s borders while leaving them in their homes. In February, polls predicted that should early parliamentary elections be held—which is now looking less likely after Ehud Barak’s June win in the Labor primaries—Israel Our Home would be competitive.

A second option for Israel would be to deal directly with Palestinians in the West Bank and set aside the question of Gaza, given Hamas’s ascendance. Since President Mahmoud Abbas and the Fatah movement are politically and institutionally much stronger in the West Bank than in Gaza, Israel could cut a deal with Abbas. It might even be possible, though it is unlikely, that negotiations with Abbas could extend to the vexing issues of refugees, Jerusalem, and settlements.

This would not be the first time that a solution to the Palestinian question was sought in the West Bank. Israeli policymakers long considered a role for Jordan in the management of a Palestinian entity located there, a prospect that seemingly ended when the Hashemite kingdom renounced claims to the territory following the outbreak of the first uprising in 1987. Such an approach, however, would cut directly against the Palestinian territorial minimum: an independent state in the West Bank and Gaza, with East Jerusalem as its capital. Indeed, a “West Bank first” plan would increase suspicions that Israel was intent on permanently sundering the two Palestinian territories, orienting the West Bank toward Jordan and the Gaza Strip toward Egypt.

A third possibility would be to actively pursue peace with Syria. At many points during the Oslo years, the Israeli government vacillated between the Palestinian and Syrian tracks, arguing that public support for territorial concessions was a resource to be carefully husbanded. The price that Israel would need to pay for an Israeli–Syrian deal would be withdrawal from the Golan Heights, something that Israeli Prime Ministers Rabin, Peres, Netanyahu, Barak, and possibly even Sharon were willing to accept. These prime ministers agreed to evacuate 99 percent of the territory, disagreeing only about where the new border should be drawn relative to the Sea of Galilee.

In the last few years, however, Israeli–Syrian peace negotiations have been blocked by the Bush administration, which does not want to “reward” Syria with a peace agreement and the return of the Golan Heights. Washington’s transformational agenda for the Middle East militates against cooperation with a junior member of the “Axis of Evil,” especially one that has further provoked the international community by its continued meddling in Lebanon. This year, there have been indications that the American position might be growing more flexible, but U.S. support for renewed Israeli–Syrian talks is not a foregone conclusion.

Meanwhile, among Palestinians and their political allies, calls for a single, binational state have grown more prominent, although they continue to lack grass-roots support. The argument for the one-state option is sometimes rooted in the logic of justice (i.e., a state predicated on privilege for Jews is fundamentally unjust) and other times in demography (i.e., if Israel continues to control the West Bank and Gaza Strip, it will eventually be forced to grant rights to millions of currently disenfranchised Palestinians). But Israeli Jews overwhelmingly reject the option, since it would mean an end to Israel as the Jewish state.

Can the United States jump-start the stalled diplomatic process, whether by reinvigorating the standard options or by formulating new ones? No other country has the stature to play this role, but as one international official put it, the Americans have tended to “take up space” without substantively advancing the process.

While one can adduce numerous examples of American neglect and even obstinacy, the coherence of American actions should not be overstated. The split between the latter-day Cold Warriors and the neoconservatives that marked the Bush administration’s first term has transformed into a battle between the so-called pragmatists, represented by Secretary of State Condoleezza Rice, and the hard-liners, led by Vice President Dick Cheney. The U.S. presence on the ground is even more fractured; its various missions have differing agendas that are not always in sync. The U.S. embassy in Tel Aviv deals with Israel; the consulate general in Jerusalem deals with Palestinians; the U.S. Agency for International Development has its own set of humanitarian and development concerns. General Keith Dayton, the current U.S. security coordinator, has a direct line to Washington; the State Department speaks with multiple voices; and U.S. intelligence agencies maintain autonomous connections with their clients in the West Bank and Gaza Strip. On a theoretical level, these different operations are coordinated, but this complex bureaucracy does not, in practice, submit to theoretical dictates.

Israel has yet to resolve its relationship with the West Bank and Gaza, and in recent years, all conventional options have been recognized as lacking. When Israelis look around, they see an array of threats, including challenges to the very nature of the Jewish state. In the hands of skillful leaders, the current crisis could also offer an opportunity. With traditional ideologies in retreat on all sides, the field is wide open for new thinking.

The flurry of activity that has followed the recent fighting in the Gaza Strip could be interpreted as a sign of new diplomatic possibilities. The resumption of money flows to a reconstituted Palestinian government, the appointment of Tony Blair as diplomatic envoy, and the signals from Israel that it will pursue negotiations with the West Bank–based Abbas suggest a change of approach. But as the history of regional politics reminds us, diplomatic bustle is not the same as political progress. Thus far, these moves are tactical changes, not the basic shift in strategic and political vision necessary to effect fundamental improvements.