The Palestinian Implosion

Salam Fayyad's bold effort to build Palestinian institutions could soon collapse -- unless Israel and the United States spring to action.

Three years ago, Palestinian Prime Minister Salam Fayyad launched an ambitious plan to build effective, responsive, and clean government institutions. The results were impressive, and Fayyad was hailed as a figure who was making true progress toward a two-state solution even as formal negotiations faltered.

These days, however, the entire project is under dire threat. The political and social worldview that informs Fayyad's vision has been undermined by Hamas's apparent ability to leverage armed conflict to its political advantage. To reverse this disturbing trend, the international community and Israel need to recognize that Palestinian institution building is a strategic priority -- not merely an economic or technical one. Urgent steps on all sides are required to save this project, or its vision for Palestinian independence and peace with Israel may give way to more confrontational approaches, to the detriment of all.

There is no denying the progress that has been made. Under Fayyad, the Palestinian Authority (PA) eliminated structural corruption in ministries and other public agencies under its control. Palestinian security forces have been providing both Palestinians and Israelis with unprecedented security. In 2011, the United Nations, World Bank and the International Monetary Fund all issued reports certifying that the PA fully met the criteria for independence. The PA "is well positioned for the establishment of a state at any point in the near future," read a 2011 World Bank report. In April 2011, international donors noted, "Palestinian institutions compare favorably with those in established states."

It has been downhill since then. In stark contrast to the situation in 2011, Fayyad's government is now unable to meet payroll for more than 140,000 public sector employees -- including teachers, nurses, police officers, and civil servants. The PA's institutions are on the verge of collapse. One million Palestinians are threatened with the prospect of falling into poverty over the course of the coming year as a result of the economic crisis.

The ongoing PA fiscal crisis was aggravated by the Palestine Liberation Organization's failed 2011 bid for Palestine to be granted member-state status at the United Nations, which led to a reduction in U.S. and European Union aid. This is now compounded by Israel's decision to withhold Palestinian tax revenues in retaliation for the successful 2012 push to win non-member observer state status at the United Nations.

According to the 1994 Paris Protocol, Israel collects taxes accruing to trade transactions with the Palestinians -- amounting to 50 percent of the PA's monthly budgetary commitments -- and is obliged to transfer the revenue to the PA. In practice, this gives Israel an easy way to plunge the authority into fiscal crisis whenever it wants to put pressure on the Palestinian leadership.

Israel also announced plans to use the withheld money to pay the Israel Electric Company more than $350 million in outstanding bills owed by Palestinians. But these debts are not owed by the PA government -- they are owed by privately owned Palestinian electric companies in the West Bank and Gaza. The latter, of course, are under the control of Hamas, which does not distract itself by trying to collect money from consumers. Israel's decision not only harms the PA, it directly benefits Hamas -- and bails out deadbeat Palestinian businessmen -- all at the expense of ordinary Palestinian public sector employees and their families.

Politically, this move also undercuts the one Palestinian leader who has been unwavering about working openly with the global community and Israel. Fayyad has consistently worked to create and maintain law and order, and rooted out systemic corruption within the ministries and agencies under his control. The tumult of the recent war in Gaza again demonstrated the effectiveness of PA governance, as Palestinian security forces successfully maintained order in the West Bank under difficult circumstances. Today, however, Fayyad is increasingly identified in the public consciousness with the inability of the government to pay public sector salaries.

Hamas, meanwhile, is riding high after its recent conflict with Israel. Its regional standing is being buoyed diplomatically by allies like Egypt's Muslim Brotherhood-led government and Qatar, which recently promised an additional $400 million in aid and rebuilding projects for Hamas-held Gaza.

The pressure from Hamas's resurgence, Israel's withholding of Palestinian revenues, and reduced donor aid could eventually lead to the PA's collapse. Strikes and demonstrations in the West Bank based on economic grievances began a few months ago, and have become a recurring feature of the Palestinian political landscape. Hamas and some Fatah officials have been trying to use the non-payment of salaries to settle scores with Fayyad and derail his policies.

Fayyad responded to Israel's withholding Palestinian tax revenues by calling on the Palestinian people to voluntarily buy Palestinian, rather than Israeli, products. It was an economic response to an economic measure: Fayyad never used the word boycott, as some reports mistakenly suggested. He did not single out settlement products, nor did he call for, or initiate, any official measures. But all of his statements were sensationally, and often inaccurately, covered in the Palestinian and international press.

This all comes in the context of Israel's announcement of an aggressive expansion of its settlement enterprise, including the construction of more than 5,000 new housing units mainly in highly strategic areas in and around Jerusalem. These proposed settlement plans, if completed, would make it exceptionally difficult -- if not impossible -- for East Jerusalem to serve as the capital of a Palestinian state, and threatens to cut off the city from the rest of the West Bank almost entirely. The danger these plans pose to the two-state solution was noted by the State Department, the 14 other members of the U.N. Security Council, and the European Union, all of whom expressed deep concern at Israel's announced settlement projects. The Palestinian public's faith in the viability of a two-state solution is at an all-time low -- and this despair is spreading regionally, internationally, and even among pro-peace Israelis.

The erosion of the two-state solution and the weakening of the PA is leading the Israeli-Palestinian conflict to a crisis point. This has been exacerbated by the financial and political crisis facing the Palestinian security forces, whose members are not being paid and whose self-image as protectors of the Palestinian national project is being undermined both within the public and its own ranks. This is the single most urgent reason to take early and effective measures to end the fiscal crisis.

The current trends are ominous: Hamas is growing stronger in both Gaza and the West Bank, while the financially strapped PA is struggling to present a viable alternative. If this continues, the world will witness what Fayyad recently termed a "doctrinal defeat" of those who work for progress through nonviolent strategies. The message being conveyed to the Palestinians is that a policy of partnership with Israel, the United States, and the international community is fraught with more risk than open confrontation.

It is not too late to correct this course and prevent the situation from deteriorating further. President Barack Obama's administration and Israel must have a frank, friendly conversation about this issue, which is vital to both countries' national interests. Specifically, they should ensure that funding is injected into the projects still being pursued by the PA to prevent its collapse and restore its credibility. It is not too late -- but time is running perilously short.


National Security

The Fiscal Cliff Sequel

Why the Pentagon will only make a cameo appearance.

"Our revels now are ended. These our actors, as I foretold you, were all spirits, and are melted into air, into thin air." Prospero, The Tempest, Act IV, Scene 1

The curtain has closed on the shadow play "The Fiscal Cliff." The actors have left and the journalists are sweeping the stage. As foretold in August 2011 it was theater, not a reality show, and certainly not reality itself. But gird your loins for the next round; the fight is far from over.

The endgame drama was a tax bill, not a spending bill, and certainly not a Grand Bargain. It did not affect spending very much at all, as nearly two-thirds of the Republican members of the House pointed out yesterday in voting against the deal.

Because it deferred virtually all of the spending issues, it opened up the opportunity for a new theatrical performance to come to town, one everybody will recognize: "The Debt Ceiling: The Sequel."

We will get to fight the sequester fight all over again in the next two months, without the tax issues to balance it out. Senator Lindsey Graham, already on the record for saying (wrongly) that the Pentagon might have to send out 800,000 layoff notices if the Pentagon budget were hit by sequester, has already advertised that his party should "save your powder for the debt ceiling fight."

But this is not going to be the same kind of fight. The markets are not going to bounce up and down about the spending issue, not in the ecstatic way they bounded up today.  The economic consequences of billions of dollars in added taxes are not the same as the consequences of spending cuts this year ($109 billion) that are less than 1 percent of overall federal spending.

Budgets and spending are familiar year-by-year struggles for Congress. Because negotiators could not get even close to a spending agreement last month, they pushed this fight to March -- about the same time that Secretary Geithner has said that the United States will hit the debt ceiling after his ability to shuffle funds around to avoid going over the top will run out of steam. So the same two trains -- spending and the debt ceiling -- are heading toward each other as they were in the summer of 2011.

What does this mean for federal spending and, my beat, for defense? Not much. Defense is still a side show, a "residual" in a larger agreement.

This week's deal postponed the Budget Control Act's spending sequester for two months, which meant some of the savings that were supposed to happen between January 2 and March 1 -- about $24 billion -- needed to be covered in some way. The deal agreed to apply some of the revenues from the tax changes to cover some of that spending gap.

Then, to make sure the FY 2013 budget does not go over the cap for this fiscal year, there will be about $12 billion in spending cuts, $4 billion of which will take place this fiscal year and $8 billion in FY 2014. These cuts would be split 50/50 between "security" (meaning defense, nuclear weapons, foreign policy, homeland security, and veterans' affairs) and "non-security" spending.

This little piece doesn't mean much for defense. If the FY 2013 defense budget went down another $2 billion from what the appropriations committees' bills look like today (they are slightly over the cap), it would affect a tiny fraction of the defense budget -- a rounding error for DOD. And if these cuts were spread out to the other security agencies, it would be even less of a hit. Appropriators find this kind of chump change in their pocket lint, every year.

The long-term sequester is a bigger budgetary deal and it comes March 1, ahead of the cap limitation I just discussed. This is the ten-year defense hit Secretary Panetta (and Senators McCain, Graham, and Ayotte, Chairman McKeon of the House Armed Services Committee, and the Aerospace Industries Association) have been hyperventilating about for more than a year. In the absence of a spending deal that postpones this ten-year sequester, the defense budget would decline by something like $490 billion from the current budget projection.

Now, I gotta tell ya, this is not the big deal these "defenders of defense" make it out to be. Losing $500 billion from the flat defense budgets projected over the next ten years would still be the smallest post-conflict drawdown the defense budget has experienced since the end of World War II -- maybe 15 percent of the ten-year budgets DOD projects today. For FY 2013, this sequester would now mean $43.5 billion out of the FY 2013 defense budget, less than before, but still significant.

But DOD would still have to manage it. Once again, for the record, military personnel are unaffected -- the president has already waived them from sequester, as the law allows. The industry would survive, because they are working on existing contracts, but business would get smaller than they hoped over the next decade. (We are already in a drawdown now, so most of the major defense contractors have already been cutting back in anticipation.) The Office of Management and Budget has made it clear that DOD's operating accounts (Operations and Maintenance) would have substantial flexibility, not what Secretary Panetta has called a "meat axe" approach.

And DOD would retain the capacity to reprogram funds, much of which can be done internally, without prior congressional approval. In fact, over the past 12 years, DOD has carried out more than 1,100 such reprogrammings, ranging from roughly $12 billion in FY 2000 to as much as $49 billion in FY 2008.

A spending deal would be necessary in any case; we need a budget every year. But this year, like the last two, will be something special, courtesy of the debt ceiling's return. Republicans are going to want a pound of flesh for having violated the Norquist pledge and raised taxes on the rich. Defeat is not a pretty thing. And the Democrats are going to want to avoid domestic spending cuts and, especially, changes in Medicare and Social Security benefits. We will be watching this new drama intensely as the new Congress comes in, the media discover the debt ceiling, and March 1 approaches. So get some more popcorn, settle down, and enjoy the show.

SAUL LOEB/AFP/Getty Images