The policy of isolating Hamas and sanctioning Gaza is bankrupt and, by all conceivable measures, has backfired. Violence is rising, harming both Gazans and Israelis. Economic conditions are ruinous, generating anger and despair. The credibility of President Mahmoud Abbas and other pragmatists has been further damaged. The peace process is at a standstill. Meanwhile, Hamas’s hold on Gaza, purportedly the policy’s principal target, has been consolidated. Various actors, apparently acknowledging the long-term unsustainability of the status quo, are weighing options. Worried at Hamas’s growing military arsenal, Israel is considering a more ambitious and bloody military operation. But along with others, it also is tiptoeing around another, wiser course that involves a mutual ceasefire, international efforts to prevent weapons smuggling and an opening of Gaza’s crossings and requires compromise by all concerned. Gaza’s fate and the future of the peace process hang in the balance.

Since Hamas assumed full control of Gaza in June 2007, the already-tight sanctions imposed following its January 2006 electoral victory have been tightened further. Israel curtailed cross-border traffic, pointing to the absurdity of providing goods to an entity whose rulers fire rockets at its citizens. The West Bank-based Palestinian Authority, seeking to undermine Hamas’s standing, has also done its part to cut off Gaza and prevent normal functioning of government; feeble protests aside, the international community (Arab world included) has been at best passive.

The logic behind the policy was to demonstrate to Palestinians that Hamas could not deliver and so ought to be cast aside. The hope was that the West Bank, buoyed by economic growth, a loosening of Israeli security measures and a revived peace process, would be an attractive counter-model. On both counts, the theory has fallen short. Crisis Group’s extensive field work in Gaza shows that the Islamist movement has come close to establishing an effective monopoly on the use of force and has a near-monopoly on open political activity. It has refashioned the legal and legislative systems and enjoys freer rein to shape society through management of the health, education and religious sectors.

Those intending to undermine Hamas have instead given it an assist. Persons who support current policy point out that Gazans are turning against the Islamists. There is real distress at economic hardships and anger at the Islamists’ brutal behaviour. Hamas’s harsh tactics, recourse to violence and curbing of the media and independent activity undoubtedly have generated resentment, disillusionment and fear among many who voted for the Islamists.

But that is only half the story. The flip side of isolation has been the Islamists’ ability to rule largely unimpeded. By boycotting the security, judicial and other government sectors and curtailing administrative links with the Hamas government, President Abbas’s Palestinian Authority (PA) created a vacuum Hamas filled. The withdrawal of the international community has reduced its leverage. Closure of the crossings has caused the private sector to wither, weakening a constituency traditionally loyal to the PA. Economic punishment designed to hurt the rulers has hurt the ruled. Hamas finds ways to finance its government and can invoke the siege to justify its more ruthless practices. The situation may be catastrophic but, from Hamas’s perspective, it is far from desperate. Far less popular regimes have survived more onerous conditions. Moreover, Hamas has had successes. Its new security force gradually restored order as militiamen curbed gunfire and kinsmen reduced inter-clan blood feuds. Criminal activity and mafia feuding have been sharply curbed.

The questions now are familiar: whether to keep pressure on Hamas in the hope of undermining it but at the risk of an explosion; whether to apply heavier, but riskier military force; or whether to try to stabilise the situation by engaging Hamas, opening up Gaza and reaching a ceasefire at the price of providing the Islamists with greater international recognition. The first two options have a rationale: any step toward Hamas and loosening of the sanctions could further entrench its position in Gaza; it could exploit a ceasefire to bolster its forces.

But the counter-arguments are more powerful. Sanctions and military pressure have strengthened Hamas’s hold. To the extent the movement has lost some popularity, the attempt to enfeeble it by squeezing Gaza arguably is working, but the success is meaningless. Hamas’s losses are not Fatah’s gains; Gazans blame Hamas for being unable to end the siege but also blame Israel for imposing it, the West for supporting it and Fatah for acquiescing in it. Military talk empowers Hamas’s more militant, armed elements and boosts the movement’s standing. Poverty and hopelessness boost the appeal of jihadi groups, particularly among under-sixteen Gazans –- half the population.

Hamas has proved skilful at rewriting the rules through ballots, bullets or breach of the siege. The more pressure on it intensifies and the more polarised the intra-Palestinian conflict becomes, the more it will be tempted to derail negotiations between President Abbas and Prime Minister Ehud Olmert. It has already shown it can disrupt peace talks. Should violence escalate, how long will it be before whatever there is of the peace process collapses? The gravest threat to diplomacy comes not when Hamas has something to gain, but when it concludes it has nothing to lose.

The alternative is not easy. Israel has legitimate concerns about how Hamas might use a ceasefire, as does the PA about how a shift of course would affect its credibility. Hamas will not accept a ceasefire if it remains isolated and Gaza under siege. To address these competing interests, a ceasefire should entail reciprocal commitments to stop all attacks from and against Gaza; an opening of the crossings that alleviates Palestinian suffering in Gaza; and the international community’s participation in a credible monitoring effort to prevent smuggling from Egypt into Gaza.

The status quo is not tenable. Israel cannot accept to see its citizens threatened by continued rocket fire. Hamas is unlikely to sit idly by as Gaza is choked. If trends continue, the worst is imaginable: increased firing of rockets against Israeli towns and cities, as well as the resumption of bombings and attacks inside Israel; intensified Israeli military incursions, assassinations and attacks on key installations; the collapse of the peace process, discrediting of pragmatic Palestinian leaders and, potentially, the conflict’s spread to the West Bank or Lebanon.

The worst is not yet inevitable but avoiding it depends on Fatah and Hamas beginning reconciliation; a ceasefire agreement that lifts the siege on Gaza and allows Gazans and Israelis near the border to pursue normal lives; and the international community at last playing a constructive part in encouraging the parties to achieve these goals.

A subsequent Crisis Group report will analyse the situation in the West Bank.

Gaza/Jerusalem/Brussels, 19 March 2008