First, Israel cannot be a Jewish and democratic state. There is no such thing. Jewish democracy is as flawed as any democracy that promotes the interest of any specific racial or ethnic group at the expense of all others. The collective cognitive dissonance that has been streamlined into Israeli thinking that democracy can be tailored to fit racial and ethnic needs is completely unacceptable as a sensible democratic standard.
Democracy is grounded on pluralism and inclusion, not racial exclusion and fear-mongering about Arabs voting in droves. The fact that 4.5 million Palestinians don't have the right to vote in an area under Israel control says volumes. The fact that Palestinians who voted in a democratic Palestinian elections in 2006 are still suffering a punishing siege to this day because of that choice, is particularly devastating.
Second, Israel is not an American ally and there is no "special relationship." Netanyahu's speech about Iran at the US Congress in defiance of President Obama and declared US foreign policy on Iran's nuclear program was the last nail in the coffin of the tired argument that Israel and the US are unified by a clear set of mutual interests. The "tail wagging the dog" argument is back in full force, and Americans must understand that their country's political elites are torn between the interests of their country and those of Israel. No amount of reasoning about the "special relationship" will rectify the damage created by Netanyahu.
Third, the peace process was a farce from the start. In fact, it was designed to be a farce, meant to manage but not resolve the conflict. The Americans had come to terms with the idea that they cannot pressure Israel to alter its policies, thus designed the peace process as a way to promote an illusion that a two-state solution to the conflict is still possible, placing the US at the helm of being a mediator between both parties.
It mattered little if the "peace process" dragged on for a century more, as long as both parties remained verbally committed to the unfeasible idea of a two-state solution. While Palestinian Authority President Mahmoud Abbas kept reiterating his lines as requested by Washington -- in exchange for money and political support from the US and its Western allies -- Netanyahu reneged, not just unmasking Israel, but exposing the American-led farce altogether. With no two-state discourse, there is no peace process, thus there is no American strategy in the Middle East and this leads to the question: now what?
As for Palestinians, they are not exactly "happy" that Netanyahu has won, but some see his victory as an important step towards confronting the 20-year charade of the peace process. They are not "relieved" that a man with a racist and bloody legacy will invite more terror and war, but they understand that regardless of the outcome, their suffering will endure, as will the siege and the occupation.
While there is little that Palestinians can learn from the outcome of Israeli elections, there is much for Americans to think about.
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