When Barack Obama referred to Israel as "a Jewish state" in his State of the Union speech, those three little words were meant to carry a very big message. In his effort to force Israelis and Palestinians to an agreement, Obama will apparently take the Israeli side on an issue that isn't get much notice but "may be even more intractable than old ones like security and settlements," as the New York Times' Jodi Rudoren recently reported: "a demand that the Palestinians recognize Israel as ... 'the nation-state of the Jewish people.'”
The Palestinians are resisting the demand, fearing "that recognizing Israel as a Jewish state would disenfranchise its 1.6 million Arab citizens [and] undercut the right of return for millions of Palestinian refugees," Rudoren reports. Israeli leaders respond "that the refugee question can be resolved separately and that the status of Israel’s Arab minority can be protected."
The refugee question can probably be resolved separately. Roughly a decade ago the Palestinian leader Yassir Arafat suggested on the Times op-ed page that he would accept a token return of refugees and a huge monetary compensation for the rest. That idea has become a standard part of the settlement outline that has been assumed by most observers for years.
The money will come mainly from the United States, just as the U.S. agreed in 1978 to pay relatively huge amounts to Israel and Egypt each year as long as they keep the peace agreement they signed then. That's one reason Americans have a personal interest in the outcome of the current talks.
As for Arab rights, Israel has been abridging them throughout its history. There's little reason to think an official recognition of Israel as "the nation-state of the Jews" would change the status of Arab Israelis in any major way.