At the upcoming United Nations General Assembly meeting, the world will be watching—though with markedly less intensity than last year—to see what the Palestinians will do.

The last 12 months, following the failed statehood bid last September, have been very difficult for all parties, especially the Palestinians, and for the peace process. Reductions, holds, and other restrictions on international aid have helped to create an unprecedented financial crisis for the Palestinian Authority. This has undermined the stability of the PA and its ability to meet payroll, and paralyzed its essential institution-building program. It has even negatively affected law and order in the West Bank, and security coordination with Israel, as the payroll for Palestinian security forces has also been undercut.

The tumult of the "Arab Spring" has distracted regional and international attention from the Palestinian issue and encouraged a "fortress Israel" mentality that is not conducive to progress on peace. Meanwhile, Israeli settlement construction and other actions in the West Bank that deepen and entrench the occupation move forward apace.

The situation has become very volatile and a repetition of last year's confrontation could put the potential for peace in serious jeopardy. All parties must act quickly and purposively to save the viability of a two-state solution. There is no justification for waiting until a catastrophe occurs.

The United States is the indispensable party to resolution of the Israeli-Palestinian relationship, and Palestinians and Israelis must recognize that and act accordingly. Recent events show that anti-Americanism remains a potent populist tool among Arabs. But it is also a dangerous one for those who wield it.

The outside world, particularly the United States and the European Union, should also urgently reassess their own policies, particularly those that give primacy to diplomacy while paying insufficient attention to concrete developments on the ground. The institution-building project initiated by Prime Minister Salam Fayyad should not be viewed as a development program, or a derivative of negotiations. It is a strategic political initiative in its own right. Reacting to diplomatic tensions by defunding the only practical vehicle that can produce immediate positive results on the ground, and the one area where Palestinians and Israeli cooperate regularly and effectively, would be shortsighted and counterproductive.

Barring unforeseen circumstances, when the UN meeting concludes without confrontation, Congress should release existing holds on aid to the PA. The U.S. should then reexamine the amount of American aid with an eye to restoring it to its previous levels. And Arab and Western governments should work together to find additional funding, especially the institution-building program, the only existing program that can provide real hope and real progress.

Israel has recognized the dangers of the PA fiscal crisis, and released some Palestinian tax revenues early over the past year, among other efforts designed to rectify the crisis. Israel needs to consider systemic measures to ensure stability and sustainability. These would include ensuring reliable transfer of taxes collected by Israel on behalf of the PA and opening up Israeli markets to Palestinian goods. Of particular importance are measures to expand Palestinian security and economic access to Area C of the West Bank. This would not only ensure Palestinian economic viability, but would signal a concrete step towards the realization of a two-state solution.

It is also crucial that shrill, strident voices among Israeli and Palestinian politicians that always seek to outbid rivals on nationalistic and patriotic credentials—those which have benefited from the tensions of recent months—be disciplined and overridden by cooler heads. Clear and public repudiation of irresponsible statements from the U.S. would help alleviate this chronic problem.

Since September of last year, it has become abundantly clear that the Palestinians cannot afford any more confrontations with the donor community. But the recent instability in the West Bank demonstrates that Israel and the international community, too, cannot afford to see the PA crippled, discredited and destabilized.