More than a year has passed since the European Union suspended its direct budget support to the Palestinian Authority (PA) in response to the formation of the Hamas-led government. Although the EU’s intention was to pressure Hamas into accepting the Quartet’s conditions, the suspension of aid did not achieve this effect. Europe is now confronted with the failure of this policy, and has undermined its own objective of Palestinian state-building. Yet it does have a way forward. The EU suspended budgetary aid soon after Israel’s January 2006 decision to cease transferring to the PA its tax revenues in response to Hamas’ election victory. These revenues account for half of the PA’s budget. Anticipating the consequences of its action, the European Commission created the Temporary International Mechanism (TIM) to circumvent the new government and provide some basic services, while excluding others such as education. In response to criticism, the EU points out that its aid to the Palestinian territories increased overall by 26 percent to $700 million last year and costs of essential services that would normally fall on the government, such as medical care, allowances and the provision of electricity and fuel, have been paid through the TIM. The EU response, however, misses the point. First, the suspension of budget aid undermines European investment to date in Palestinian institution-building and reform. With the launch of the 1993 Oslo process, donors understood that an effective Palestinian administration would be crucial for the success of the two-state-solution and invested in state-building: reconstruction, infrastructure and institutional development. Progress achieved in these areas is now being reversed and contributing to an increasingly likely collapse of the PA. Moreover, the EU has failed to apply past lessons from its state-building efforts of the Oslo era, which was premised on Israel’s respecting its duties as an occupying power and gradually relinquishing control. Yet the opposite occurred as Israel entrenched its control over the Occupied Territories through the expansion of settlements, roads, and checkpoints, and severely restricted Palestinian movement. Consequently, Israel has drawn the donors into the humanitarian aid game, in which the EU expends greater resources and allocated funds from development and state-building to humanitarian relief rather than insisting that Israel cease its actions or bear the costs of its occupation. The TIM continues this pattern as it is implemented without addressing Israel’s unwillingness to remit Palestinian tax revenues and its closure of the West Bank and Gaza Strip. Both are unlawful measures responsible for the humanitarian and economic crisis in the first place. This is creating open-ended aid dependency: A self-reliant Palestinian economy or a viable state can never emerge under conditions that deny free movement. Observers note that the EU’s budgetary suspension punishes the Palestinian population. Even if Europe had the right to impose sanctions on the Hamas-led PA, it cannot inflict harm upon the civilian population, especially as it has helped foster aid dependency. Furthermore, by contributing to the collapse of the provision of basic services and public administration, the EU is undermining respect for the rules governing occupation, which provide for the right to public security and an effective administration. Europe has set the wrong example for Israel, which has a legal obligation to transfer the revenues and comply with international law. One year on, the European Commission and EU member states must accept that their policy has failed. Making the TIM permanent in response to Israel’s unwillingness to assume its financial responsibilities and lift its closure regime is no solution, whether for the Palestinian population or the European taxpayer. Rather the EU must resume direct aid like its two neighbors Norway and Switzerland, and compel Israel to fulfill its responsibilities. Alternatively, the EU should consider whether its role in the Palestinian territories is indirectly prolonging Israel’s occupation, postponing the emergence of a Palestinian state, and serving no one’s interest. Brigitte Herremansis Middle East desk officer at Broederlijk Delen and Pax Christi Flanders, a Belgian Catholic development NGO and peace movement. Stephanie Koury, a former legal advisor to the Palestinian Liberation Organization and member of the Palestinian delegation to the International Court of Justice case involving Israel’s separation wall, is research fellow at the Sir Joseph Hotung Program on Law, Human Rights and Peacebuilding in the Middle East at the School of Oriental and African Studies in London. They wrote this commentary for THE DAILY STAR.