It is worthwhile to examine exactly why the President believes that.
These seem to be the reasons he gave Sunday:
First, the number of Palestinians living west of the Jordan River is growing rapidly and fundamentally reshaping the demographic realities of both Israel and the Palestinian territories. This will make it harder and harder – without a peace deal – to maintain Israel as both a Jewish state and a democratic state.
This is an old argument, and I cannot say that I am expert enough to say how true it is. But it is worth mentioning that this is hardly a universal view, and that there is much evidence that shows otherwise. As with everything else, the truth needs to be determined outside of politics.
Second, technology will make it harder for Israel to defend itself in the absence of a genuine peace.A genuine peace is one where Israel's neighbors do not even fantasize about attacking Israel. Not one where they are coerced into not attacking by an ephemeral government, not one where they do not attack because of the military consequences - but one where they simply have no desire to, as I imagine most nations in Western Europe and the Americas are.
This will never happen in the Middle East. There will never be that level of peace, just as there wasn't between Israel and Egypt. The best we can ever hope for realistically is a detente where the weaker party has no desire to stir things up, even if it covets everything owned by the other.
This means that the best that Israel can hope for is a "Palestine" that keeps a short leash on its terrorists out of fear. Not love, not friendship, but fear. Just as Israel is not currently overly concerned about rocket attacks from Egypt, because it knows that Egypt will work to stop any such attacks, that is the best that Israel can want from a Palestinian Arab state.
And this is exactly the status quo today.
Anything that upsets this status quo will inevitably increase the danger to Israel's citizens. The reason is simple: real peace is not possible between Arabs and Jews who are not in a dhimmified state and who control land considered to be both Arab and Muslim. Muslims aren't going to change their religion and Arabs are not going to change their culture just because the president wishes to use his supposed great powers of personal persuasion.
And third, a new generation of Arabs is reshaping the region. A just and lasting peace can no longer be forged with one or two Arab leaders. Going forward, millions of Arab citizens have to see that peace is possible for that peace to be sustained.
The Arabs who are revolting have shown not only no desire to have a peaceful relationship with Israel but a significant desire to fight Israel. Whether this trend wil continue with each Arab uprising remains to be seen but there is little reason to be optimistic. Optimism, in this case, is the enemy of reality, and saying that peace must occur because it, um, just has to is simply ignoring reality. Israel can do nothing to make Arabs like them enough for real peace, in this or any other universe.
Just as the context has changed in the Middle East, so too has it been changing in the international community over the last several years. There is a reason why the Palestinians are pursuing their interests at the United Nations. They recognize that there is an impatience with the peace process – or the absence of one. Not just in the Arab World, but in Latin America, in Europe, and in Asia. That impatience is growing, and is already manifesting itself in capitols around the world.Is impatience a reason to do something foolhardy? I can guarantee that if these impatient countries knew that the "peace process" would lead to war - and that this is pretty much inevitable - their enthusiasm would wane quickly. They are also wishing and hoping for a peace that is impossible.
Right now, under this supposedly unsustainable status quo, West Bank Palestinian Arabs are in about as good shape as they were during the 90s under Oslo - an economic boom they threw away with the second intifada. Gazans, now that they have mostly stopped rocket attacks, are also in better shape then at any time since Hamas took over Gaza.
If an independent Palestine was declared, the economies of both areas would plummet again. Israel would wash its hands of existing agreements that have helped make Ramallah and Nablus and even Jenin normal places again. The PA economy, right now completely dependent on Israel (and curiously deficient in having forged close trading relationships with other Arab countries) would go into a tailspin, budgets wouldn't be met, police and security personnel wouldn't be paid, and they would then migrate over to (probably Iranian-funded) terrorist alternatives. This is not a pessimistic Likudnik pie in the sky theory - this is what we saw happen during the second intifada. If police aren't paid, they join terror groups who will pay them. In Gaza, they're a bit more honest about it.
All of a sudden, the status quo doesn't look so bad. The "unsustainable" status quo is a far sight better than what will replace it.