Of all the conflicting issues Israelis and Palestinians must resolve – including territorial claims, secure borders and the future of east Jerusalem – the Palestinian refugee problem in particular has the potential to stymie any pragmatic solution to the conflict. As Israelis and Palestinians renew direct talks, the European Union can and must begin to play a key role in helping the parties resolve this difficult and thorny issue.The EU is uniquely suited to utilize its formidable economic resources and political clout to take the lead in initiating and facilitating such a resolution. In doing so, it would establish itself as an indispensable interlocutor in the effort to achieve a sustainable peace agreement, while at the same time enhancing its strategic and economic interests in the Middle East. Although EU foreign policy chief Catherine Ashton should have been present at the launch of direct talks in Washington last week, her absence should not be interpreted as an indication that the EU will not be critical to ensuring that the renewed peacemaking efforts succeed.The writer is professor of international relations at the Center for Global Affairs at NYU. He teaches international negotiation and Middle Eastern studies.There is only one realistic solution to the refugee issue: compensation, resettlement and rehabilitation in a Palestinian state. While majorities of Palestinians support a “right of return” to the State of Israel as a matter of principle, polls have shown that only a small number of refugees actually seek to return to Israel proper. Meanwhile, Israel has refuted the principle of “right of return” in every encounter with the Palestinians since 1988, consistently stating that sustaining its Jewish majority is a sine qua non to any agreement. Any solution must, therefore, be based on resettlement and rehabilitation in a future Palestinian state or in their current country of residence.MANY PALESTINIAN and Arab leaders have also previously conceded that apart from a symbolic number of refugees (20,000-30,000) returning as part of family reunification, the solution lies largely in the new state of Palestine. This formula would fulfill Palestinian aspirations to return to their homeland, albeit not their original homes. Such a solution would be consistent with Security Council Resolution 242, which calls for “achieving a just settlement to the refugee problem” as well as with the Arab Peace Initiative, which calls for “a just solution to the Palestinian refugee problem to be agreed upon in accordance with UN General Assembly Resolution 194.” It should be noted, however, that 242 supersedes the nonbinding 194.To change the political dynamics surrounding the renewed talks, the EU should take the lead in beginning to create the means that would make such a resolution possible. European nations have championed the cause of Palestinian refugees for decades and traditionally have been a leading contributor to Palestinian projects, including collectively serving as the largest donor to the UNRWA. Considering its substantial support for the Palestinians – as well as the Palestinian inclination to turn to the EU as a balance to the close US-Israeli relationship – the EU is uniquely positioned to influence the Palestinian position regarding the status of the 4.5 million refugees registered by the UN.Facilitating a resolution would require ample capital, perhaps in excess of $10 billion – far more than the $264 million allotted for UNRWA.Guaranteed money for refugee resettlement would provide an incentive for Palestinians to think practically about how to utilize such compensation constructively, rather than continue to use the issue as a political tool.Of course, the Europeans cannot solve the refugee issue alone. The US, Russia, China, the Arab states and Israel must also significantly contribute.It would also require close cooperation with the Palestinian Authority, Syria, Lebanon and Jordan, where many of the refugee camps are located. The Arab states in particular should provide logistical and organizational support. In addition, they can play a particularly important role in promoting a new narrative regarding the “right of return” to a newly established Palestinian state.US President Barack Obama’s comment at the launch of direct talks that “a lot of times I hear from those who insist that this is a top priority and yet do very little to actually support efforts that could bring about a Palestinian state” was a call on the Arab states to match their rhetoric in support of peace with greater action – political and material – to achieve it. The Arab states that have historically used the plight of the refugees to cover their own shortcomings and misguided policies now have an opportunity to answer the president’s call while benefiting the people who have been living in squalid conditions for decades, and helping to facilitate a resolution of the conflict. Such a measure would be welcomed by Israel in that it would mitigate calls for a return to Israel proper.The resettlement of the refugees would require large-scale economic investment for the creation of jobs, housing and schools and other measures to ensure that existing Palestinian communities can absorb an influx of new citizens. To this effect, the EU should support the PA’s creation of a new ministry tasked with resettling refugees and aiding in their transition. Such an initiative is fundamentally different than any previous attempts to address the refugee issue, as it is premised on beginning to facilitate a resolution to the issue even before negotiations are concluded.The relaunch of direct negotiations offers the EU an opportunity to begin promoting this concept as its official position, emphasizing that this is not a controversial idea.Some Arab leaders who have been involved in previous negotiations argue that while the solution rests with resettlement and compensation, it would be difficult to advocate such a solution publicly in advance of reaching a comprehensive agreement fearing that it would instigate public backlash. But providing the means to settle the problem now will begin to change the current situation of the refugees while serving to modify the public perception about the practical meaning of the “right of return.”MOREOVER, SUCH an approach would bolster PA Prime Minister Salam Fayyad’s plan to establish a de facto state in the West Bank and Gaza by next year and many refugees can start returning to their homeland and investing in their new communities. For the 60 percent of refugees currently living in camps in the West Bank and Gaza, this will mean working with the PA in an organizational capacity to pull their families out of refugee status and into proper housing.There is no party better suited to lead this effort than the EU, and no better time to start than now.