The Arabs could always form their own state in the current territories, the issue is they want Jerusalem.
Annexing and granting them citizenship is suicide
They only want it because Abraham was promised all of it for HIS DESCENDENTS..the Israelites, FOREVER!
No, that’s not the sole issue. They want not only all of Jerusalem, but the entire land “from the river (Jordan) to the (Mediterranean) Sea”.
The eastern half of the city still has an Arab population. But the issue is more than just Jerusalem. There is the question of the settlements that Israel wants to keep and would break up any contiguous Arab territory, Israel also wants to maintain underground water rights, and the Jordan Valley. The latter would deprive the Arab state from having a non-Israeli international border. On the Palestinian side there is their refusal to give up on the return of the refugees.
Annexing and granting them citizenship is suicide
As a Jewish state, granted. Either choice is unpalatable. The problem started with unrealistic expectations of the founders of Israel. At the time of the partition the Jews only comprised around 30% of the population yet were to be given half of the land. They ended up with 70% of the land after independence. Additionally, the partition was imposed on the Arabs without negotiations and without their consent. Thus conflict was inevitable. While am truly not any fan of the Arabs, there can be no peace until the Jews recognize that the Arab population of the territory have the same rights as they do. Israel needs to face the reality and make some hard choices. I do not envy them and of the two choices, annexation or partition, I do not know which is better.