After four years of internal schism, the Palestinians have agreed on forming a united government backed by the rival factions Hamas and Fatah.

The implementation of the deal that will be ceremonially signed in Cairo on Wednesday poses a number of challenges, the biggest of which will have to be faced by western decision-makers: will the west recognise the new government, or will the new government again be subjected to sanctions and boycotts? As of yet, the decision is still pending.

The Egyptian-brokered unity deal that is backed by 13 Palestinian factions in effect ends the split of the Palestinian Territory into two competing parts. Following Palestinian elections in 2006 and a violent takeover of the Gaza Strip by Hamas in 2007, Palestinians have been governed by two distinct governments from Gaza and Ramallah.

Whereas the Palestinian Authority under President Abbas and Prime Minister Salam Fayyad in Ramallah was internationally recognised and bolstered with western aid, the Hamas-run Gaza was targeted with a comprehensive blockade. As economic stagnation spread in Gaza, significant progress was attained in state-building efforts instituted in the West Bank.

At the same time, the intra-Palestinian split severely weakened the Palestinian negotiating position vis-à-vis Israel. After all, the Palestinian president in effect represented only one half of two bitterly divided entities.

Newly regained Palestinian unity has once more changed the parameters of Middle East peacemaking. For the first time in years, Palestinians will be represented by a single government. This will strengthen their bargaining power and enable the Palestinian leadership to follow through on the plan to obtain statehood through a vote in the UN General Assembly in September from a position of much more influence.

Good news for democracy

Although the composition of the transitional government will not be finalised for a few more weeks, the government's main task has already been defined: the government will be charged with rebuilding war-torn Gaza and will focus on the preparation of presidential and parliamentary elections within the coming year. Given tht the political mandates of President Abbas and both governments in Ramallah and Gaza have long expired, this is good news for democracy in Palestine.

On the ground, the agreement largely maintains the status quo. The Fatah-dominated Palestinian Authority in Ramallah will, for the time being, be left in charge of the West Bank, while security in Gaza will remain under the control of Hamas.

While a "higher security council" will work on integrating armed forces into a "professional security service", this approach reflects the realities of two movements that have deeply entrenched themselves in both parts of Palestine.

Notably missing from the new government's portfolio are negotiations with Israel. In view of the fact that the Palestinian president, Mahmoud Abbas, also holds office as chairman of the Palestine Liberation Movement (PLO), the factions have agreed that bilateral contacts will continue to be managed by Abbas.

At the same time, Hamas officials were quoted as saying that the Islamist group would implement an unofficial truce with Israel and cease firing missiles.

Despite widespread Palestinian enthusiasm surrounding the agreement, many challenges of implementation persist. Will elections take place as scheduled? Will the agreement be honoured by internal oppositional forces? Will political prisoners be released? Will Ramallah-paid civil servants in Gaza return to their offices? Many questions remain.

Back to boycott?

This also holds true for the question of who will lead the transitional government. In all likelihood, Prime Minister Salam Fayyad will not be allowed to extend his premiership. Yet, given that the premier will ultimately be chosen by Abbas, Fayyad might eventually stay in office until elections take place.

Abbas himself has already declared that he will not again run for office.

While these are important matters, a key challenge will have to be tackled by western decision-makers. After all, the establishment of a Palestinian government of national unity is hardly without precedent.

In 2006, following Hamas's victory in elections to the Palestinian Legislative Assembly, the international community reacted to a Palestinian unity government that included Hamas with a comprehensive boycott.

In view of Hamas's violent history of terror attacks, the Middle East Quartet presented it with three conditions for political engagement: Hamas was called upon to recognise Israel's right to exist, to forswear violence and to recognise previous agreements reached between the Palestinians and Israel. The movement's refusal resulted in four years of political boycott.

Wriggle room

Though these policies have failed to oust Hamas from power in Gaza, they have made progress in diplomatic efforts elusive. Diplomacy that sidelines important veto-players such as Hamas might appear easier to launch, but is certainly more difficult to conclude, given that any agreement will need to be embraced by the people on the ground.

Today, the west risks repeating the mistakes of 2006. On Sunday, the Israeli prime minister, Binyamin Netanyahu, ruled out any contact between a Hamas-backed government and Israel, declaring that the Palestinians "cannot have peace with both Israel and Hamas". At the same time, Tel Aviv announced its decision to withhold financial transfers to the Palestinian Authority if it does not receive prior guarantees that the funds will not reach Hamas.

In Washington, a confrontation between Congress and the White House is unfolding. While prominent lawmakers have called for a renewed financial boycott, the Obama administration has opted for a more cautious approach. Calling on the new government but not on Hamas as a movement to fulfil the Quartet conditions, the White House has created some leeway for future engagement. This room for manoeuvre should be used.

The stance taken in Washington and European capitals will have far-reaching repercussions. A renewed financial boycott of the Palestinian Authority would jeopardise any prospects for a jumpstart of final-status negotiations.

This, last but not least, is in view of the fact that a relaunched boycott would probably result in a prolonged deadlock that will prove difficult to break. Also, a new round of sanctions would endanger any progress in institution-building attained under Prime Minister Fayyad.

Just last month, the World Bank declared that the Palestinian Authority "will be well positioned to establish a state at any time in the near future", acknowledging the ambitious two-year plan of state-building so far implemented by Fayyad. Given the Palestinian Authority's dependency on western support, these achievements are now at stake.

In many ways, finding the right response to the Fatah-Hamas agreement might well prove to be the true challenge posed by Palestinian unity.

Michael Bröning is director of the East Jerusalem office of Friedrich-Ebert-Stiftung, a political foundation affiliated with Germany's Social Democratic Party. He is the author of "The Politics of Change in Palestine: State-Building and Non-Violent Resistance" (Pluto Press, March 2011).