First off, I actually saw the tape from Lebanon where the MP's made the controversial remarks. Peggy Nash was holding a tiny shoe she found in the rubble, while Borys Wrzesnewskyj looked deeply shaken by the carnage he had seen. Every reporter I have heard, who has witnessed the devastation first-hand, is completely dumbfounded by the scale and scope. Once you put the context in place, the statements made seem less alarming than a simple reading would suggest. Wrzesnewskyj made his comment about "state-sponsored" and I immediately thought to myself, "that will be trouble", but I could understand it because you could sense the backdrop that produced such a flippant remark. Standing in the middle of a completely bombed out area, after touring the death and misery all day, might cause someone to make comments that cooler heads might otherwise resist. If these MP's hadn't clarified their comments later, then the maelstorm of criticism would carry more real weight in my eyes.
The people who argue that we should have no contact with Hezbollah deny practical truth. If you accept the premise that Lebanon can't be liquidated from the map, then this admission brings tough choices. The reality is clear, Hezbollah is so woven into Lebanese society that it can't be isolated from the "state". Hezbollah is also more influential than ever in the post-war period, which demands some dialogue if you actually hope to reach the Lebanese people. Hezbollah won't disappear, the Lebanese people won't stop viewing their actions as "resistance" and Israel will never have security unless we engage.
Should Canada have Hezbollah on its list of terrorist organizations? Unequivocally yes, however Canada should also attempt to see if there are incentives that could eventually lead to removing the political wing from the list. If Hezbollah were to recognize Israel, denounce all "terrorist" activities, much in the same way the PLO did, then that represents progress and has the effect of increasing Israeli security.
The simple fact remains, the world has already negotiated with Hezbollah behind the scenes to achieve the ceasefire. The Americans have had secret talks with insurgent groups in Iraq (who have bombed and killed their own soldiers). NATO is apparently negotiating with the hated Taliban to see if some will lay down their arms. We don't have high-profile summits, but we sure as shit have some dialogue. Nasarallah has a reputation for being "reasonable", this suggests there may be room for movement with the right stick and carrot approach. Simple refusal ignores the situation and has the ironic effect of actually endangering Israel further.
If someone in the mid-80's would have suggested that Yasser Arafat would shake the hand of a Jew, win the Nobel Peace Prize, recognize Israel and visit America, they would have been institutionalized. Maybe a dialogue with Hezbollah is a useless enterprise, but what is really lost by trying? Give the "moderate" fringe in Hezbollah something to latch on too that has the potential to change minds (it does happen). We need to adopt an evolutional approach, wherein small steps could actually lead to significant change. The alternative is do nothing, ignore the "terrorists", while Lebanon suffers and we wait for the next conflict.