Question: Is the State of Israel good or bad?
Answer: In a nutshell, as I understand it, the Chabad position on the State of Israel is as follows. The State was the embodiment of all the aspirations of nationalist Zionism, which was a secular and even antireligious philosophy designed to replace true Torah-based Judaism with a secular nationalist ideal, G–d forbid. This agenda is false and evil, and delays the true redemption. Chabad thus opposes any identification with the government of the sort that would give the impression that one accepts the evil philosophy behind it.
However, the idea of saving and protecting Jews from danger is legitimate and worthy, and in fact a Torah imperative (" pikuach nefesh"). The Zionists who set up the State performed a worthy deed in setting up an army to protect the Jews from the hostile Arabs, and in organizing a place for Jews to live to escape persecution.
Yet this does not mitigate the fact that they simultaneously committed an evil deed by associating this endeavor with promoting their anti-religious, anti-Torah philosophy. Their intentions in setting up the State were therefore a mixture of good and evil.
Practically speaking, the Jews who live there are Jews like any other, and so they need military protection; thus, those who serve in the army do a tremendous Mitzvah in defending Jewish life, regardless of the fact that the government that dispatches them represents the philosophy of Zionism.
Likewise, the Land is holy, and those who settle in it in a holy way perform a Mitzvah regardless of the fact that the government that technically controls the Land embodies the philosophy of Zionism. For in reality the government does not own the Land; rather, it is Hashem’s eternal gift to every single Jew.
Question: Why don’t you celebrate Israeli Independence Day?
Answer: Among other reasons, because it is simply untrue—the Jews living in Eretz Yisroel today (may they increase manyfold) are not independent from the non-Jews. This reality is so blatant that all one need do is select any random news report concerning Israeli foreign relations, and one will see how the Israeli government grovels in front of the goyim. Moreover, this has been going on in one form or another all along, only in an ever-increasing measure, and especially over the past decade. It has reached such depraved, outrageous proportions that it boggles my mind every time I attempt to get my head around it.
In particular, I am referring to the vile atrocities of surrendering Jewish land, guns, and money to our sworn terrorist enemies, expelling Jews en masse from their homes, and criminalizing the building or renovation of Jewish homes—all out of the craven fear of “what will the goyim say.” This shows plainly and irrefutably just how much "independence" Zionism has brought us.
Our control over the Land is significant and must be maintained because the Land is holy and G-d-given, and because to relinquish any part of it would severely endanger those who remain. However, the truth must be recognized that this control is only partial, that we are in reality vassals to the United States of America, and thus our titular control does not constitute true independence. (One recent reminder of this was the pathetic way that the IDF scrambled to complete its military operation in Gaza, which was codenamed Cast Lead, before President Obama came into office—lest their actions displease the president and he wield his influence to obstruct their efforts, through withdrawal of aid or the like.)
Question: Doesn’t the very existence of the State of Israel constitute the fulfillment of biblical prophecies foretelling the return of the Jewish people to Eretz Yisroel?
Answer: No, we're still in exile. The secular Zionist state is not the fulfillment of any biblical redemptive prophecies, which will only be fulfilled through Moshiach. Moreover, calling the exile redemption delays the coming of the true redemption! Conversely, the first step towards true redemption is recognizing that we are indeed in exile, for only then can we truly pray for the redemption.
In fact, not only are we not in a state of redemption, but in a way the exile is even worse in the Holy Land, for in many places there, may G-d save us, the atmosphere is lacking in fear of G-d (although the numbers of those returning to Jewish observance have been steadily increasing, thank G-d). To sin in the Holy Land is considered more severe than to sin in the diaspora, for a sin committed in the King’s palace is worse than a sin committed outside it (Tashbetz, sec. 559).