Any solution is illegal, thus probably unrealizable, unless confirmed through a vote with independence as the other major option on the ballot, i.e. an exercise of effective self-determination. I just cannot see a credible way around that within the UN framework. But if that can be arranged, autonomy is clearly an interesting option. Both full independence and full annexation to Morocco holds a potential for disruptive crisis and violence:
* INDEPENDENCE could in a worst-case scenario bring about a failed state if it lacks foreign material/security support and/or as a result of Moroccan subversion (like in East Timor). That W. Sahara would end up as an Algerian satellite is of course also possible, but (a) I can’t see why that is any worse for the West than a Moroccan annexed territory, if Algeria stays reasonably stable and (b) a Sahrawi state would find Morocco both willing and capable to help break any over-reliance on Algeria, for nationalist and strategic reasons.
* ANNEXATION, if forced through w/o Sahrawi grievances seriously addressed, and with hopes for independence not totally extinguished, could lead to future flare-ups when Morocco is weak, and/or a resurgent post-Polisario Sahrawi nationalism turning Islamist. (There's serious potential for that in the Mauritania/W. Sahara Moorish areas.) Also, flooding the desert with ~15,000 armed and experienced Polisario fighters who suddenly lost their raison d'être, source of income and status, while also being more or less cut off from the traditional tribal networks that could contain their activities, doesn't bode well for stability in the area. It is utterly naïve to expect they will all meekly accept to go live on the dole in "Moroccan Sahara" after the humiliation of defeat. Consider the insecurity projected by the GSPC with only a few hundred men in the Algerian Sahara, and how smugglers have chipped away at stability and sovereignty in these areas, and expect tenfold desert unrest if Polisario is broken up forcibly. With this in mind, if autonomy can be accepted in a non-flawed self determination referendum, where it visibly beats independence as an option, then it is clearly an intriguing possibility.
The main problems I think are what Driss Basri (for his own self-interested reasons) pointed out: that Sahrawi autonomy risks feeding into Moroccan separatisms (mainly Rif), and Morocco really cannot afford to emasculate the central state if it wants to continue reforming/developing. Autonomies in these kinds of underdeveloped areas invariably turn into inefficient, money-gobbling and reform-resistant local fiefdoms for tribal, central gov-blessed apparatchiks. (That will happen in W. Sahara too, and the Khelli Henna crowd is a good example of the kind of self-serving elite which will run it, if indeed anything is left for them to run after the Moroccan state’s lawyers have had their say post-independence.) The other problem, which Basri underlined, is that permanent autonomy could very well in the long run serve to strengthen Sahrawi particularity and feed into resurgent nationalism in times of crisis, even if support for independence will dip immediately after autonomy is granted. This is particularly so if the way it is brought about is not 100% acceptable, i.e. with a proper UN-sponsored vote, so as to kill off the Polisario discourse once and for all. Then the whole conflict would bubble up again, only more intractable, with the clear-cut colonial border and popular sovereignty principles long gone, leaving only historical distrust, ethnic suspicion and dolchstoss myths in their place.
That would really be the worst of two worlds, and if autonomy is to be attempted, to avoid this it needs: (a) Foreign backing to resist creeping Moroccan subversion. Achievable, Spain is perfect for the part. (b) Foreign money to sweeten transition. Achieveable, and necessary also in the case of independence or integration etc. (c) Large enough initial powers to be able to present it as a no-losers compromise. Not sure Morocco is ready to do this, we’ll know in April inshallah. (Thought it won’t be anything near your “confederation” suggestion.) (d) To be coupled with a discourse or principles that explicitly sets W. Sahara out as a special case, so that the Rif (or the Kabylie in Algeria for that matter) will not follow by demanding same, starting a vicious spiral. Achievable, just package it right. (e) Self-determination, some form of free and fair referendum on independence or autonomy, to demonstrate that the conflict is over and that there are no issues of principle to invoke against Moroccan sovereignty – come what may, the conflict is over. Some CORCAS shenanigan simply will not do, but here I fear Morocco simply cannot deliver. The MAP recently sent out something about how the support of CORCAS was tantamount to self-determination … it read very much like a trial balloon. If that is the way they’re going to go about the self-determination issue, someone needs to kill the autonomy plan quickly, because that will undermine not only Western Sahara but Morocco too.