Recent goings-on led me to the UESP of Knight-Paladin Gelebor, where I read this quote of his:
Perhaps they'll never return to their former appearance, but over the centuries, I've noticed a rise in their intellect. If a line of communication could be established with them, maybe they can find peace. It's the only way they'll discover that they weren't always malignant... they were once a proud and prosperous race."
So, can the Falmer be rehabilitated? How? What would be appropriate reparations for the Falmer from the Nords?
I think they could somehow be brought back to a "civilized" state. As for reparations for the Falmer from the Nords? I'm against the idea, it's not as if the current Nord generation is responsible for their forefathers actions, and they shouldn't have to pay for it. Just leave them be, living in their hidden valleys, as there is plenty of space there and it is not widely known to anyone else.
There would only be a problem if they decided to expand from their mountains/valleys, where both the Falmer and the Nords would claim ownership of Skyrim land. And if that ends up being the case, I'd support nordic claim over the falmer claim, right of conquest and all that.
Playing it out in my head, it seems likes a pretty bleak outcome. I imagine the Falmer would want to expand out, and if the Nords don't let them, it's likely to result in violence. Maybe it would be a move of peace to offer small plots of land as reparation? Though I imagine that's likely a stall at best, as the population will expand and need more land. Which raises the question about coexistence and what kind of evolutionary changes we'd see in the Falmer if people were just really nice to them for a really long time.
True, violence is the most likely outcome here. The population issue becomes a bigger problem if we consider the current Falmer generation reproduces at a higher rate (at least that's what it seems like).
Worst (or best) outcome, the Dominion finds out about the Falmer ascension before men do and, fueling a sentiment of revenge, gets a new ally deep in the Empire.
I imagine Gelebor would end up being the mediator in either case, since he's more or less a bridge between all elves and Falmer. He'd be the bridge between humans and Falmer too, but I doubt that would go over as well. Which makes me worry that you might be right about the Dominion finding out about them first. Though...it makes you wonder. If Gelebor was the mediator, who would he turn to first? The Nords? The Dominion? A few trusted allies? Auriel, perhaps hoping for divine intervention?
It's hard to see a way that it doesn't eventually end poorly for Skyrim. Either the Falmer go to war and weaken Skyrim, making even more room for the Dominion, or like you said, they ally themselves directly with the Dominion, which effectively makes them enemy-allied insurgents that would be better supplied and able to attack from underground. Welp. Peace out, Skyrim.
I once had an idea for some DLC quests involving the Falmer.
You were required to be a member of the Thieves' Guild, though - and complete the main quest line for the Thieves' Guild - then, as opposed to selling the Eyes of the Falmer, you go back to Irkngthand, and put the Eyes in the Falmer Statue there. This begins a series of quests that end with either the Falmer being utterly annihilated or having their vision restored and once again being the Snow Elves.
The story of the Falmer shares a theme with that of the Ayleids of the Heartland and as such it is unlikely they will ever regain anything. TES is all about stories and their cultural parallels and we can see the same stories told despite huge cultural gaps. I am afraid that for me the Falmer's story has ended.
Hmm I personally don't think the Falmer as it currently stands can be rehabilitated. Thier culture and physical/mental state has devolved as of Skyrim to a savage sub humanoid race. Look at what few pictures there are of the snow elves as they stood vs what the falmer in Skyrim. Physically they have changed significantly. What they eat, what they use as magic, what they use as architecture (always in ruins and making chitin "tepees"). They don't currently possess any written language and no one has been able to gain any sort of rapport with them. I'm afraid unless an additional game introduces a lost tribe of sorts that is closer to civilization it won't happen.
To my knowledge, the Dwarves said they would give the Snow Elves sanctuary in their underground cities since the Snow Prince died in battle with the Nords (Or Atmorans at the time). The Dwarves had one price: the eyes of the Falmer.
This went one of two ways: The Falmer literally had their eyes stolen by the Dwemer (Gouged out), or (More likely in my opinion) the glowing mushrooms that they were fed blinded them, it likely infected their genetics and caused the blindness to be passed down through the generations until eventually they evolved to not have eyes and their ears and noses became more acute as a result.
The only way I can see the Falmer undoing this curse, so to speak, is to have some kind of magic restore their eyesight. Also, the reason they are so savage when you meet them in game is because they don't know what you are, remember that these Falmer are not the same Falmer that the Dwemer poisoned, they haven't met humans before, so they respond with violence to what they don't understand, maybe if they could see they would be able to respond more appropriately, either that or it'd make them more dangerous.