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It seems as if there is no ideal solution, as you stated. Instead you must examine all options and choose the one that is least harmful.
The way you have worded this question implies that your wife is a driving force behind her parents' idea to move next door. You stated that she "wants" them to.
If they do move in then there will continuing bickering in your relationship between you and your wife, between you and the parents, and ultimately between your wife and her parents.
You must eliminate the option of them moving in next door as this would be the most harmful.
It is up to you to prevent this from happening by telling your wife that although there are positive aspects to them moving next door, it would be unacceptable and unbearable to you if they did. You must then follow this up by telling the parents. in a nice setting (such as whilst having them over for dinner), that you have misgivings about them moving next door because you will not be comfortable with them living next door and it will hurt your relationship with your wife.
When they ask you why you will have to tell them in a very frank way that they interfere with your relationship because they are able to manipulate their daughter as if she was a child.
Tell them that if they move next door you are afraid that it will doom your marriage to failure because they already are a negative influence from afar.
It would be best, of course, if your wife could tell them instead that she is afraid it will not work out and may be the end of her marriage if they move next door and that she urged them not to consider this.
You will have to explain to your wife that you will not support this and let her understand that you are afraid this will be the end of your marriage..
You should tell her not as a threat, but as a fear that this will happen. You will be telling the truth. Your marriage will not survive this, or will just endure as an unhappy and miserable entanglement of family disharmony.
You must be courageous and forceful and make her understand that her parents moving next door would be a grave mistake. Her continuation to encourage them (rather than dissuade them) will be a terrible mistake and that NOW is the time to back down from this.
You MUST make the choice to make this clear to your wife and her parents.
She MUST make the choice between having them next door and having a marriage that works in harmony.
You could further dissuade the parents by having a forceful talk with them and lay down the ground-rules of their behaviour towards your family which includes not interfering with your marriage by second guessing what they do and by any judgmental statements they make. Tell them that you do not want them living to close to you and that doing so will hurt your inter-family relationship and not strengthen the bond.
Hopefully you can turn this around because if you do not this will potentially break up your marriage and they will be at fault.
Your manner is delivering your feelings and thoughts to them is the crucial element in making your words effective and convincing. You must be kind, direct, and unswerving. Let them know your utter seriousness of intent and if the don't see it or don't agree with you tell them that this is not an intellectual or logical question but one about your deep emotional reaction to the notion of them moving next door.
If they discount what you say then tell them that they are ignoring your heartfelt thoughts at their own peril.
You must be gentle and kind, but above all firm, direct, and unswerving. You will have to show them that you are serious. They do not respect you and you have not put your foot down before. This is a defining moment and you MUST make a stand and you MUST prevail.
I wish you wisdom, strength, and courage and to those ends I shall keep you, and all of your family, in my prayers.
Elliott, MAE, LPCC, NCC, CCMHC