The Israeli government is worried, and it has every right to be. There is an international consensus that Israel's continued settlement activity is illegitimate and a major obstacle to peace, and much of the world may be running out of patience. In particular, Europe is beginning to take action on the settlement issue by withholding economic cooperation.

Israel is now facing the serious prospect of widespread boycotts and restrictions carefully targeting settlement activities, as distinct from Israel itself. Late last year Israel signed an agreement with the European Union on scientific cooperation, Horizon 2020, which explicitly prohibits the funding of research projects in Israeli settlements. But this, it seems, was just the beginning.

The German government, which is considered one of the closest friends of Israel not only in Europe but globally, is now insisting that those same restrictions also be applied to bilateral cooperation agreements that fund both academic and private sector research.

Germany is negotiating two separate agreements with Israel that would provide funding to Israeli academics and businesses. But Berlin is insisting that none of these can be located in any part of the occupied territories, including East Jerusalem.

The operative language currently guiding Germany's efforts is drawn directly from a 1986, Israeli-German funding arrangement that stipulates, "Projects... shall be conducted only within the geographic areas under the jurisdiction of the State of Israel prior to June 5, 1967."

This language is instructive because it bases its objections squarely on international law, rather than any other foundation. Israel's settlement activities are strictly prohibited by Article 49 of the Fourth Geneva Convention, paragraph 6. This has been understood by both Israel and the international community since settlement activity began. But after 20 years of continued, and even sometimes intensified settlement growth, while peace talks with Palestinians have failed to produce a conflict or occupation ending agreement, the European and international willingness to turn a blind eye, it would seem, has run its course.

Israeli officials are right to feel concerned that if Germany insists on taking these steps, and extends its own settlement boycott to both the private sector and to the bilateral sphere, many other European states are likely to quickly follow suit. But what is truly surprising about these developments, which have been steadily developing over recent years, is that Israel appears to be surprised by them every time.

Many Israelis are concerned that settlement boycotts are a form of "delegitimization" of the State of Israel. But this is wrong on two counts.

First, boycotts that focus on the territories occupied in 1967 actually reinforce the legitimacy of Israel in its internationally recognized boundaries, although they do reject the settlement of occupied territories. So, unless one conflates the occupation with Israel itself, boycotting settlements does not in any meaningful sense challenge the legitimacy of Israel. By distinguishing between the two, it actually underscores the legitimacy of Israel. Highlighting the illegitimacy of the occupation can only be based on a prior understanding of the legitimacy of Israel proper.

Second, and even more significantly, what is being missed by many Israelis is that it is not the boycotts of settlement activity that delegitimize Israel, even in the eyes of some of its closest international allies, but it is the settlements themselves.

Even if Israeli officials are successful in softening Germany's stance this time they must now finally realized that it is only a matter of time before there is a widespread Western boycott against the settlements. Recently, the largest investment fund in the Netherlands announced it would no longer invest in Israel because of the ongoing occupation.

Because of their national narrative, religious views, or ideological perspectives, many Israelis view the settlements as perfectly legitimate. What they must recognize, however, is that they are alone in this opinion, globally. And Israel cannot remain deeply connected to the international system and global economy, and especially the West, while continuing to flout basic the international laws governing occupied territories.

The European policy is sound, and an approach I have long supported. Back in 2010, I noted that "while those of us at the American Task Force on Palestine firmly oppose Israel's delegitimization, we also oppose the occupation and support peaceful, nonviolent efforts to end it. We have strongly supported Palestinian efforts to build the institutional, infrastructural, economic and administrative framework of the Palestinian state under occupation, in order to end the occupation. We have also supported nonviolent protest efforts such as popular boycott of settlement goods that call attention to the important and undeniable distinction between Israel itself on the one hand and the occupation and the settlements on the other hand."

The new EU, and now German, policies are fully in line with this formula. The international community must do more to clarify to Israelis that their settlement policies are not acceptable and that the whole world sees a vital distinction between the legitimate state of Israel and the illegitimate and illegal settlements in the occupied Palestinians territories.

Israelis should listen to the consensus of former security chiefs who unanimously emphasize the urgent need for a peace agreement with the Palestinians. And they should also heed the group of 100 leading Israeli business leaders who went to this year's Davos conference with a platform stating bluntly that Israel's economic future also depends on peace with the Palestinians. One of their most important concerns is the realization that if the status quo continues, boycotts will continue to grow and Israel's economy, they realize, will be badly damaged.

There are many in Israel's political class and civil society who either disagree with or do not understand what these experts are saying. And it's possible some are so devoted to the settlements and occupation that they simply don't care. But the message from Israel's most senior security and business professionals is clear, rational and certainly correct: however much some Israelis might want to continue the occupation, the future of Israel requires a peace agreement and a state of Palestine.