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The European Council on Foreign Relations, which frequently informs EU policy, argued in a paper on Wednesday that the EU is in breach of its own laws. It had to go further to distinguish its dealings with Israel from Israel's activities in the West Bank and East Jerusalem, which it has occupied since 1967.
European diplomats have long said that labeling - to make clear the goods originate in settlements - is only the first in a series of steps the EU could take against Israel over its settlements policy, one that in financial terms is expected to have a relatively minor impact on the Israeli economy.
But the new proposals would go much deeper and further, reaching into banking, loans and mortgages, qualifications earned in settlement institutions and the tax-exempt status of European charities that deal with Israeli settlements.
"Under its own regulations and principles, Europe cannot legally escape from its duty to differentiate between Israel and its activities in the occupied Palestinian territories," says the report, titled 'EU Differentiation and Israeli Settlements'.
The authors argue that by pushing much further to separate the EU's dealings with Israel from the settlements, it will force Israel to decide what sort of relationship it wants with Europe and in turn encourage it to return to talks with the Palestinians on a two-state solution to the conflict.
The most significant proposal is on banking, where large Israeli institutions have daily dealings with major European banks, while also providing loans and financing to Israeli businesses and individuals based in the settlements.
Under European Commission guidelines from 2013, EU- and member-state-funded lending cannot be provided to Israeli entities operating in the occupied territories. While not legally binding on EU states, the guidelines have an influence.
The issue extends into loans and mortgages. An Israeli with dual European citizenship should, in theory, not be able to use a settlement property as collateral for a European loan since Israeli-issued property deeds are not recognized.