Ostensibly this is done for security reasons. Israeli companies import leather from Europe and pass it to Palestinian companies, who turn it into shoes and jackets. The Palestinians pass the goods back to the Israelis, who then send them to Europe as Israeli products. The point of this is that Israeli importers and exporters cream off a percentage that would otherwise have gone to Palestinians. Europe has made its view of the settlements extremely clear.
Settlements change the physical character and demographic composition of the occupied territories.
But what Europe says and does are two different things. By allowing settlement products to be imported under an Israeli guise, Europe helps to keep the settlements in business. The more farsighted Israelis recognise this as an obstacle to peace. In some cases there is no attempt to disguise the origin of these products. Ahava produces bath salts and cosmetics from the Dead sea on the occupied West Bank.