The vote to grant Palestine observer state status at the UN last month brought a rare promise of hope to a land where it has been in short supply. It is disappointing, however, that European countries failed to endorse the bid unanimously. As former European heads of state, we find such a lack of coherence difficult to reconcile with the European Union's support for a two-state solution.

The same gap between rhetoric and action can be seen in the EU policy on Israeli settlements in the West Bank, including East Jerusalem, which are encroaching on the land of the prospective Palestinian state and rendering it ever harder to achieve. Just last week, the Israeli government authorised settlement on a crucial area of land connecting East Jerusalem to the West Bank.

A report by 22 European NGOs, Trading Away Peace, reveals that Europe imports 15 times as much from the Israeli settlements as it does from the Palestinians. The EU has repeatedly urged Israel to "immediately end all settlement activity". And yet, by trading with settlements, Europe is inadvertently shoring up their economic viability and contributing to their permanence. It is also stifling the chances of economic development in the West Bank, undermining the billions the EU is simultaneously investing in Palestinian state-building.

A delegation of Elders, the group of independent leaders of which we are members, recently returned from a visit to Israel and the West Bank. The strongest impression was one of disillusionment, even fatigue, among both Israelis and Palestinians, who feel the two-state solution inching ever further away.

Contrary to widespread perceptions of stalemate, the situation on the ground is far from static: more than 40% of the West Bank has already been taken for settlements, roads and military use, as have the majority of water and other natural resources. This is a moment for the EU to show greater leadership. As Israel's largest trading partner, the EU could start by differentiating between Israeli goods and those produced in illegal Israeli settlements. In most European supermarkets, it is impossible to tell whether dates or avocados marked "Israel" were grown in Israel or on confiscated Palestinian land.

A wide range of goods manufactured in Israeli industrial zones established in the West Bank are sold on European markets under the misleading label "made in Israel". The British and Danish governments have already taken the lead by adopting simple labelling guidelines which allow consumers to distinguish between products from settlements, those made in Israel, and Palestinian products.

What these governments have done is nothing more than what is required by existing EU consumer protection legislation. As a result of the policy, major retailers in Britain and Denmark have stopped selling products from illegal Israeli settlements. Correct labelling of settlement goods is not an anti-Israeli policy. It is pro-consumer, pro-peace and pro-international law. It is an approach which supports the vision of two states, Israel and Palestine, living side by side in peace and security.

By drawing a clear distinction between settlement goods and Israeli products, the European Union has a unique opportunity to reconcile its positions and actions on West Bank settlements, and restore its credibility on the Middle East peace process. This would be a small but responsible step, from the recipient of this year's Nobel peace prize, to preserve the two-state solution, and therefore the very feasibility of peace.