From a tactical point of view, the settlements are bargaining chips (just as the settlements in the Sinai were prior to the peace agreement with Egypt). The principle is quite simple, form Israel point of view, the Palestinians are part and parcel of the Arab aggression in the last 100 years, and surely since 1947, which sought the destruction of the state of Israel. Such aggression can be partially "punished" by loss of territory, just as German aggression and Japanese aggression in WWII resulted in permanent loss of territories. Until their is a peace agreement that assures Israel's future security (a demilitarized Arab Palestine, for instance) and recognized borders, such borders do not exist. If there is an assurance to the Palestinians that they will always get no less than, let say the 1967 borders, what prevent them from terrorizing the Israeli to get more? That is what they are engaged in, and that activity should result in "penalties", and they will.
Zeev
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