Great-grandchildren are being punished because their relatives (might) have fought against Israel back then.

They are punished because they are Palestinian and Israelis are racist occupiers.

Aren't the Israeli politicians realizing they are fueling the conflict by doing this?

Yes, of course. Israel has a long record of maximum escalation and starting wars and ethnic cleansing. They have official doctrines of killing as many civilians as possible in bombing campaigns rather than engaging with fighters directly.

Israelis are incredibly racist.

P.S. I am from Germany, imagine new generations still had to suffer for the crimes the Nazis committed. That would be unforgiving and unjustified. It is our job to make sure this never happens again, though.

Good on you for having this position despite the racism of your government against solidarity with Palestine!