So this is actually a super-nice position to be in, you can support your ally no matter what they do, while still looking contrite and morally superior by pulling the "we are Germany, we are not allowed to have a say in the matter" card.
I think what grates me is the dishonesty: We want to do both at the same time: A neutral mediator that advocates for the two state solution and the world's (second-)closest ally of Israel. That's like wanting to be both the coach and the referee. At some point it just becomes an insult to everyone's intelligence.
(The US does the same spiel)
I'm not sure why you think that any of this makes Germany look morally superior. I certainly don't feel that way.
Also, Israel is a trade partner, which is important because the non-western countries are hesitant to trade with them. Israel is culturally integrated into certain European institutions, in part due to German support (soccer, Eurovision, other sports).