Diesel had the side-benefit of basically being a handicap for European automotive OEMs; the Americans, Koreans and Japanese didn't really have competitive diesels until much later. In markets outside of Europe, CTDI was losing to hybrids badly, so a little plausibly-deniable protectionism with a dash of greenwashing seemed like a great idea.
There's a theory that the only reason the European regulators finally closed the loophole is that Toyota and Hyundai's diesels were finally competitive and, in turn, European hybrids weren't underperforming glitch-ridden pieces of crap, so the sop to Mercedes and VW wasn't worth it any more.