Israel weathers financial crisis

By Alex Brummer, May 24, 2012

Israel receives little credit for its economic achievements. So it was a nice surprise to find Stanley Fischer, governor of the Bank of Israel, as the star turn at a luncheon for global economic policymakers at last month’s International Monetary Fund (IMF) meeting in Washington.
Zambian-born Fischer, a former deputy managing-director of the IMF, had been tasked by his Washington hosts with looking at the appropriate fiscal responses to the “Great Recession.” He liberally peppered his conversation, that included some of the smartest finance and economic minds in the world, with examples from Israel’s own experience. Fischer could speak with confidence.

In addition to his considerable expertise which positioned him as a candidate for the top role at the IMF in 2007 — when the job was filled by the now disgraced Dominique Strauss-Kahn — Fischer was also armed with the knowledge that an IMF mission to Israel had just given the Jewish state a clean bill of health.
The thorough-going report would have been the envy of most nations. Yet one would be hard pressed to find any reference to it in the Western media, which still prefers to see Israel as a diplomatic problem and human rights minefield rather than a beacon of Anglo-Saxon capitalism in the region.
The first sentence of the report is one that would have cheered Britain and much of the eurozone had it referred to their economies: “Israel emerged from the 2008-09 global crisis with strong economic growth, a resilient banking system and unemployment at historic lows.” In other words, it was in reasonably good shape to withstand the ill wind blowing from the eurozone and the rest of the world. It says that the global slowdown will have an impact on Israel.

Growth which slowed from 4.7 per cent in the first quarter of 2011 to 3.2 per cent in the final three months of the year would be slightly below trend in 2012. Inflation would remain on target at just above two per cent but the balance of payments might suffer because of global uncertainty and “regional strains” as a result of the Arab Spring. Israel, despite its problems trading with its immediate neighbours, has an extremely open economy. Exports represent an extraordinary 40 per cent of the nation’s total output.
In its early days we tended to associate Israeli exports with agricultural produce — while still important, that long has been a thing of the past. Now the nation is a world-class player in high-tech products such as electronics, pharmaceuticals and communications equipment.

Despite the barriers placed by Brussels and some European nations in Israel’s way, because of political pressure from the pro-Palestinian lobby, some one-third of Israel’s exports go directly to the EU. But as the IMF acknowledges, the real figure is probably higher. It notes that a potential problem for Israel this year are surging oil prices, partly a result of the strategic threat from closure of the Strait of Hormuz, because Israel is a large net energy importer. That is a position that may change as the vast natural gas field, discovered off the North West coast of the country, increasingly satisfies the country’s energy needs.
Unlike much of the rest of the Western world the IMF concludes that Israel is much less vulnerable to the financial crisis. The Israeli banks are not widely engaged in cross border business. Overseas assets and liabilities amount to 10 per cent and 14 per cent of total output respectively and they have negligible exposure to the rocky world of the euroland bankers.

But Israel is not without its Achilles heel. The Fund noted that in 2011 Israel, like many of the Western economies, encountered its version of the “Occupy” movement — the protests against income and social inequality. It fears that the so called “cottage cheese” protests, which at their peak saws hundreds of thousands of people take to the streets, could re-occur. The causes, in the view of the Fund’s inspectors, are a decade of stagnant inflation-adjusted wages and the concentration of economic power in the country in too few hands.

Israel is much less vulnerable to the financial crisis

To the credit, however, of the Netanyahu-led government, efforts to address those inequalities are underway. The Trajtenberg Committee, the government’s response to the protests, recommended big tax and spending changes designed to start eliminating these inequalities. These including tax rises for companies and on capital gains, reductions in indirect taxes such as petrol, and tax help to families as well as extra spending on childcare. Many of these reforms have since been passed by the Knesset. The IMF is hopeful that enough has been done to prevent a resurgence of street protests. But should the eurozone explode and growth falter there can be no guarantee.

Alex Brummer is City Editor of the Daily Mail and author of ‘Britain for Sale’ published by Random House.

    Last updated: 1:18pm, May 24 2012