Bank of Israel fiasco bodes ill for economy

Gone: Leo Leiderman (Photo: Getty images)

Gone: Leo Leiderman (Photo: Getty images)

There is a long list of reasons for the ongoing farce that is the attempt to appoint the next governor of the Bank of Israel.

So far in the saga, two appointees — respected veteran economists — have declined the post following allegations of past misdeeds. As a result, the bank has been without a permanent chief banker for a month now.
None of this bodes well for the management of Israel’s economy.

In early 2005, when then finance minister Benjamin Netanyahu convinced Stanley Fischer — whose past positions included vice-president of the World Bank, deputy managing director of the International Monetary Fund and vice-chairman of Citygroup — to emigrate to Israel and accept the position, it was naturally a major coup. In Israel, appointing the central bank governor is the prime minister’s privilege but, at the time, Mr Netanyahu had the full backing of then Prime Minister Ariel Sharon on all financial and economic matters — even though Mr Sharon was his bitter political rival. Mr Sharon eagerly endorsed the selection and Israel secured Mr Fischer’s services for the next eight years.

This time around, the finance minister is the totally inexperienced Yair Lapid, and his prime minister does not trust him on these matters.

Mr Netanyahu had little time to undertake lengthy searches for the new governor, and prominent American-Jewish economists approached for the job (in an attempt to re-enact the successful Fischer appointment) turned him down.

Who could blame them for not wanting to work with a neophyte finance minister and a suspicious prime minister who is trying to juggle managing the economy with his other duties? The lack of success led to procrastination and, by the time Mr Fischer stepped down last month, there was no clear candidate.

Mr Netanyahu was forced to fall back on a small pool of Israeli candidates who had what he felt were the required qualities: the gravitas necessary to appear as an equal player in global financial circles and an uninhibited belief in free market principles.

Spurning Deputy Governor Karnit Flug — who was recommended by Fischer — feeling she had neither of the requirements, he reached out first to former governor Jacob Frenkel and then to Bank Hapoalim’s chief economist Leo Leiderman, only to see them both wilt under media scrutiny.

But the media on its own did not bring down the two men. Public trust in Israel’s financial leadership, in particular that of the prime minister, is falling. The disaffection manifested itself in the social justice protests two years ago and again earlier this year in Likud’s dismal election results.

As a result, Mr Netanyahu no longer enjoys the kind of recognition as a “financial magician” he once had and finds it nearly impossible to win support for his decisions on who should be the new Bank of Israel governor.

Last updated: 3:45pm, August 9 2013