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Euphoria is a word usually associated with financial markets ? shares, bonds, commodities and sometimes, real estate as well. Until the last month's sudden retreat on the Israeli stock market and elsewhere in the world, one could sense that irrational exuberance in the air, and could feel risks being underpriced, too.

Euphoria-driven financial bubbles have an interesting characteristic: when they burst, it is very easy to evaluate their dimensions and to see the harm they have done. That helps to quickly begin to repair the destruction the blast left behind.

Doubly dangerous however is euphoria in government economic policy. Macroeconomic management can be like a buried cancer, or like hypertension: it slowly eats away at the body (the economy) and one morning it explodes with a bang, when it's already too late.

In recent weeks the press has been faithfully reporting an inundation of upbeat macroeconomic news items. The Finance Ministry last week raised its growth forecast for 2006 to 5.3%. Massive tax surpluses are building up and the budget deficit is approaching zero. The Warren Buffett-Iscar deal not only puffed up the national breast with pride but will bring the treasury a billion dollars.

But rumbling underneath the surface is the disease of bad macroeconomic management, and it's spreading. A top treasury official told us on Thursday that he had never been more worried about macroeconomic policy: "Everywhere I look all I see is complacency," he wailed.

* Government expenditure is only supposed to increase by 1% a year. But the prime minister and finance minister, backed by the Bank of Israel governor, decided to raise that ceiling from 1% to 1.7%.

Now, the population is growing by 2% a year: the whole idea had been for the increase in government spending to be less than population growth. It still is: but Israel is a place where the government controls 50% of GDP, the national debt is among the highest in the world (in terms of ratio to GDP), and every last clerk in government knows that the public sector is tremendously wasteful. More money for social issues could be allocated from within the budget, without raising taxes or borrowing more.

* Not a month after its establishment, the coalition is crumbling. Each minister and Knesset member has his own economic agenda and nobody feels committed to a long-term strategy of preserving a responsible inflation expectations policy. Economic reforms, such as the open-skies policy, that had been opposed by big business, are now under frontal attack by Knesset members and politicians too.

* The strong man at the Prime Minister's Office is Raanan Dinur and he's slowly pushing aside all the rest. Dinur had been the director-general at the Ministry of Industry and Trade under Ehud Olmert and today he's still Olmert's right-hand man. He's one of the last bolsheviks in Israel and truly believes in increasing government involvement in the economy.

*The government agreed to increase the budget by NIS 3.7 billion, to increase social spending. Of that NIS 800 million is to finance partial reinstitution of child allowances, but even items that do have a grain of economic sense were added without anybody thinking where to get the money to pay for them.

* Surplus tax revenues resulting from the cyclic nature of economics, from the stock market boom and from economic steps taken in 2003 and 2004 are giving the political echelon the false impression that there's money there for the spending. When the cycle turns some more suddenly everybody will notice two gigantic monsters that didn't lose so much as a kilogram in the last seven years: the gargantuan national debt, and the elephantine public sector.

The euphoria sweeping the government in the spring of 2006 is reminiscent of the first year of the Yitzhak Rabin government. The economy was leaping like an ibex, tax surpluses were mounting and the prime minister and ministers were happy to spend. Public-sector wages were hiked by 20% and in some sectors, by as much as 70%. Billions were lavished on "projects". When the wheel turned and the cycle flipped, Israel was left with staggering debts and sky-high tax.

The events of the last two weeks have prodded investors, corporate managers and bankers into wakefulness. But the chances of anybody responsible for macroeconomic policy learning the lesson is vanishingly small. It will take months or years for the full damage of bad fiscal policy to come home.