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Last week a high-ranking army officer met with the press. Toward the end of the meeting, one of the editors dared divert from the pure military nature of the discussion and asked, "How much is this costing us?"

The officer snarled dismissively: "Ten, twenty million shekels a day." Three hours later, the editors received a call from the army spokesman. "The officer was inaccurate. The cost is NIS 50 million to NIS 100 million a day," he said.

One could interpret that little anecdote in any number of ways. One could simply conclude that the army doesn't think in financial terms. Ten, 20 or 100 million shekels doesn't make any difference to it. Or, one could suspect that the army is preparing the public and political echelon for the war: over the defense budget.

Shoot first, add later

When the cannons road and the number of Israeli army casualties is mounting at terrifying speed, nobody wants to get into a debate about the defense budget. Let's get this war over first, then do the math, they say.

But Israel is not the U.S. We don't have that luxury of shoot first, add later. The debate on the defense budget and national priorities must be handled professionally and mainly, soon, irrespective of our security situation. The mud of Lebanon is foul enough: Israel cannot afford to fight on yet another front, the economic one.

If the tiny State of Israel wants its economy to keep growing, to create jobs, to help the poor and sick, it cannot afford to maintain a gigantic defense mechanism. Each shekel spent on defense is at the expense of other services that the government is supposed to supply  to the people. Each shekel spent on defense is a threat to the most important economic reform of them all: freeing up resources for the private sector.

They told us so. They're still wrong

"We told you so," sneer the top army brass, who have been fighting tooth and nail to preserve the defense budget.

But it's nonsense. This war does not prove that the defense establishment is efficient, that Israel can sustain the pension terms of career officers, and that arms procurement is based on sensible economic criteria too.

This war only proves that high spending on security is no guarantee of safety, and that billions of shekels spent on smart equipment and intelligence can have highly dubious results.

Nobody knows how this mission in Lebanon will end. But everybody knows that ultimately, it will have to culminate in a diplomatic solution.

The justification cited for expanding the scale of the fighting, which is exacting a growing number of casualties, is to preserve Israel's deterrence. But Israel's true deterrence lies in the resilience of society and the state to military threats. It lies in the backing that the army receives from the people, and in the state's ability to advance economically even when the cannons are roaring.

The economic reforms in Israel since the last war with Lebanon are keeping the economy strong even with the north at war. It is critical for these reforms to be defended, to preserve Israel's deterrent power.

Iran, and ourselves

Leaving Iran out of it, and Israel can't do anything about that without America - the biggest threat today is that the military debate will conquer the public agenda.

Throughout most of Israel's history, the governments hid behind the fog of war to avoid discussing and setting long-term economic plans and goals. Swirled in that fog, Israel's education and welfare systems deteriorated badly, ripping open huge rifts in society.

The second Lebanon war places great challenges before the government. The direct cost of the conflict, compensation for the people of the north and the slowdown in tax collection will dig a hole in the 2007 budget.

To avoid raising taxes and its deficit too, the government must strictly adhere to a economic policy more sensible and conservative than ever before. And the army, intelligence and political echelon must do some serious soul-searching. Retreat from making the army more efficient and from economic reforms is not possible.

Fischer was right

On Monday, Bank of Israel governor Stanley Fischer raised interest rates for August 2006 by 25 basis points to 5.5%. Immediately Fischer found himself bombarded from every direction: manufacturers, traders, brokers and politicians accused him of choking the economy at this of all times.

Ah, how short memory is. Not four years have passed since the security situation our financial stability. Yet people seem to have forgotten the stench of fear in the summer air of 2002. And now? Despite the mounting trouble in Lebanon, which is growing worse by the day, Israel's financial establishment is functioning perfectly well. The shekel is not falling, the stock market is rocking along, money is not fleeing the country and even foreign investment persists.

But none of that can be taken for granted. Once the stability of Israel's financial system comes into question, nobody knows where the discussion will end. It's a snowball, and we saw how destructive that can be four years ago.

Fischer's interest rate hike was a conservative move that needed to be made, in order to clarify that the central bank is determined to preserve Israel's financial stability. The moment the uncertainty disappears, Israeli interest rates can be lowered again, without risking the country's financial stability.