Israel Bank Governor David Klein has expressed severe doubts regarding the government's functioning during the economic crisis. In a speech last Thursday, he said, among other things: "Economic and social deterioration cannot take place calmly for long. There might come a moment, and nobody knows when, that the government's very ability to rule will be in question. The government, therefore, must take immediate, firm steps to move away from this danger. Any government that allows the economy to continue sinking is risking loss of control over the large systems."
Prime Minister Ariel Sharon, who heard this in the Prime Minister's Office with the finance minister and senior PMO officials, responded with dismissive contempt. Those with him also reacted jokingly, either due to the rivalry between the treasury and the Bank of Israel or due to the tendency to criticize preachers at the gate.
Klein's warnings deserve to be taken seriously. Large economic systems in crisis collapse rapidly, in a chain reaction, and the result is social collapse and the creation of poverty and plight - as has happened in crises in Thailand, Malaysia, Russia and Argentina.
The treasury should not have tarried. It should have resorted to emergency measures some time ago - it should have presented a reform and cutback plan to the caretaker government at the beginning of February so the plan could have been approved this week at the Knesset's first session.
The plan must consist of two components. The first is a sharp, deep budget slash, to make sure the deficit does not exceed 3 percent. Any deviation will be reflected immediately in reducing the credit rating, in a rush to the dollar and and a sharp devaluation, in price rises, further interest rate hikes, and therefore in deeper recession and worse unemployment.
This time the reducing of budget expenditures cannot be done by a uniform cut in all ministries, but according to an order of priorities - cutting duplications and the budgets of ministries that contribute less to the economy. There is no certainty that the target now talked about, NIS 10 billion in cuts, will suffice to compensate for expected loss of income. The treasury will have no choice but to dismiss workers and reduce wages in the public sector.
The second component required is a package of steps to promote growth. For this, the Finance Ministry must present a series of reforms and structural changes across the economy, like uniting 90 local authorities, canceling the religious councils, directing pension funds to the capital market, privatizing government corporations and investments in physical infrastructure: roads, trains, electricity, gas, water and sewage.
These steps are imperative. But they are not sufficient. Today the connection between the non-existent peace process and the economic situation is clear to all. The continuation of the violent dispute with the Palestinians will prevent the basic condition for changing direction - the need for stability and security. Without presenting a political horizon and conducting negotiations to implement it, no economic plan - even the most courageous and correct - will be able to shift the economy to growth
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