The protests shaking Greece and developments in Europe do not affect Israel, Bank of Israel Governor Stanley Fischer said yesterday.

While cautioning Israel's leaders not to succumb to complacency and to keep a close eye on events, he also sought to reassure investors and the public that the euro zone's troubles will not destabilize Israel's economy.

"We have to constantly stay on the alert and take special steps if needed," Fischer said, speaking at a meeting of the Knesset Finance Committee. "At the moment I do not see a need." But he qualified that "sometimes the unexpected happens more than the expected."

If Israel avoids mistakes in economic policy - and it has indeed avoided mistakes in recent years, the governor said - its economy should continue to develop while Europe manages its crises; for example, the current one in Greece and the emerging trouble in Spain.

Yesterday the protests rocking Greece took a deadly turn. Greeks protesting against government austerity measures threw Molotov cocktails at a bank branch in central Athens, killing three people in the worst violence to hit the country since riots in 2008.

Tens of thousands of Greeks took to the streets. Masked youths clashed with police in riot gear, who responded with tear gas and flash bombs that clouded the blocks surrounding parliament.

Blow to Papandreou

The violence is a blow to Prime Minister George Papandreou's plans to push through tough budget cuts demanded by the European Union and International Monetary Fund in exchange for a 110-billion-euro aid package unveiled on Sunday.

Papandreou, speaking in parliament, expressed shock at the deaths but also defended his austerity plans, which foresee 30 billion euros in savings mainly from cuts in wages and pensions. He vowed that the government would not abandon its drive to save the country from ruin.

Back over here, discussing Israel's economic strengths, Fischer noted that the countries defined as "developing" posted stronger economic growth during the global economic crisis than the ones classified as "developed." When it comes to growth, Fischer said, despite its recent classification by the OECD as a "developed nation," Israel is more like the developing ones.

It is true that the travails in Europe are likely to depress Israeli exports to the continent, Fischer said. They aren't likely to affect Israeli imports, he added. Israel's capital market won't be affected because it has no connection with Greece, or even Europe.

But things could change if the European economic contagion infects America, Fischer warned. If the U.S. economy weakens, Israel is likely to suffer as well. But he considers that scenario unlikely.

Doubts have arisen about whether the 110-billion, three-year euro aid package for Greece from the euro-zone members and International Monetary Fund will suffice. The Wall Street Journal reported on Tuesday that the package does not cover Greece's towering costs: Athens will have to borrow from investors as well by selling bonds from the end of next year. But if the markets refuse to "show their faith," the country could go bankrupt yet. Much depends on whether Papandreou can push through the budget cuts and austerity measures he promises.

Fischer also said yesterday that Greece has locked in enough money to tide it over for two years - but that its exit from the crisis depends on those very cuts and measures it undertook. If it can't cope, its situation will be very tough, he said.

Ship of fools

Greece isn't alone in the boat. The troubles of certain other euro-zone countries such as Portugal and Spain aren't as dire, but they too will have to accept painful budget cuts, Fischer said.

The Portuguese government has undertaken to implement emergency measures planned for 2011 this year. A Moody's analyst told Reuters yesterday that the agency is more likely to downgrade Portugal's credit rating now.

The lower a country's credit rating, the more interest it will have to pay to borrow money. Moody's said it could downgrade Portugal's Aa2 ratings by one or at most two notches, citing "the recent deterioration of Portugal's public finances as well as the economy's long-term growth challenges," especially due to low competitiveness.

Fischer had actually been summoned to appear before the Knesset Finance Committee to present the Bank of Israel's report for 2009. At the start of his address, he said that the state of the global economy is improving. The International Monetary Fund now expects the global economy to expand by 4.2% this year and 4.3% in 2011. It anticipates U.S. economic growth of 3.1% this year and 2.6% in 2011. But the euro-bloc countries are expected to grow just 1% this year and 1.5% the following year.

The Bank of Israel estimates that Israel's economy will grow by 3.7% this year and 4.0% in 2011. Unemployment has pleasantly surprised, falling to 7.4% in the last quarter of 2009, compared with around 10% in the United States and the euro zone, Fischer said.

As for the burning issue of the day, Fischer noted that the euro treaty has no defined process for expelling a member, and added that none of them - even Germany - want to toss out Greece. But, he added, if a member breaks the rules, it could find itself on the outside.