Fischer Talks Tough to Treasury Over New Bank of Israel Law

Governor expected to hold heated press briefing today.

Bank of Israel Governor Stanley Fischer is to hold a press conference in Jerusalem today at which he is expected to lash out at Finance Ministry opposition to promoting the new Bank of Israel Law.

Fischer is expected to put forward the central bank's position on the new law, and to blame treasury past and present heads for failing to get the law passed.

The crisis in relations between the Bank of Israel and the Finance Ministry escalated last week after Fischer delivered the central bank's proposal for the law to Finance Minister Yuval Steinitz on Monday. The draft exposed a number of differences in principle between the two bodies.

These include the composition of the monetary committee, a new entity whose duties will include setting interest rates, and the employment terms of the bank's employees.

On Tuesday Steinitz argued that the draft cannot serve as the basis for negotiations on the bill, and claimed that the central bank had reneged on a number of issues over which agreement had previously been reached.

"If the Bank of Israel is going back on understandings that were reached then the Finance Ministry will also have objections to a variety of issues," Steinitz said.

In response to the treasury's position, the central bank recently informed the treasury it was considering issuing longterm bonds without consulting the Finance Ministry in advance (see box), in violation of previous agreements between the two bodies.

Bank of Israel officials say, however, that at present the issue is a theoretical one since there are no plans to issue such bonds.

The monetary committee that is to be created by the Bank of Israel Law will be headed by the governor of the central bank. It was previously agreed that the committee would have six members: three members from the Bank of Israel and three external members from business and academia, with the governor given an additional vote in the event of a tie.

Loss of faith

In light of its ongoing disagreements with the Finance Ministry over the bill, as well as the erosion of trust in Israel's political system, Fischer changed his mind and now wants just five members on the committee - three from the bank and just two external members.

Then there's the issue of wages at the Bank of Israel. The proposal submitted by Fischer to Steinitz last week explicitly excludes the central bank from Article 29a of the Budget Fundamentals Law.

This article gives the treasury, through its wages director, control over all issues related to wages in the public sector, including within the Bank of Israel.

The central bank's draft stipulates that all future wage agreements for its employees are to be based on existing agreements.

It also calls for the creation of an administrative council that would be responsible for any changes to wages at the bank.

The Finance Ministry could appeal its decisions to a tribunal.

Treasury officials say that the central bank's proposal, if introduced, would set a precedent for Israeli labor relations that could bring about an end to state control over public-sector wages.

"The principle of [government] supervision over wages as specified in Article 29a is a fundamental condition for transparency and good governance," Steinitz said on Tuesday in response to the Bank of Israel proposal.

"It is a sacred principle that cannot be violated, and does not in any event infringe on the independence of the Bank of Israel or of any other governmental body," Steinitz said.

In its official response to the draft, the Finance Ministry said, "After two years of long and stubborn negotiations, including thousands of hours of discussions, disagreements and agreements, we were shocked by the governor's proposal. In effect, the governor and the bank are going back on all the agreements and promises."

Fischer was furious, and the following day issued the harshest statement seen so far in relations between the Bank of Israel and the Finance Ministry during his tenure.

"Unfortunately, after three and a half years of attempting to push forward the Bank of Israel Law, through cooperation with the treasury, we once more discover that the treasury's perspective reflects a lack of understanding regarding the central bank and its independence, and does not serve the Israeli economy," the Bank of Israel said in its response.

Bank of Israel officials stressed this weekend that, contrary to the Finance Ministry's claims, the new Bank of Israel Law does not aim to serve the central bank and its governor, but rather the Israeli economy.

They noted that in contrast to the current situation, in which the governor is permitted to set the bank's monetary policy on his own, the new law assigns this authority to the monetary committee as a whole, enabling public supervision and complete transparency.