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Most of the Israeli public has now internalized the fact that we cannot tap the economy's potential for growth (5 percent annually) unless we reach a political settlement with the Palestinians that will include a total cessation of terrorist activity.

Most of the Israeli public also understands that it is possible to achieve a growth rate of 2 percent annually with a low level of terrorist activity, although this would mean a freeze in the standard of living per capita, because the population is also increasing at the rate of 2 percent annually.

However, if we compare a 2-percent growth rate with the renewed economic growth in the United States and in some parts of Europe, marching in place is actually backtracking.

Strangely enough, the finance minister, who is so determined to achieve economic growth in order to prove that he is doing his job properly, does not agree with this assessment.

Benjamin Netanyahu says that the Oslo Accords placed peace at the top of the agenda, with second place going to economic growth and third to security. Since the Oslo agreements failed, he proposes turning the agenda upside down.

At the top of the agenda, he places security, or, in other words, a total cessation of terrorist activity. Attaining this goal would bring about a renewal of rapid economic growth and only then would the third item on the agenda - a peace settlement - be obtainable.

But how can both the end of terrorism and security be attained without a peace agreement, without concessions and without the evacuation of Jewish settlements? Netanyahu apparently has all the answers.

In any event, a recent study by two Tel Aviv University economics professors - Danny Sidon and Zvi Eckstein - proves the existence of a Gordian knot binding together terrorism and economics. The two economists ran a model that counted the number of persons killed in terrorist acts, the number injured and the number of terrorist acts within the Green Line during a given quarter. They have proved that the higher these figures, the lower the level of economic activity in the following quarter will be.

Their study demonstrates that the terrorist acts of the past three years have forced the Israeli economy to backtrack by several decades, to the level of the severe recession experienced in 1967. They carried out their examination by calculating the ratio between Israel and the U.S. in terms of gross national product per capita (adjusted to buying power). This year, we sank to a ratio of 43 percent, which was the figure in 1967.

The fact that the standard of living in Israel has declined this year to a level that is less than half the standard of living in the U.S. explains the findings of a recent public opinion poll, according to which 20 percent of all Israelis would be prepared to emigrate if they could be promised a job overseas.

The conclusion of the research study by Sidon and Eckstein is that the Israeli economy will not recover, even if the world shifts to economic growth and even if the high-tech industry gets back on its feet. Perhaps there would be some short-term economic revival; however, the recession will not end as long as the intifada continues.

The problem with Israel's persistent recession is the danger of the situation deteriorating into a financial crisis. The crisis Israel is experiencing now is expressing itself in a reduction in GNP per capita, in a lowering of the standard of living, in increased gaps between the rich and the poor, in the deepening of the national budget deficit and in the constantly growing burden on the weaker social strata. However, a society can endure such a situation for a very long time.

The problem is that suddenly, without any prior warning, the macroeconomic crisis could become a dangerous financial crisis. This happens when the public begins to have fears regarding the future. The public then reacts by running to the dollar, thereby creating a devaluation that would be impossible to control.

Other consequences would be renewed inflation, the transfer of huge sums overseas, bankruptcies of businesses and banks, and a rapid deterioration to widespread unemployment.

Israel was on the brink of such a financial crisis in mid-2002, but, at the very last minute, the crisis passed. There have been such grave crises in other parts of the world - in Thailand, Indonesia and Malaysia in 1997, in Russia in 1998, and in Argentina in 2001. Israel is not immune.