Netanyahu's Governess Teaches Him a Lesson

Bank of Israel Governor Karnit Flug taught the government a few simple lessons in economics.

Emil Salmon

Bank of Israel Governor Karnit Flug had to wait months to be appointed as Stanley Fischer's successor last year, while Prime Minister Benjamin Netanyahu searched high and low for someone, anyone, instead of her.

The delay smacked of desperation and sexism. When she was finally confirmed in the job, economic experts breathed a sigh of relief and the markets rose.

What do you call Israel's first woman central bank governor? A governess? It seemed an appropriate title on Sunday, as she quietly and authoritatively taught the government a few simple lessons in economics while presenting the Bank of Israel’s annual report for 2013.

If I were casting, the movie would star Minnie Driver but, more like Julie Andrews in The Sound of Music, Flug began at the very beginning – which was a very good place to start, though her first observation was more Mary Poppins than Maria von Trapp.

“When we look from 30,000 feet, the state of the economy looks quite good,” said Flug, noting that Israel’s 3.3% growth rate, 6.3% unemployment rate and remarkably low debt-to-GDP ratio is considerably better than average performance in both the OECD and the Eurozone.

And, just as Israel had weathered the 2008 worldwide economic meltdown, she even sounded confident that the economy would withstand the disappointment of a collapse in the peace talks.

“A positive outcome of the talks would be favorable for the prospects of the economy in terms of growth,” Flug said, but “we should we remember that we’ve had a lot of experience with geopolitical shocks, and the Israeli economy has shown resilience to these shocks.”

Then she ditched the umbrella and carpetbag and morphed into Rebecca de Mornay, firmly rocking the cradle.

“Not everything is as bright when you look deeper,” she noted ominously. (Cue scary music.)

She warned that the government's spending plans were in danger of missing its own targets on debt and that continued under-investment in education was a strategic economic blunder.

Nor did she mince words when she stated that the promise by Finance Minister Yair Lapid to cut VAT for some first-time homebuyers would probably increase house prices, which have shot up by 80% since 2007 – that’s higher than Mary Poppins’s Uncle Albert’s ceiling at teatime, and no laughing matter.

"The fact there will be those entitled to the benefit ... may increase demand for housing in the short run and, without sufficient supply, that will lead to higher prices," Flug said, warning that it would create a budget hole of more than $700 million that would have to be plugged from somewhere.

"I am afraid it will not get the wanted results," she said.

Like her predecessor Stanley Fischer, Flug said the low participation of Israeli Arabs and ultra-Orthodox were major factors dragging the economy down.

“Given demographic trends among Arabs and haredim, it is crucial for the economy to improve their integration into the labor market and Israeli society,” she said.

Netanyahu has not yet responded in any detail to Flug’s first annual report, so it’s unclear how this story will unfold. Will Flug become Jane Eyre to Netanyahu’s Rochester? Given their shaky start, no-one should sign up Fran Drescher to star in the movie version just yet.