Prime Minister Benjamin Netanyahu and opposition chairman MK Shaul Mofaz (Kadima) reached a surprise agreement early Tuesday morning to form a national unity government.
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The move came as the Knesset was preparing to disperse for early elections, which were expected to be scheduled for September 4.
Under the agreement, Kadima will join Netanyahu's government and commit to supporting its policies through the end of its term in late 2013. Mofaz is expected to be appointed deputy prime minister, as well as minister without portfolio.
Mofaz will also serve as a member of the security cabinet, and Kadima members will serve as chairmen of the Knesset foreign affairs and defense committees, the economics committee, and any others that are agreed upon by both sides.
Chairwoman of the Israel Labor Party, Shelly Yacimovich, will become opposition leader instead of Mofaz. The process is also likely to affect Yair Lapid's new party, Yesh Atid – it will have to wait another year and a half for elections to the 19th Knesset.
In exchange, Netanyahu's government will support Kadima's proposal to replace the Tal Law, which enables ultra-Orthodox youth to defer national service.
The sides also agreed on instituting changes to Israel's electoral system.
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Yair Lapid responded to the move on Tuesday morning on his Facebook page. He described the formation of the unity government as "the old kind of politics" and "corrupt and ugly."
"It is time to remove it from our lives," he wrote, adding, "This is politics of chairs instead of principles of the interests of the group instead of the whole nation. They think that now they will continue for some time, and that we will forget, but they are mistaken. This disgusting political alliance will bury all those involved."
Shelly Yacimovich criticized the move, and calling it an alliance of cowards, and the most ridiculous zig-zag in Israel's political history. She also said that the move represented an opportunity for the Israel Labor Party to lead the opposition.
Meretz head Zahava Gal-On expressed outrage over the surprise move, calling it a "mega-stinking maneuver by a prime minister who wants to avoid elections and a desperate opposition chairman facing a crash."
"This is a disgrace to the Israeli parliament and a terrible message to the public, which is losing faith in the leadership of the state," she added.
Shaul Mofaz was elected head of Kadima less than two weeks ago, when he defeated former party head Tzipi Livni in the party's leadership primary.
In an interview with Haaretz ahead of the primary, Mofaz insisted that, if elected, he would not join a government led by Netanyahu.
"Kadima under my leadership will remain in the opposition. The current government represents all that is wrong with Israel, I believe. Why should we join it?" he said at the time.