For a Fistful of Dollars

Shraga Brosh is not alone. His good friend Ofer Eini has joined him in the campaign of pressure and threats, and this week a new friend joined them: Industry, Trade and Labor Minister Eli Yishai.

Shraga Brosh is not alone. His good friend Ofer Eini has joined him in the campaign of pressure and threats, and this week a new friend joined them: Industry, Trade and Labor Minister Eli Yishai. Brosh, the president of the Manufacturers Association, has said that "this is a national disaster." Eini, the chairman of the Histadrut labor federation, is threatening to take the economy out on strike and Yishai has announced that if Bank of Israel Governor Stanley Fischer does not reduce interest rates of his own free will - he will consider "legislation on the matter."

And what is this frightening "national disaster" that requires such drastic steps? Not the terror attack yesterday in Dimona, not the Qassams that keep landing on Sderot, not the powder keg in the Gaza Strip and not even the threats from Iran. The reason is far more material: the weakening of the dollar.

True, the position of exports to the United States is problematic. The dollar has dropped by 15 percent since the start of 2007 and it is not simple to overcome a decline like this in the return on exports. But this is very far from a "national disaster."

The finance minister is not to blame for the dollar's weakening, nor is the governor of the Bank of Israel. Forces many times larger than they determine the behavior of currencies in the world, above all the United States' double deficit - both in its budget and balance of payments.

U.S. President George W. Bush has acted with appalling irresponsibility in pursuing a wild budgetary policy. On the one hand he has lowered taxes, but on the other he has greatly increased defense spending (Iraq and Afghanistan). The result has been a huge budget deficit, which has led to a huge deficit in the balance of payments.

The wild party was joined by the citizens of the United States, who during the past six years have been living in a fools' paradise. They inundated the malls and very much increased personal consumption, contributing to the increase in the balance of payments deficit. As a result, international investors started to flee from the dollar and move to the euro. To all of this must be added the process of reducing interest rates in the United States, which has decreased the dollar's attractiveness even more. It is no wonder then that the dollar has weakened.

To these international processes must be added Israel's rather strange situation, which can be defined as "the curse of a blessing." The state of the Israeli economy is good. Growth is high, the budget (for the nonce) is under control and there is a surplus in the balance of payments. The shekel interest rate (4.25 percent) is also higher than the American interest rate (3 percent). All this is leading in only one direction: the weakening of the dollar relative to the shekel.

The state of the Israeli economy relative to the American economy will inevitably lead to a decrease in exports and an increase in imports, and therefore to the closing of the surplus in the Israeli balance of payments. That is, the success of the Israeli economy is producing a correction that is hurting exporters and exports. That is how market mechanisms work - and it is impossible to intervene in them.

The manufacturers are demanding emergency aid of $2 billion and the imposition of a tax on short-term movements of capital. They do not deserve emergency aid. We did not ask them to share their profits when the dollar exchange rate hit nearly NIS 5 in June 2002. An artificial tax, meanwhile, will cause only damage.

Therefore, the only thing possible to do now is to lower the interest rate. Not by threats, not by legislation, but by persuasion. After all, the low dollar is moderating inflationary pressures in the wake of the slowdown in the prices of imports, apartments and rentals. This being the case, the governor of the Bank of Israel can lower the interest rate to some degree.

At the same time, it is possible to remind Brosh that the dollar's weakening is a worldwide problem. The situation of anyone who is exporting from Europe to the United States is worse than that of the Israeli exporter. All of the European's costs are in the expensive euro, whereas his income is in the cheap dollar.

Moreover, though the dollar has been crashing over the past two years, the euro has weakened only slightly relative to the shekel and many companies are exporting their goods (about half of all exports) to Europe. Their situation is not so bad.

It is also worth knowing that while exporters are talking about the losses they are suffering because of the dollar's weakening, they are forgetting to tell us about the dollar loans they have taken, loans that are now being eroded and are contributing to profitability. And the exporters also have at their disposal various financial tools that protect them from a continued decline in the dollar, in return for a certain insurance premium.

Brosh is demanding "responsibility from the state," but responsibility does not mean submitting to pressure. Responsibility means that each side in the equation does its part.

The world economy will determine the dollar rate. The Bank of Israel will take care of inflation. The Finance Ministry will prevent the budget from being breached. And the exporters will become more efficient, improve, diversify their export markets and manage currency risks better. They should apply themselves more to their computers and lathes and less to the government.