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Trump Has a Better Handle on Israel Than Anyone

The markets are making a big mistake in assuming it will be business as usual after the elections. The end of the Bibi era is going to leave Israel ‘messed up’

David Rosenberg
David Rosenberg
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US President Donald Trump speaks with reporters as he departs the White House, in Washington, DC, on June 2, 2019.
Trump,June 2, 2019Credit: AFP
David Rosenberg
David Rosenberg

Thus saith the Trump: “Israel is all messed up with their election - I mean that came out of the blue three days ago. So that’s all messed up. They ought to get their act together.”

The U.S. president isn’t what you would call the most trenchant observer of the world scene. He struggles to articulate basic thoughts and mixes fact with fiction with aplomb according to his needs and prejudices. But even a broken clock is right twice a day, and this time Trump may not only be correct: he may very well have understated the extent to which Israel is messed up.

The mess seems to have eluded almost everyone. In Israel, the media and the political class have focused on the Netanyahu-Lieberman drama and on micro-analyses of how the next election will play out in September (most agree: with another victory for Netanyahu’s religious-right coalition). There’s even a sense of relief in some circles that Netanyahu’s assault on democracy has been suspended and that the great exit door for him is opening up.

The nonchalance is most evident in the financial markets, the very place where anxieties over the elections should have been expressing themselves since the Knesset dissolved itself last week after less than three months.

But the Tel Aviv Stock Exchange’s benchmark TA-35 index actually rose the day after the vote. It dropped on Sunday when the trading week resumed, but that wasn’t because of the elections but because of Trump’s surprise Mexican tariff, which caused Wall Street to drop sharply.

Israeli government bonds have risen since the Knesset vote and the shekel has barely moved against the dollar. It seems the financial markets are taking the same short-termist approach that everyone else has about the elections.

The short-term outlook acknowledges that, yes, it will now be many months before the next government is formed and can begin to tackle the government’s growing budget deficit and economic policy initiatives, but none of this is so urgent. A few months, a few more billions of shekels, so what?

The fact is that Israel’s fiscal metrics are quite good compared to a lot of the developed world and none of the reforms on the agenda are so pressing that they can’t wait a little longer. Let the politicians play and get back to work next year. As an analyst for Standard & Poor’s told Reuters: “I don’t think this will blow up the fiscal story massively, even if they loosen fiscal expenditures.”

Bibi in the medium term

That’s the short run. “In the long run we are all dead,” as the economist John Maynard Keynes once said, so we need not worry about that either. But what about the medium term?

That’s where things start looking messed up because one way or the other, the Netanyahu era is over. Even if the Likud Party and its allies win a majority of Knesset seats in September, there are good odds Bibi will face the same problems forming a coalition as last time. Even if he does succeed, he faces the prospect of an indictment by the end of the year. And even if he decides he’s staying on while he fights it in court, his grip on the Likud will inevitably loosen and internal opposition to his leadership will intensify.

Ten years of Netanyahu may not have been good ones for democratic values or clean politics, but they have been excellent for the economy. The three Netanyahu governments engaged in sound fiscal policy and for the most part shunned populist politics that would have harmed the economy. Despite his hardline reputation, Netanyahu was a cautious leader who didn’t let Israel get entangled in wars or provoke diplomatic entanglements.

All that was made possible because Bibi kept Israel’s political house in order. When S&P raised Israel’s credit rating last August to an AA-minus one of the factors was the government’s commitment to fiscal prudence and “generally effective” governance structures.

Maybe a Bibi 2.0 will arise from the ashes, but I wouldn’t count on it. When it comes to heir apparents, Netanyahu has pursued a scorched earth policy: Israel’s political right is less united than it appears to be under the prime minister’s strong hand.

More likely a post-Bibi era will be chaotic. There will no longer be the magician keeping the fractious Likud in order and smoothing over differences inside the coalition about issues of religion and state. In this free-for-all atmosphere, politicians will be tempted engage in populist policies and more incitement than they do now. Weak prime ministers will use the currency of budget handouts to buy political support and fiscal prudence will become history.

If this sounds apocalyptic, that’s because it is easy to forget that even after a decade of political peace and economic prosperity, Israel remains a fragile vessel. Political differences have been papered over by Netanyahu’s capacity for avoiding them, the Middle East remains a dangerous place and the economy faces serious structural problems that Israel’s high-tech success has kept in the background.

Everyone assumes the Bibi era can and will continue with or without Bibi, but that’s a big mistake. For the markets, it could well be a costly one, too.

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