Analysis |

The Biggest Loser of Israel's Upcoming Election

When Israel went to an election amid a global recession in 2008, Bank of Israel Governor Stanley Fischer came to the rescue. This time, it’s not clear who might fill his shoes

David Rosenberg
David Rosenberg
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Outgoing Prime Minister Naftali Bennett, left, incoming caretaker PM Yair Lapid and Benjamin Netanyahu, with the Knesset behind them.
Outgoing Prime Minister Naftali Bennett, left, incoming caretaker PM Yair Lapid and Benjamin Netanyahu, with the Knesset behind them.Credit: Artwork: Anastasia Shub. Photos: Eightshot_Studio/Shutterstock, Atef Safadi, Oded Balilty/AP, Yoav Dodkevitz, Kobi Gideon / GPO
David Rosenberg
David Rosenberg

History often has the annoying habit of repeating itself. We are witness to that now.

Back in the autumn of 2008, the world was in the grip of the worst economic downturn since the 1930s. Investment banking firm Lehman Brothers had gone bankrupt the month before – the signal event in what would become known as the Great Recession. In Israel, the economy was contracting and the future looked bleak. But the government of Ehud Olmert collapsed that October, leaving Israel under the control of a caretaker government powerless to deal with the crisis.

Fast forward to the spring of 2022 and the world is again looking recession in the eye. The downturn isn’t here yet, but rising interest rates, China’s constant COVID lockdowns and a bear stock market make it look increasingly inevitable. And just as in 2008, Israel is heading into a general election, leaving it with a caretaker government that can do little to respond.

Most of the commentary about the economic impact of another election – Israel’s fifth in the space of three-and-a-half years – focuses on all the government reform measures that will now be shelved, if not left to die. These include raising the minimum wage, compensating the self-employed for omicron losses and measures to rein in soaring housing prices. The failure to get this legislation passed will impose a cost on the Israeli economy, especially on ordinary Israelis.

But it pales in comparison to the risk that Israel may be dragged into a global recession without a state budget or a finance minister with the power to do much to grapple with it.

To our misfortune, history never repeats itself perfectly. In 2008, the crisis was already upon us. There was no time to lose while the politicians campaigned and then negotiated a coalition government. The burden of dealing with the crisis fell on Stanley Fischer, who as governor of the Bank of Israel could act independently of elected leaders.

Israel was lucky to have Fischer at that critical moment. He slashed interest rates, from 4.5 percent at the outset of the crisis to what was then a record low of 0.5 percent, to help businesses and consumers. He also launched an unprecedented and largely untested policy of quantitative easing, designed to enable the financial markets that were seizing up in the face of the global crisis to continue functioning.

By the time the new government of Benjamin Netanyahu secured Knesset approval for a 2009-10 budget in July 2009, the economic crisis had largely passed for Israel. The economy had contracted sharply in the final quarter of 2008 and first quarter of 2009, but by the second quarter it was growing again. In the third quarter, growth was running at an impressive 3.6 percent.

Fischer was arguably Israel’s greatest central bank chief ever – one with a deep understanding of economics and policy, an astute politician and a great communicator. His actions in 2008 and 2009 were so effective that he became the first central banker in the world to raise interest rates, signaling that the crisis was over for Israel. The problem Fischer now faced wasn’t recession but accelerating inflation.

The Bank of Israel's then- Governor Stanley Fischer in March 2009.Credit: Daniel Bar-On

In 2022, we no longer have Stanley Fischer to save us. Current Governor Amir Yaron may yet prove his mettle, but so far his policies have proved to be tepid in the face of rising inflation.

Moreover, with interest rates so low (0.75 percent today, not much more than the low Fischer cut the rate to in 2008), Yaron has little of the traditional ammunition central banks use to contain economic downturns. If he finds himself at war with stagflation – a combination of recession and inflation that some economists believe may occur – his problems will be compounded.

Also to our misfortune, Israel’s economic policy problem goes deeper than the abilities of the Bank of Israel and its boss. In 2008-09, the government fell, elections were held and a government was formed all the space of four months. If this history were to repeat itself in 2022-23, the recession threat might be containable: By the end of the year, a new government could get to work quickly, if belatedly, to combat the effects of an economic downturn.

But there’s another history that is likely to repeat itself this year: the one of three-and-a-half years of political deadlock that back-to-back elections have failed to break. If recent history repeats itself in this election, the politicians may not be able to form a coalition or, if they do, the process could be quite lengthy.

If a coalition is formed, it may well be as fragile as the previous two were, and then we’re back to the polls again for round number six.

In the meantime, Israel’s caretaker finance minister has his hands tied, perhaps for months or even years. Government spending in 2023 – when many expect the recession to hit – is limited by law to a month-by-month allocation based on 2022 levels. There will be no room for countercyclical measures or initiatives to fight the downturn.

There’s no reason to panic yet (and if there was, it would be irresponsible to say so). For one, there may not be a recession in the end. For another, the Israeli economy’s fundamentals remain sound: it has a thriving high-tech sector, and its fiscal deficit and public debt levels are relatively good.

These were all factors that contributed to Israel’s quick recovery in 2009 and should work in its favor again this time as well.

The Tel Aviv Stock Exchange during the pandemic.Credit: Eyal Toueg

The big question is how long the economy can put up with successive crises and political deadlocks. Despite repeated elections and the COVID pandemic, the international credit rating agencies have given Israel the benefit of the doubt because of the economy’s strong fundamentals.

At some point, though, they may reach the conclusion that this isn’t just a crisis of limited duration but a fundamental problem in its own right.



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