Netanyahu Backtracks, Considers Female Candidate for Bank of Israel Governor

The topsy-turvy selection process of the next governor of the Bank of Israel has taken another unexpected turn, with consideration now being given to the central bank's deputy governor, Karnit Flug, who has been acting head of the bank since the departure of former governor Stanley Fischer in June.

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Flug was initially passed over as a candidate to replace Fischer by Prime Minister Benjamin Netanyahu, but the prime minister has apparently warmed to the idea of her candidacy, particularly after he was turned down by Lawrence Summers, a former United States Treasury Secretary and Harvard University president.

Flug met with Netanyahu over the weekend in what was described as a “working meeting.” Prior to that, political figures had put out feelers to see if Flug was even interested in staying on as governor, after being passed over in the past.

Fischer announced in January that he would be leaving the bank in June.

Although the governor had recommended Flug as his replacement, Netanyahu proposed former governor Jacob Frenkel for the job. Frenkel dropped out of the running, however, when it was disclosed that he had been detained in Hong Kong several years ago on allegations of shoplifting at the Kong Kong airport.

Frenkel described the incident as a misunderstanding, but withdrew his candidacy as Bank of Israel governor due to the controversy. Economist Leo Leiderman was then proposed as Fischer's replacement, but he too withdrew, this time for personal reasons. More recently, the three candidates publicly in the running have been former deputy governor Zvi Eckstein, who served under Fischer, international economist Mario Blejer, who is a former governor of the Argentine central bank, and Victor Medina, a former official at the Bank of Israel, the Finance Ministry and the private business sector.

The three candidates have all been approved by the Turkel Committee on senior official appointments, but Netanyahu and Finance Minister Yair Lapid have failed to agree on a common candidate. The impression has been created that they have not been satisfied with the choices before them, which apparently helped thrust Flug back into consideration.

Other reasons for the reappearance of Flug's candidacy are reportedly the good impression she has made on Netanyahu as acting governor and Fischer’s ongoing support for her. The former governor recommended Flug as his replacement when he left and continued to express his support for her in recent months, even after the three other candidates were presented to the Turkel Committee.

At one point in the process, Netanyahu attempted to recruit former U.S. treasury secretary Summers - a repeat of his recruitment from abroad of world-class economist Fischer when Netanyahy was finance minister. Summers, who had been under consideration for chairman of the U.S. Federal Reserve Bank until he dropped out last month, declined Netanyahu’s offer, paving the way for consideration of Flug as a candidate, in addition to the three other candidates.

The final choice will apparently be made this morning, after the weekly cabinet session, in a meeting between Netanyahu and Lapid.

The Israeli central bank bequeathed by Fischer is very different from the one he took over eight years ago. It is no longer the bank governor alone who makes interest rate decisions, but instead a five-member monetary committee, although the governor gets a double vote. That will require the next Bank of Israel governor not only to take a stance on the issue, but to convince his - or her - committee colleagues of the wisdom of the governor's position. In her capacity as acting bank governor, Flug has already encountered such a challenge, when two of her committee colleagues took issue with her interest rate recommendation, but she prevailed in lowering it by a quarter percent to one percent.

Fischer has cited this as an example of Flug's leadership capabilities and continues to tout her as his official replacement.

Whoever gets the final nod will have other major policy decisions to confront, including foreign exchange policy and how to preserve exporters' profits amid their concern over a strong shekel. The next governor will also have to initiate policy steps to head off a real estate price bubble, which many believe already exists. Also required will be the capacity to influence government policy to ensure fiscal discipline, to get the government to address problems in the capital market and to deal with widening gaps between rich and poor and the cost of living, as well as low workforce participation rates in some sectors of the population.