Who Will Fill Stanley Fischer's Big Shoes?

The early exit of the respected Bank of Israel governor may not have come as a surprise, but it nevertheless leaves a gaping hole in Israeli economics, one which will be tough to fill.

In Themarker's series on "Israel's 100 Most Influential People" in September, we warned, "Bank of Israel Governor Stanley Fischer may be losing interest in his job."

We had it right, evidently: On Tuesday, Fischer informed Prime Minister Benjamin Netanyahu of his intention to step down at the end of June after 8 years on the job.

His announcement was not terribly surprising, and Netanyahu probably wasn't surprised either.

Fischer, 69, has spent his entire life as witness to the extent to which politicians, not economists, dictate economic decisions. And after achieving most of his goals during his term in office, now he's looking for a new challenge.

What interests him? Over the past years his name has come up as a possible candidate to succeed Shimon Peres as Israel's president, but Peres isn't going anywhere and Fischer has convinced everyone who has inquired that he isn't interested in the position. Close associates of the governor, however, say his real dream lies elsewhere: He wants to be Israel's foreign minister.

This is an interesting proposition: Fischer has a better international reputation than any other Israeli and would be welcome anywhere he chooses to go throughout the world. He truly believes that he could accomplish things no previous foreign minister has been capable of, including advancing the peace process. But is it realistic? It doesn't appear coincidental that Fischer announced his resignation after the election, with the commencement of coalition negotiations and the divvying up of cabinet portfolios.

Officially, Fischer denies exploring or discussing any position. He's noted for saying at every opportunity, "I don't vie for positions that aren't offered me." But nobody is left with the impression that he plans to retire. His associates insist he's staying in Israel and isn't considering going back to the U.S.

Stanley Fischer is therefore likely to wait with patience and grace – two characteristics he has in abundance – for an interesting offer from the prime minister. Perhaps it will be a role in the foreign ministry anyhow, or maybe it will in fact be the position of finance minister. He will likely take it under consideration. Netanyahu also knows this, and Fischer's virtual candidacy will play in the background during the coalition negotiations process.

One thing nobody questions: In his eight years heading the Bank of Israel, Stanley Fischer was the most independent and professional governor, and economic figure, Israel has seen in a generation. He was deemed "the responsible adult" when politicians bickered among themselves like children. During his term Fischer never bowed to anyone, including tycoons who tried to influence his moves and attempted to discredit him through the media under their control.

He knew how to skillfully manage relations with the government, getting cabinet members and prime ministers to accept his policy and recommendations, proof positive of Fischer's affinity for the political arena and his talents there. He enjoyed many achievements: Israel's economy grew at a brisk pace, and it suffered less from the 2008 economic crisis than most Western countries.

But it wasn't all perfect. Fischer, a friend and mentor to U.S. Federal Reserve Chairman Ben Bernanke, operated in Israel according to the orthodox monetary model favored by Western central bank leaders. He lowered the interest rate during the crisis, leading to a rapid rise in housing prices. Fischer probably considers this a fair price to pay for keeping the economy from stalling, but housing prices have become a major socio-economic problem.

Fischer again lowered interest rates in the past few months, and housing prices continue climbing, which will pose a thorny challenge for both the new government and Fischer's successor. It is therefore highly likely that Fischer will deal with this issue in his last major move at the Bank of Israel, perhaps by imposing a new of set of restrictions on mortgage banks.

In his announcement, Fischer said that he's leaving his future successor a central bank in good shape, touting a new law which he worked hard to bring about and considers a major achievement. Nevertheless, the timing of his resignation is far from encouraging. One capital market analyst expressed concern that Fischer's successor will have a hard time dealing with "the budgetary overrun, the freeze in improving the debt-to-national product ratio, the growing impact of the continuing global crisis on the Israeli economy, and the credit crunch stemming from higher capital adequacy requirements for the banks."

And the list of concerns could grow. It was Fischer who compelled the politicians into passing the Sheshinski Law for gas royalties as well as the Business Concentration Law. It was Fischer who pressed the government to maintain (until last year) the fiscal discipline that spared Israel from the debt crises befalling the U.S. and Europe. Will his successor have the standing and reputation needed to deal with such issues, or will he prefer leaving the dirty work to the government, settling for the monetary task of setting the bank rate?

There are even things that Fischer didn't get involved in. He didn't push for greater competition between the banks, and he didn't insist that the government cut or streamline the defense budget. There isn't even any wall-to-wall consensus on the success of his main monetary actions.

There are those who think Fischer's dollar buying binge, which raised Israel's foreign currency reserves to above $70 billion (including 3% invested in U.S. stocks), saved the economy from a revaluation that would have brought the export sector to its knees. But many also claim it had no effect whatsoever on the exchange rate while putting the central bank in a riskier position.

Several economists are already being mentioned as candidates to replace Fischer. These include Prof. Elhanan Helpman, an esteemed Israeli economist in the academic world and a Nobel Prize candidate; Prof. Manuel Trajtenberg ,who already dealt with national policy when heading the National Economic Council and his work on the committee bearing his name; and Prof. Avi Ben Bassat, who served as director of the Bank of Israel's research division and director-general of the Finance Ministry.

The big question is which of these men, or any other Israeli candidate with families and children living and working in Israel, for that matter, can display the personal independence and outstanding professionalism that Stanley Fischer brought with him from the U.S. This won't be an easy bill to fill.

Tomer Appelbaum