Fischer’s No. 2 Likely to Preserve His Policies Until Frenkel Arrives

Deputy Governor Karnit Flug will be in charge of the Bank of Israel for up to three months.

With all the speculation over the past week about what Jacob Frenkel will or won’t do when he takes the helm of the Bank of Israel, as of this week it is Deputy Governor Karnit Flug who is in charge. And, until Frenkel arrives in Israel, an interim period that could last as long as three months, she is expected to preserve the policy legacy of her previous boss, Stanley Fischer.

As acting governor since Monday, Flug will chair the monetary committee’s monthly sessions on the interest rate and enjoy the final say in case of a tie vote. It will also be up to her to determine whether to intervene in the foreign currency market to stem any weakening of the dollar vis-a-vis the shekel.

On Wednesday, after Frenkel’s nomination was approved by the Turkel committee, the Prime Minister’s Office said the new governor would take up his duties in another two to three months.

Endorsed by Fischer, Flug was regarded as the frontrunner to be the Bank of Israel’s ninth governor in a field of candidates that included professors Manuel Trajtenberg and Leo Leiderman − that is until Frenkel was chosen for a return engagement. And as the runner-up, it can be reasonably assumed she was also the most disappointed over the outcome.

Early last week the top brass at the Bank of Israel joined political and business leaders to pay tribute to Fischer. In the midst of the festivities word came through the media that Prime Minister Benjamin Netanyahu had chosen Frenkel to succeed Fischer.

The crowd’s focus quickly shifted to Frenkel, who was present at the event, with everyone quickly forming a line to congratulate him. Flug herself learned of the appointment through a text message from her daughter. One of the attendees said the disappointment was written all over her face. To add insult to injury, Flug was shortly afterwards called on to make a testimonial speech in Fischer’s honor.

The following day Netanyahu asked Flug to serve as acting governor until Frenkel wraps up his affairs in the United States, stressing that he also wanted her to stay on as deputy governor. Flug agreed to both requests.

Flug will not be the first deputy governor to temporarily take the top job. At the end of 2004 Meir Sokoler stepped in for four months until Fischer was confirmed as David Klein’s successor.

Fischer’s footsteps

In economic policy, Flug follows in Fischer’s footsteps − that is she believes in fiscal rectitude but understands that the government has a social role. Central banks have an agenda that extends beyond price stability − to ensure economic growth. These views have been expressed in Fischer’s decision to lower interest rates over the past year and, more recently, to intervene in the foreign currency market.

Criticizing the Finance Ministry’s decision to raise the 2013 deficit target, she told the cabinet at its May 5 meeting, “A 4.65% deficit this year following the 4.2% deficit last year, two years in which the economy was at near full employment, is high and should be reduced.”

Flug defended the central bank’s keeping interest rates low at the annual conference of the Israel Builders Association in Eilat six weeks ago. “A low interest rate helps sustain economic activity, particularly in exports, consumer spending and investment in economic sectors,” she said. “A higher interest rate while central bank rates around the world are at a low would increase pressure on the currency and hurt exports.”

Commenting on the cost-of-living protests in September 2011, Flug said in her first interview after assuming the position of deputy governor: “To understand the roots of the protest you need look at the fact that gross wages have remained more or less stable and net wages rose very moderately, but services have been reduced and the public is forced to spend money on services the state once provided. ... The reduction in taxes has gone too far.”

Age 58, she is the daughter of Noah Flug, an economist and noted advocate for Holocaust survivors, and Dorota Flug, a pediatrician. She was born in Poland and came to Israel at age three. She graduated from the Hebrew University high school popularly known as “Leyada” and served as an officer in the Israel Defense Forces. Flug went on to complete her undergraduate and master’s degrees with honors at Hebrew University before earning her Ph.D. in economics at New York’s Columbia University in 1985.

After working five years at the International Monetary Fund, Flug joined the Bank of Israel in 1988. In the mid-1990s she did a stint as a senior economist at the Inter-American Development Bank in Washington D.C., returning to the Bank of Israel in 1997 when Frenkel appointed her deputy director of the research department under Leiderman. In June 2001 she was promoted to head of the department.

Tomer Appelbaum