Analysis | New Bank of Israel Governor

Leiderman to Take Office With Pair of Ticking Time Bombs Left by Fischer

His knowledge of economics and monetary policy is unimpeachable, but the new Bank of Israel governor will have to show economic leadership, too.

The Turkel Committee, which is charged with vetting Leo Leiderman's fitness for the job of bank of Israel governor, will find it hard to reject his candidacy. As far as anyone knows, his name is not connected with any scandals.

In fact, when you sift through his remarks over recent years, it's difficult to find any instance where his assertions or conclusions were erroneous. To the contrary, he has spoken cautiously and conservatively.

He believes that the way to address the problem of home prices needs to come from the supply side - that is, the government will need to provide the solution by accelerating the sale of undeveloped land.

On the question of the budget deficit, he favors a low rate equal to 2% or 3% of gross domestic product, and no more. Only in one area is he likely to meet any argument with the government: His preference for dealing with deficits by cutting public spending and not by raising taxes.

Would he be willing to upset his relationships with Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid over this? Don't count on it.

The question of Leiderman's expertise and theoretical knowledge of macroeconomics and monetary policy is unchallenged. He understands the subjects thoroughly and kept abreast of the latest thinking while he was previously at the Bank of Israel, then later at Deutsche Bank and most recently at Bank Hapoalim.

Is he a leader?

The real question regarding Leiderman is if he can succeed in doing more than displaying a deep knowledge of monetary issues and demonstrate economic leadership. With the departure of Stanley Fischer, the Israeli economy has lost a true leader of that sort.

Leadership isn't expressed only by navigating the economy through one of the world's biggest global crises, as Fischer did, but also in implementing an effective and courageous policy in the foreign currency market, bank regulations (including at Hapoalim, his soon-to-be former employer) and relations between the Israeli economy and the world.

Fischer knew how to make courageous decisions and to defend them afterward. This is a valuable asset in the age of global markets and the free flow of capital.

Fischer didn't quite do enough to increase banking competition, and it is hard to believe that Leiderman will rush to deal with it, either. But this doesn't mean he sees himself as a representative of the banking industry at the Bank of Israel. Indeed, it is reasonable to assume that he will try to try to remove any suspicion of that.

100 days of grace

Leiderman can expect to get 100 days of grace, during which he will get the opportunity to formulate an organized agenda of policy needs and directions for the Israeli economy and society. Those close to him say we need not worry, that we can rely on his integrity, that he will serve the broad interests of the Israeli economy and people, and not those of the institution he once worked for.

Leiderman's leadership can be understood three ways. The most important is as economic adviser to the government in an era when the Israeli economy is looking to rebalance the weighting between the business sector and consumers, and between the various segments of society and the relative contributions they make - or fail to.

The state budget the Knesset passed this week is the first of the current government and Lapid. It is regarded as a difficult and problematic spending package, lacking vision. Leiderman will need to give Lapid some direction in building the next budget on a foundation that provides more growth generators for the economy and more hope for Israeli society.

Will he be able to connect to Israel's needs after the social justice protests of 2011? Is he attentive to calls for a more reasonable standard of living, equal access to housing, health and education, and to the need to address the fat calves in the public and government sector? Is he prepared to enter the struggle? Or will he devote his energies to the traditional business of central bank governors: ensuring stability for prices and the banking system.

Two additional tasks facing the new governor involve wresting control of the ticking time bombs of the housing and forex markets.

In housing, his declared view is that the government needs to increase the supply of land available for development. Sitting at Bank Hapoalim he must certainly understand the impact of a bursting real estate bubble. In the five years ahead of him at the Bank of Israel, he can assume that he will witness at least one business cycle that will create a real estate crisis.

The second time bomb is the forex market. Fischer succeeded in gaining some measure of control over it and protecting Israeli exports, because he demonstrated determination and nerves of steel.

That's the main ingredient for a successful market intervention. Leiderman is far more connected than Fischer ever was to the forex dealing rooms of local and foreign banks, and knows the people who work in them and their daily routine. It's not clear at this stage if this will be an asset or not as Bank of Israel governor.

Does Leiderman believe at all in intervention? Will he continue on Fischer's path? If he decides yes, will he have the nerves at the most critical moments to stand up to his friends at the foreign banks that are battling the central bank's goals?

The number of questions hovering over Leiderman are enormous, but what is clear is that Fischer bequeathed him challenges that require him to learn the issues fast, and act just as quickly.

Olivier Fitoussi
Ofer Vaknin