Hamas Victory Need Not Depress Israeli Growth, Says Governor

Israel must exploit the good times to slash debt, not up spending, Fischer urges

DAVOS - The Israeli economy can continue to expand even under the new conditions created by the Hamas victory in the Palestinian elections. That is the message of Stanley Fischer, the governor of the Bank of Israel, who professes to see no reason to change the forecast of 4.3% growth for Israel in 2006.

In conversation with TheMarker at the World Economic Forum in Switzerland, Fischer begs to note that the Palestinians have an interest in not hurting their own economy: when they attack Israel, it boomerangs.

In broader conversation with the international press, Fischer drove home the message that the Israeli economy is strong. In 2005 it achieved 5.2% growth, he noted. The illness of Prime Minister Ariel Sharon has not impacted economic stability and it took the stock market less than two weeks to recover the ground it lost when Sharon was incapacitated by a massive stroke.

Naturally, Fischer qualified, the Israeli economy would grow faster if the peace process could advance. But the nation has the capacity to guard its security and the stability of its economy even if the peace process is paralyzed, the governor said.

He disagrees with the view, often repeated, that Israel?s economic recovery stemmed from the disengagement and the U.S. economic recovery, not economic policy. Obviously there were multiple factors, Fischer said, but equally clearly, without the steps the government took in 2003 and steps it continues to take today - the situation could well have deteriorated very badly. Therefore, whatever happens on other fronts, Israel must not change its economic policies, the governor exhorted.

He also utterly rejected claims coming from the left and center that any surplus budgets should be used to expand government spending on education, welfare and infrastructure: what Israel must do is continue reducing the national debt, the governor urged.

Stanley Fischer showing off his Israeli ID
 Eventually another recession will come, because it always does, he pointed out. Everywhere in the world, seven good years are followed by seven lean ones. What people forget is that when Israel?s lean times arrived the government was unable to exercise anti-cyclical policies because of the towering government debt. The same happened in Germany and France: when recession arrived the governments were helpless because of their giant debt burdens.

Meanwhile, because it did not have that debt problem, in 2001 and 2002 the U.S. managed to spend its way out of recession while cutting tax, Fischer explained.

Times are good now, to be sure, he said: Israel must exploit being on a roll to reduce debt and prepare for harder times.