Six Big Threats to the Israeli Economy This New Year

The old regional order was shaken to the foundation over the past year. Egypt and Syria were weakened by their internal rebellions, and Turkey is trying to take advantage of the new situation.

The coming Jewish year of 5772 will start with a new Middle East. No, not the same "new Middle East" that President Shimon Peres advocated in the 1990s, with cross-border business from Iraq to Haifa, but a shaky Middle East filled with internal struggles and clashes over its re-creation.

The old regional order was shaken to the foundation over the past year. Egypt and Syria were weakened by their internal rebellions, and Turkey is trying to take advantage of the new situation. Turkish Prime Minister Recep Tayyip Erdogan spoke of his intentions to restore the glory days of the Ottoman Empire even before the so-called Arab Spring.

Egypt protester - AP - September 2011

Closer to home for Israel, the Palestinians are determined to declare an independent state, which certainly does not add quiet to the region as a whole, or to Israel in particular.

On top of all this, the economic crises in Europe and the U.S. certainly bear no good tidings for the Israeli economy.

Here are six economic threats to the State of Israel on the eve of the Rosh Hashanah holiday:

Palestinian Authority. An outbreak of violence, a third intifada, would be a disaster for the Palestinian economy. In 2010, there was over 10% economic growth in the West Bank and Gaza. Most Palestinians are well aware of the unbreakable connection between the Israeli economy and the Palestinian one, and know their salvation will not come form Jordan, Egypt or anywhere else. The Palestinian business sector remembers very well the damage done during the second intifada and does not want to return to those times. But who knows where things can lead, especially in the name of "national honor." The Palestinian economy would not be the only one to suffer in case of violence; so would the Israeli economy. The damage might be more indirect, but war is expensive to both sides.

U.S. The United States is still the strongest economy in the world and Israel's most important ally, both economically and politically. The problem is that the engine pulling the U.S. economy is sputtering. The sharp split between Republicans and Democrats in the Congress has made it impossible for the administration to come up with a coherent policy to deal with the high unemployment on one hand and the huge deficit on the other.

The slowdown in the American economy affects Israel in many ways, such as reduced imports as Americans buy less. A weak U.S. economy makes investors more wary of risk, and sends them looking for safer havens - and Israel, which is considered risky, loses out. In the previous crisis this trend was only temporary and not very deep. But this time it could be much worse.

Europe. The European crisis is only getting worse and is far from resolution. A decade after its launch, the euro bloc is in an existential crisis, and could even disintegrate. The panic in European markets in face of the debt crisis certainly has spilled over into Israeli markets, and will affect Tel Aviv no less than London. But the more direct threat is not to the financial sphere, but the real economy.

Trade with Europe is one of the largest sources of income for manufacturers, with exports to Europe reaching $15.3 billion in 2010, a third of all Israeli exports. The continent is very important because of its physical and political closeness. Israel has a free trade agreement with the EU. While many deals were canceled this summer for political reasons relating to the Palestinians, the real blow will come for economic reasons. It happened during the 2008 crisis, but the long term damage was not great. This time it could be different - and more frightening.

Turkey. The story of extreme about face in Turkey's policies toward Israel probably started the day the Turks realized they would never be allowed to join the EU. This led the Turks to decide that the way to build their regional power base was to turn the strategic partnership with Israel into a rivalry. The battles are being conducted on almost every front, and every victory is a milestone for the Turks on their route to becoming a stronger regional power than Israel.

For now, the relations between the two business sectors, as opposed to the political sectors, are still functioning, but they too are also under constant threat. Prime Minister Recep Tayyip Erdogan said this week that Turkey could get by without doing business with Israel. For now, the trade numbers show little change, but that could change - and quickly.

Egypt. The peace treaty between Israel and Egypt never fulfilled its economic potential. The recent regime change in Egypt exposed the strength of the anti-Israeli trend among the Egyptian public. The Egyptian government is unstable and affected strongly by the public sentiment and the media. Israeli exporters to Egypt are worried that the Egyptian regime will sacrifice relations with Israel to calm the masses, who continue to protest against Israel. The new Egyptian president will be crucial to setting relations between the two countries. Jordan. Ties with Jordan are very important to Israel as another anchor for peace in the region, as well as a portal for exports to the east and Arab countries. The stability of the regime in Jordan is critical to Israel, since if King Abdullah were to fall, he would most certainly be replaced by a Palestinian regime. The declaration of the Palestinian state may lead not only to demonstrations on the West Bank, but also to similar ones on the East Bank that could destabilize Jordan.