A funny thing happened on the way to Election Day. By every reckoning, the vote is going to end in a stalemate, with neither the right nor the left being able to assemble a Knesset majority. The end of the Netanyahu era is at hand – and no one has any idea what is going to come next.
At best, we’re looking at protracted coalition talks and no effective government for much of the rest of the year. At worst, well, who knows?
All this should add up to enough political uncertainty to send a country’s markets into a tizzy. That hasn't happened.
The Tel Aviv Stock Exchange’s benchmark TA-35 index fell after Knesset voted to dissolve itself in May, but since then it has risen more than 5%. Bond prices have climbed, and last week Standard & Poor’s affirmed Israel’s AA- credit rating with a Stable outlook.
Perhaps the most counterintuitive thing of all is that the shekel climbed to its highest level in two years against the dollar and other major currencies. Foreign investors and Israel’s rich aren’t bailing out - they’re bailing in.
Compare that with Italy, where bond prices skidded last week after League leader Matteo Salvini said his coalition with the 5-Star Movement was untenable and called for early elections, or the pound sterling since Boris Johnson took over as prime minister of Britain with no hope of extricating the country from its Brexit crisis.
Italy and Britain have far more serious economic problems for their governments to tackle than Israel has. But it’s not as if we don’t have a fair share of our own, and we’ll have been without an effective government for almost a year – since the first election was called in December 2018.
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The shekel itself is the first of those problems. Although the panic it has aroused about the damage to exports is overwrought, we’re entering an era of currency wars and negative interest rates.
There’s the budget, too: The deficit is rising quickly, Netanyahu’s caretaker government doesn’t have the power to address it and no work can proceed on the 2020 budget until a new government is seated.
The government also faces long-term problems, like the low labor productivity, and the limping effort to integrate Haredim and Israeli Arabs into the workforce. Israel’s high-tech engine has hit a ceiling and isn’t growing at the pace it once did. Investment in infrastructure is lagging and red-tape hinders new business.
Netanyahu is supposed to be the man behind the Israeli economic miracle, but these days he’s looking a lot less like Winston Churchill than like toast. Anyway, he likely won’t be around to deal with these problems. So why aren’t the markets on edge?
The real miracle workers
It’s because the miracle had little to do with the prime minister. It had a lot to do with the growth of Israel's high-tech industry, for which he can take no credit. It was helped along by the entry of more Haredim into the workforce, though Bibi has suspended that process to appease his Haredi coalition partners.
Until recently, Netanyahu governments were guardians of fiscal discipline, an often overlooked but important factor in the Israeli growth story.
But, as the S&P report notes, that’s not so much because of the prime minister but because of the treasury mandarins, and a general consensus in Israel about fiscal policy.
The fact is that when it comes to economic policy, Netanyahu has been mostly asleep at the wheel. But it hasn’t made a lot of difference.
In many respects Israel resembles the Italy of the 1950s and 60s. Governments came and went in rapid succession, and yet the economy enjoyed high growth. Living standards rose and the country boasted world-leading companies like Fiat and Olivetti. Starting in the 1970s, however, the situation changed, and today Italy is the sick man of Europe.
The fact is, modern economies need effective government over the long run. Education and training are state functions, as are building infrastructure, enforcing the right mix of rules and regulations, and setting taxes and spending at levels that don’t discourage business but cover the cost of quality healthcare, schooling and government services.
It’s in areas like these, where government is supposed to act vis-a-vis the economy, that Bibi has failed. And, just like Italy in the 1960s, the cost of that failure will come later.
Financial markets tend to look at the topline metrics like GDP, unemployment and fiscal deficits. They give short shrift to long-term and underlying trends, so from their point of view, all is well in Israel.
But as Israelis with jobs and hopes for our children, we have more fundamental needs – education, healthcare, skills and so on. Netanyahu hasn’t supplied those goods. The resilience of the markets is little comfort to us.