A Void Where There Should Be a Governor at the Bank of Israel

A central bank governor who doesn’t make her presence felt poses a concrete danger to Israel’s economic stability.

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Bank of Israel Governor Karnit Flug.
Bank of Israel Governor Karnit Flug.Credit: Emil Salman

“An empty car drew up outside 10 Downing Street and Clement Attlee got out of it,” Winston Churchill once quipped about the former British prime minister.

Unfortunately, that’s the situation today at the Bank of Israel. Karnit Flug, the bank’s governor, is a present absentee. She doesn’t exist. She doesn’t count. Her words disappear into the void without influencing anybody.

Her status sank to an unprecedented nadir a few days ago, when, during a meeting on foreign currency attended by Finance Minister Yair Lapid, Flug and 15 other senior officials, Lapid had the nerve to publicly rebuke her over the wording of an obituary published internally by the central bank – as if this issue was in her control. The obituary was indeed offensive and unnecessary, but since when does a finance minister rebuke the central bank governor? Is she his underling? Is she subordinate to him? Moreover, even a junior clerk shouldn’t be humiliated in public.

This, of course, is not the real issue, but it’s a symptom of the problem. The real issue is the central bank governor’s nonexistent status. Lapid would have swallowed his tongue a thousand times before daring to insult Flug’s predecessor, Stanley Fischer. He would have known that Fischer’s revenge would be harsh and painful.

But even this isn’t the biggest issue. The biggest issue is that a central bank governor who doesn’t make her presence felt poses a concrete danger to Israel’s economic stability. In this situation, there’s nobody to serve as a counterweight to Lapid. There’s nobody to stop him. There’s nobody to prevent him from doing things that endanger the economy.

Toward the end of Fischer’s tenure, Lapid decided to hike the 2014 deficit target to 3.5 percent. Fischer raised an outcry and demanded that he make do with 3 percent. Lapid was compelled to listen to a man who knows a thousand times more about economics than he does, and set the deficit target at 3 percent.

Lapid doesn’t yet understand the ramifications of an excessive deficit, which increases Israel’s external debt, lowers its credit rating, raises interest rates, reduces investment, harms production and employment and even endangers stability.

This year as well, even before Operation Protective Edge in Gaza began, Lapid raised the deficit target for next year to 2.9 percent, after he himself had originally set a target of 2.5 percent for 2015. He didn’t even ask Flug’s opinion. Nor did he pay heed to her criticism – which admittedly was uttered very softly and weakly rather than in a clear, assertive fashion – when she said he ought to raise taxes rather than increase the deficit.

Flug is a knowledgeable economist and an honest person. But when you do no more than say a few general, ambiguous sentences, the public also doesn’t understand the depth of the problem.

Moreover, Flug hasn’t met with other ministers or forged an alliance with the prime minister (as Fischer did), and therefore she has failed. She hasn’t done her job as the government’s economic adviser. An adviser must build a strong position for herself so that people will listen to her, but she has built nothing. Lapid even boasted to his cronies: Who will they love more – the one who says we have to raise taxes, or the one who says we don’t have to?

This is also exactly what happened with Lapid’s plan to eliminate value-added tax on purchases of first homes. Flug did offer a few words of criticism here and there, but she didn’t do anything. She didn’t speak with other ministers in advance, as Fischer used to do. She came to the meeting of the Ministerial Committee for Legislation with no advance preparation, and once there, she voiced her opposition in a boring speech.

But Lapid had already “bought” the ministers, so she once again appeared to be an empty vessel, someone to whom nobody pays attention. The ministers didn’t take her into account at all; they voted against her unanimously. Thus the zero-VAT proposal passed easily, and Flug returned to the central bank humiliated.

And what will happen if Lapid announces a “package” for the 2015 budget – i.e., an addition of several billion shekels for defense expenditures, which will make the deficit even bigger and endanger stability, growth and employment?

The answer is clear: Then, too, we’ll hear a whisper of opposition from Flug’s direction. But Lapid won’t even blink. At most, he’ll spare a bored glance at the empty car as it drives away.

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