Karnit Flug was the governor of the Bank of Israel, the nation’s central bank, from 2013 to 2018. “One of my biggest challenges was the strengthening of the shekel,” she told me on Monday.
The shekel was strong, even too strong, partly because investors from around the world wanted to get in on the magic of the so-called start-up nation, a hotbed of innovation in software, artificial intelligence, chips, medical equipment, biotech, electronics and wireless communications. In the 10 years through the end of 2022, the shekel was one of the few developed-nation currencies to appreciate against the dollar. It rose 6 percent against the dollar over the period, while the euro fell 19 percent.
That was then, this is now. With political turmoil at a raging boil, restraining the shekel is “certainly not the problem the current governor has,” Flug told me ruefully. The currency has fluctuated widely and trended slightly downward since Prime Minister Benjamin Netanyahu managed to form a hard-right-wing government at the end of December and began trying to push through a package of legislation that critics say would undermine the independence of the courts.
On Monday, after a night of demonstrations and a day of strikes, Netanyahu announced that he was postponing what he calls “the reforms.” But calm did not return. Itamar Ben-Gvir, the head of the far-right Jewish Power party and a key member of Netanyahu’s coalition, insisted that the fight isn’t over and the judicial changes will eventually go through.
The shekel has tended to fall on days when Netanyahu’s agenda advances and to rise when his agenda is in retreat. The wonder isn’t that it has lost ground this year, but that it hasn’t lost even more ground. It has fallen only about 2 percent since the start of the year.
One reason the shekel hasn’t fallen more against the dollar is that currency traders have chosen — rightly or wrongly — not to focus on the political situation in Israel, Marc Chandler, the chief market strategist at Bannockburn Global Forex, told me. Most of the things that could go wrong in Israel are still just possibilities, not certainties. When it comes to a nation’s domestic politics, foreign exchange traders “either ignore it or exaggerate it,” Chandler said. “In Israel’s case, they’re ignoring it.”
The biggest economic issue for Israel isn’t what happens to the shekel over the coming weeks and months, but what happens to its high-tech economy if the ultranationalist and ultrareligious elements of Netanyahu’s coalition achieve their objectives. That’s something currency traders aren’t well equipped to assess. It’s what most concerns Flug and other economists I interviewed.
“There are some worrisome warnings. The ax has not come down yet, but it’s still hanging,” Eytan Sheshinski, an emeritus professor of public finance at the Hebrew University of Jerusalem, told me. He was among hundreds of economists who signed an emergency letter in January warning that “the concentration of vast political power in the hands of the ruling group without strong checks and balances could cripple the country’s economy.”
Lucian Bebchuk, a professor of law, economics and finance at Harvard Law School who was born in Poland and educated in Israel and the United States, organized a similar letter in February that was signed by current and former U.S. professors of economics, including 11 Nobel laureates and other luminaries. In an interview, he said that inclusive institutions are necessary for economic progress, and that is particularly true for Israel because of its open economy, its high-tech sector and its security challenges.
Bebchuk and Oliver Hart, a Nobel laureate economist at Harvard, wrote in a recent article, “How the Start-Up Nation Could Fail,” that “lack of a broad distribution of power brings about increased extraction of value from some groups to others” and that “strengthening the grabbing hand of political players produces serious distortions that are detrimental to economic performance.”
Tech, for example, is mobile, so if Israeli start-ups feel that Israel no longer welcomes and supports them, they could move easily to the United States, Europe or elsewhere. Israel’s Channel 12 television reported last week that Greek officials were trying to persuade some Israeli entrepreneurs to relocate to Greece.
Flug told me: “I’m much more concerned over the longer-term effects because they can be really, I would say, devastating.”
Quote of the Day
“We cannot be satisfied merely with makeshift arrangements which will tide us over the present emergencies. We must devise plans that will not merely alleviate the ills of today, but will prevent, as far as it is humanly possible to do so, their recurrence in the future.”
— Secretary of Labor Frances Perkins, radio address (Feb. 25, 1935)
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