Karnit Flug served as governor of the Bank of Israel, the country’s central bank, from 2013 to 2018. “One of my biggest challenges has been strengthening the shekel,” she told me Monday.
The shekel was strong, even too strong, in part because investors from around the world wanted to tap into the magic of the so-called start-up nation, a hotbed of innovation in software, artificial intelligence, chips, medical devices, biotechnology, electronics and wireless communication. In the 10 years to the end of 2022, the shekel was one of the few developed world currencies to appreciate against the dollar. Against the dollar, it rose 6 percent over the period, while the euro fell 19 percent.
That was then, this is now. With political unrest brewing, the shekel’s withholding “is certainly not the current governor’s problem,” Flug ruefully told me. The currency has been volatile, trending slightly lower since Prime Minister Benjamin Netanyahu was able to form a far-right government in late December and tried to push through a package of laws critics say would undermine the independence of the courts.
On Monday, after a night of demonstrations and a day of strikes, Netanyahu announced he would postpone what he calls “the reforms.” But there was no peace. Itamar Ben-Gvir, leader of the far-right Jewish Power Party and a key member of Netanyahu’s coalition, insisted the fight was not over and the judicial changes would eventually come through.
The shekel tends to fall on days when Netanyahu’s agenda is advancing and rise when his agenda is in retreat. The miracle isn’t that it’s lost ground this year, but that it hasn’t lost more ground. It’s only fallen about 2 percent year-to-date.
One of the reasons the shekel hasn’t fallen more against the dollar is that forex traders have chosen – rightly or wrongly – not to focus on the political situation in Israel, Marc Chandler, Bannockburn’s chief markets strategist, told me Global Forex. Most things that could go wrong in Israel are still just possibilities, not certainties. When it comes to a country’s domestic politics, “they ignore it or exaggerate it,” Chandler said. “In the case of Israel, they ignore it.”
The biggest economic problem for Israel is not what happens to the shekel in the coming weeks and months, but what happens to its high-tech economy if the ultra-nationalist and ultra-religious elements of Netanyahu’s coalition achieve their goals. This is something forex traders are not well equipped to assess. This is what worries Flug and other economists I’ve interviewed the most.
“There are some worrying warnings. The ax hasn’t fallen yet, but it’s still hanging,” Eytan Sheshinski, professor emeritus 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 enormous political power in the hands of the ruling group without strong checks and balances could cripple the country’s economy.”
Lucian Bebchuk, a Harvard Law School professor of law, economics and finance who was born in Poland and educated in Israel and the United States, organized a similar letter in February, which was signed by current and former US economics professors, including 11 Nobel laureates and other luminaries. In an interview, he said that inclusive institutions are necessary for economic progress, and this is particularly true of Israel because of its open economy, high-tech sector and security challenges.
Bebchuk and Oliver Hart, Nobel laureates in economics at Harvard, wrote in a recent article How the Start-up Nation Could Fail that “the lack of a broad distribution of power leads to increased extraction of value from some groups for others”. and that “strengthening the grip of political actors creates serious distortions that are detrimental to economic performance.”
Tech, for example, is mobile, so if Israeli startups feel Israel no longer welcomes and supports them, they could easily migrate to the United States, Europe, or elsewhere. Israeli television Channel 12 reported last week that Greek officials were trying to persuade some Israeli entrepreneurs to move to Greece.
Flug told me, “I’m much more worried about the longer-term effects because they can really, I would say, be devastating.”
quote of the Day
“We cannot be satisfied with makeshift arrangements to get us through the current emergency. We must devise plans that will not only alleviate today’s ills but, as far as is humanly possible, prevent their recurrence in the future.”
— Secretary of Labor Frances Perkins, radio address (February 25, 1935)
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