Pressure from business, tech sectors likely to push Israel's government to compromise on judicial reforms


Al-Monitor Pro Members


David Rosenberg

Israeli reporter specializing in business, economics and politics


Feb. 6, 2023

Bottom Line:

A proposal to weaken the independence of the courts and politicize the government’s legal apparatus risks harming the Israeli business environment. In addition, hardline policies on the Palestinians and settlement expansion risk damaging the perception of Israel as a liberal democracy and raising the risk of resurgent violence, further deterring foreign investment and depressing local business and consumer sentiment.    

Background Facts: 
  • Prime Minister Benjamin Netanyahu’s government unveiled a wide-ranging program of legal reforms on Jan. 4 aimed at stemming judicial overreach. The main goal is to restrict the High Court’s ability to declare legislation unconstitutional and give elected officials a greater say in the appointment of judges.  
  • The plan has encountered unusually strong opposition, both in the form of mass protests and pushback from the business, legal and academic establishments. Opponents assert that weakening judicial independence will make Israel a less attractive place to do business.  
  • The US, Israel’s most important ally, has signaled concerns about the reforms, with Secretary of State Antony Blinken emphasizing to Netanyahu on Jan. 30 America’s “support for core democratic principles and institutions.”   
  • The reform agenda took on added urgency on Jan. 18, when the High Court ruled that Interior and Health Minister Aryeh Deri could not remain in the cabinet due to a past conviction for tax fraud. Deri, whose Shas party is the second-largest in the coalition, is demanding Netanyahu pass legislation that would allow him to return to office.  
  • The financial markets have not yet reacted strongly to developments. A warning by the country’s leading bankers meeting with Netanyahu on Jan. 28 about the reforms’ impact caused a brief drop in bank shares, but they have since recovered. The shekel has lost ground to the dollar since last week, but since the reform crisis began it has appreciated.   
  • At least two major international investment banks (Goldman Sachs and JPMorgan) have expressed concerns about judicial reforms. "Any material deteriorating in the institutional strength can have an impact on investment flows, however, the scale and timing of such is difficult to judge," JP Morgan said in a February 2 report. It cited similar reforms in Poland undertaken in 2015 that "appear to have led to some lags in FDI flow."
  • The government’s secure Knesset majority means it can easily win approval of the proposed reforms, but the unusually broad-based and vociferous extra-parliamentary opposition and reaction of the financial markets may move Netanyahu to compromise. Concerns voiced by the key high-tech industry, which is heavily reliant on foreign investment and accounts for more than half of exports, appear to have resonated with the prime minister.       
  • On national security issues, the new government has given the far-right Religious Zionism party control over the army’s civilian administration of the West Bank, including settlements, with leader Bezalel Smotrich appointed a minister in the Defense Ministry. Itamar Ben-Gvir, the national security minister and leader of Otzma Yehudit, another far-right coalition partner, has been given enhanced control over the national police.  
  • Religious Zionism is likely to use those powers to expand settlements and deprive Palestinians of land rights, access and movement, which could inflame an already tense situation in the West Bank.  Ben-Gvir has signaled that the police will respond with greater force to protests and Arab violence.  
  • The government’s hard line on security is being tested now after a terror attack on Jan. 28 that left seven Israelis dead. Far-right leaders are urging tough and high-profile measures in response, including settlement expansion. But Netanyahu has traditionally preferred to let the security forces do their work quietly and avoid measures that might incite Palestinian anger or opposition from Washington.  
  • The religious and far-right parties in the government have made comments about LGBT people, Israeli Arabs, secular Jews and “the left” that signal plans for illiberal policies.    
Alternative Scenarios:

Scenario 1: The government compromises on reform plans  

The government compromises on some provisions of the judicial reform program. It could take the form of increasing the Knesset majority required to override High Court decisions from the very narrow 61 votes in the 120-member legislature and by agreeing not to allow the composition of the judicial appointments committee to be too heavily slanted in favor of coalition nominees. This would enable the government to gradually tilt the High Court more to the right while preserving a modicum of judicial independence. On the issue of legislation enabling Deri to rejoin the cabinet as a minister, Netanyahu has little room to compromise without the risk of Shas leaving the coalition. But he will have a difficult time convincing the court that any bill that is passed is not “personal” legislation designed for Deri, which the High Court would likely rule as unconstitutional.   

Scenario 2: The Knesset adopts reforms as proposed   

Knowing it has enough Knesset votes, the government legislates the entire package as originally proposed or with cosmetic changes. The immediate practical impact would be small, because the reforms would take time to manifest themselves, but Israel's democratic image would be harmed, especially if it also pursues controversial policies in the West Bank and at home favoring the ultra-Orthodox minority and discriminating against LGBT and Arab Israelis. Although the most hard-line members of his coalition, including Justice Minister Yariv Levin, have said they see little or no room for compromise, it is unlikely Netanyahu is prepared to pay such a heavy price to enact the legal reforms. His highest priority is to find a way to have the criminal indictment against him dropped, which would entail measures, like weakening the power of the attorney- general, which are not contained in the reform package.   

Scenario 3: The Government abandons reform measures  

The government abandons the legal reform plan, at least for now. Doing so would mark an embarrassing policy failure early in the term of the government but not necessarily a fatal one. The coalition partners have higher priorities, including tightening Israel’s grip on the West Bank and measures favoring the ultra-Orthodox population. As long as the coalition can continue to smooth over differences among themselves, these priorities should keep it intact. Netanyahu himself is not believed to give the legal reforms a high priority. That said, there are other measures, such as weakening the powers of the attorney- general by splitting the role into two, that Netanyahu will undoubtedly want to pursue    

Conclusion - Most Likely Scenario:

The government is likely to back down on some reform provisions, less due to the demonstrations against them than to the unexpectedly strong opposition from the legal, academic and especially business communities and Washington. Unlike most of his coalition partners, Netanyahu cares about Israel’s international standing, maintaining good relations with the US and ensuring a favorable business environment, especially for the high-tech industry. He has taken the trouble to meet with business leaders and downplay the risk of economic damage from the reforms. While the prime minister would like to bring an end to his criminal trial, the reforms would not have had a direct bearing on that. The court ruling against Deri will remain in force with or without the reforms. If Netanyahu wants to bring him back to the cabinet, he will have to find an alternative route. As regards Palestinian/settlement issues, Netanyahu will have a hard time keeping his far-right partners in line, thus risking resurgent violence in the West Bank and harm to Israel’s international standing.   

Contributor Background:

David Rosenberg has more than 30 years experience reporting, commenting and speaking on business, economics and politics in Israel and the Middle East. He has worked for Reuters, The Jerusalem Post and Dow Jones, and was bureau chief for Israel for Bloomberg News. He is the author of two books (Cloning Silicon Valley, 2001, and Israel’s Technology Economy, 2018) and has been published in The Wall Street Journal and Foreign Policy. He now writes commentary for the Haaretz daily. 

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