The real reason Israel’s economy is slipping toward recession

While recent figures indicate that the Israeli economy is heading toward a recession, are politicians suppressing the connection between the economy and the diplomatic stalemate?

al-monitor A bank employee counts Israeli shekel notes for the camera at a bank branch in Tel Aviv, Aug. 7, 2013. Photo by REUTERS/Nir Elias.

Topics covered

yesh atid, two-state solution, labor party, knesset members, israeli politics, israeli-palestinian conflict, diplomatic process

May 18, 2016

It was the eve of the 2009 election, and the Israeli economy was reeling from a recession. At the time, the newspaper Calcalist asked Labor Party Chairman Ehud Barak how he intended to restore the economy if elected prime minister. Barak spoke of a war against regulations and of raising the deficit, but he also presented another tool not in the standard economic toolkit. He called for “advancing negotiations with the Palestinians and breaking free of the diplomatic stalemate," saying, "We will submit a plan for a comprehensive regional peace with a strong economic footing. That kind of diplomatic plan would make a decisive contribution to promoting investment in the region and boosting the economy.”

For years, the link between diplomatic prospects and the economy was a major motif of the center-left agenda, a connection particularly visible after the signing of the Oslo Accord and the peace treaty with Jordan. When the Israeli market opened to foreign investment, industry flourished and the economy grew accordingly. In contrast to that period, the worrying figures released May 16 by the Central Bureau of Statistics show the country potentially sliding toward a recession. Nevertheless, the political discourse hardly touches on such links.

According to these statistics, growth in the first quarter of 2016 was low — only 0.8% — compared to the two previous quarters at 3.1% and 2.3%, respectively. There has also been a decline in the exportation of goods and services of 12.9%, calculated annually, compared to an increase of 6.3% during the same period of 2014. Economists say that a decline of this magnitude could be the result of a “quiet boycott” of Israeli products.

Still, there were very few voices in the political arena this week prepared to name the diplomatic stalemate as the cause of the current situation.

Take Yesh Atid. The party used the unflattering figures as the basis for a mini campaign around the failed management of the economy by Prime Minister Benjamin Netanyahu’s fourth government, focusing particularly on his plans to institute a two-year budget. Party Chairman Yair Lapid served as finance minister in Netanyahu’s third government and received poor marks from the public for his performance. He had no intention of letting a chance to attack Netanyahu and current Finance Minister Moshe Kahlon slip by.

The chair of the State Control Committee, Knesset member Karin Elharrar, also of Yesh Atid, announced that the committee would convene for an emergency discussion about the Central Bureau of Statistics’ figures and the two-year budget, which she claimed would result in disaster.

In a conversation with Al-Monitor, Knesset member Mickey Levy, also of Yesh Atid and a former deputy finance minister, blamed the government for “continuing to trade in Israel’s economic stability in exchange for political survival.” He went on to warn about the dangers inherent to a two-year budget, which he says has already proven itself to be a devastating failure. As he put it, “The current data about the situation to which the Israeli economy has deteriorated is proof that the unrestrained distribution of public funding without any responsibility whatsoever leads to economic disaster.” He didn’t say a word about the diplomatic stalemate.

Perhaps one would expect as much from Levy. On the other hand, the same was true of the former head of the Shin Bet, Knesset member Yaakov Peri. One of the main reasons he entered political life was to advance the diplomatic process. Nevertheless, he did not mention the diplomatic stalemate as a possible cause of the impending recession. Instead, Peri followed the lead of Elharrar and Levy and attacked the two-year budget.

Yesh Atid's well-orchestrated and organized campaign against the two-year budget was an appropriate move for an opposition party that misses no opportunity to attack the government. On the other hand, Labor was too embroiled in infighting over whether it should join the coalition to even go that far. As a result, it missed an opportunity to attack the economic policies of Netanyahu and Kahlon and put the worldview that links economic growth with the diplomatic process up for discussion. With Labor Chair Isaac Herzog looking for ways to join the government, he can hardly be expected to attack Netanyahu or put the diplomatic process at the top of his agenda.

That being said, when Al-Monitor asked Knesset member Erel Margalit, a successful businessman and technology entrepreneur who plans to run for the Labor leadership, what he thought the reasons for the economic situation were, he responded, “The government lost control of the economy. In the last year alone, 60,000 businesses shut down. For the first time in years not a single industrial factory opened up, while even high tech, the engine powering the Israeli economy, is finding its way to New York, Dublin and Berlin. There is no minister of economic affairs [a portfolio Netanyahu retains]. The finance minister is actually the housing minister [meaning that Kahlon is the one focusing on the housing crisis], and there is no driver to lead the Israeli economy forward. The decision to promote a two-year budget will deliver a death blow to the Israeli economy, blocking any possibility of developing new engines for economic growth.”

It seems that Margalit, like the Knesset members from Yesh Atid, is satisfied with attacking the two-year budget, without even mentioning the diplomatic process.

The only individuals in the opposition camp who pointed to the relationship between the economy and peace were the Knesset members from Meretz. They have not broken right and are not looking for ways to join the government. Knesset member Michal Rozin told Al-Monitor, “It is impossible to separate the diplomatic stalemate from the economic situation and the recession. Instability on the security front does not allow for foreign investment. In the past, when Israel advanced a diplomatic process, Israeli productivity flourished. We have recently seen a 13% decline in exports, which is the obvious result of attitudes toward Israel around the world.''

Knesset member Tamar Zandberg agreed. In a conversation with Al-Monitor, she said, “You don’t need to be an analyst to recognize the enormous economic potential of peace and tranquility. In the past, any sign of a diplomatic solution on the horizon led to unprecedented growth of the economy, while every wave of terrorism resulted in an enormous step backward.”

The sad conclusion is that one of the most prominent components of the center-left’s agenda is currently being eroded by efforts to flirt with the right.

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