Fischer: Peace is vital for Israel's economic health

Bank of Israel Governor Stanley Fischer on Wednesday said that peace was important to Israel’s long-run economic health.

“In the long-run this economy will have to make peace with its neighbors, when everyone is ready for that, which I hope will be sooner rather than later,” he said at the Hertzliya Conference.

“To say there’s no partner is incorrect; it takes two to tango,” he said later in Hebrew, prodding Israel's political leadership to start “tangoing.” Among the reasons peace is important: “I don’t think the defense budget can continue to grow at the rate it has in recent years. We’ll have to find a different way to deal with that problem.”

Peace was one item on a laundry list of long-term issues Israel would need to address. The country’s poverty problem, concentrated in the haredi and Arab sectors, is unsustainable, nor is the 4.2% growth rate among non-working populations, which will double their ranks in 17 years. Education, both high school and university-level, need attention, he said.

But all was not gloom and doom. All in all, Fischer said, the Israeli economy was both strong and resilient. “The short run situation of the Israeli economy is very good except in one respect.” With unemployment at a 30 year low, a fairly even Balance of Payments account, inflation below 2%, banks still in good shape, a marginal decline in poverty and increasing labor force participation, the economy has much to be proud of.

“What is not good is what happened to the budget,” he said. “If we don’t get the budget straight now, the government will be fighting with the budget every year.”

The political challenge of the budget, which he pointed out will remain larger than the 2012 budget even after the necessary cuts are made, is avoiding populism, which he defined as satisfying short-term demands at the expense of long-term interests.

One of the underlying themes Fischer returned to repeatedly in his two speeches at the conference was the importance of being prepared for the unexpected. The concept, easily understandable in a defense context, is equally applicable for the economy, he said.

“There is a big shock that could be coming,” he said. Israel’s economy proved its resilience through a remarkable series of shocks, from political instability to wars to financial crises. In order to deal with the coming crises, Israel needed foreign reserves, budgetary reserves, conservative banks and, most of all, a skilled labor force that can adapt easily.

Fischer gave no hints as to whether the Bank of Israel would lower its interest rates this month to battle the strengthening shekel, which have affected the export market. He noted that most major economies had interest rates between zero and one percent, and predicted that would remain the case until signs of inflation or growth began to peek through.

Europe, he said, would return to moderate growth by the end of the year, while the United States was gearing up for a more robust recovery. Yet he didn’t expect world interest rates to rise until 2015.