Fischer anxious about high gov’t spending

Bank of Israel governor tells ‘Financial Times’ he is monitoring budget commitments for future years.

June 26, 2011 23:19
Bank of Israel Governor Stanley Fischer

Stanley Fischer speech at BGU 311. (photo credit: Dani Machlis/BGU)

“We follow with keen concern and attention the government’s budget spending,” Bank of Israel Governor Stanley Fischer told the Financial Times in an interview Friday.

“So far we are doing well, but they are making commitments for future years that depend on fairly high rates of growth. At 4.5 percent growth, we have not made any excess commitments; at 3% growth we have. We will just have to monitor that.”

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He also cited high levels of poverty among haredim and Israeli Arabs, declining achievements in education and the geopolitical situation as risks to long-term growth.

Fischer attributed Israel’s robust economic growth to several factors.

“There were times when people were nervous about the banks, but no bank got into serious trouble,” he said. “All the banks survived. The financial system remained essentially intact. That meant that when we pressed on the monetary accelerator by cutting interest rates very sharply, domestic demand was able to respond because the banks were in a position to lend. We are dealing with some of the consequences – house prices rose very rapidly in part as a result of that.

“Another important factor was that our export sector continued to perform very well.

And we were fortunate to be in a sufficiently strong position that our fiscal policy did not have to become ‘exaggerated’ in order for the economy to return to growth very rapidly.”

“We were in a remarkably good situation before the crisis, in part because we had a very severe crisis in 2001 to 2003,” Fischer added. “The [Ariel] Sharon government in 2003, with the current prime minister, Binyamin Netanyahu, as finance minister, implemented a very tough fiscal adjustment program and made a series of other structural changes that kept improving the macroeconomic situation.

“Fortunately, this put us in a very strong position by the time this crisis hit. We had a balanced budget essentially by 2007.”

He cited Israel’s high inflation and a too-rapid rise in housing prices as two major risks.

“We are not extremely comfortable with the significant appreciation of the shekel,” he said.

Fischer said active measures would be needed to bring inflation back down to within the 1%-3% target range.

Regarding housing, monetary policy and supervisory measures have been taken on the demand side, he said, adding: “The real answer to our current situation in the housing sector is an increase in supply.

Housing prices are continuing to rise, but there is a sense that the situation is starting to get under control.”

Commenting on the disqualification of his candidacy to head the International Monetary Fund because of his age, Fischer said: “I do think the age requirement is not sensible and should be lifted, and that candidates should be examined on their merits and not on the basis of some technical and irrelevant issue.”

He said he had been given no assurance when announcing his candidacy that the age limit would be lifted, adding: “I had assumed, and I had hoped, that the board would not use that issue, given that its obligation is to find the best candidate.

But evidently they felt comfortable nonetheless using that issue.”

He said the decision on the next IMF director general likely would be made this week.

Commenting on Greece’s debt crisis and its possible effects on the euro zone, Fischer said remarks by analysts that it would be very hard for Greece to avoid default were meaningless because such remarks are made all the time.

He cited similar debt crises in the Baltic countries as an example.

“It really is a matter of what the country is willing to do and how it analyses the consequences for itself,” he said.

“These things are extremely difficult to tell without appraising the political possibilities.”

Fischer said the previous Greek bailout had been appropriate, but the question that needed to be asked now is whether that continues to be the case. Europe and the IMF and the global economy must confront this issue, he said.

Asked if there was a risk of contagion, both inside the euro zone and beyond, Fischer said: “Those things are very hard to predict. There is always a risk of contagion. In advance of any strategy that may be taken, you have to ask yourself: What are the risks of contagion? You may not forecast it correctly, but you have to analyze it.

There is a very large degree of uncertainty in those decisions because a lot depends on how measures are implemented.”

Explaining a previous remark about risk to the foundation stones of the modern economy, he said: “There are two major currencies in the world at the moment, and one of them is the euro. The decisions that will be taken now are going to be very important for determining what the euro will look like in the future. There will be a euro in the future, but whether the area keeps expanding is, for example, one of the issues for which current decisions are going to be very important.”

Fischer compared the argument that it might be better for some countries to abandon the euro with the argument about bank failures in the US.

“This reminds me of the argument that said: ‘Wouldn’t it have been good for the American financial system to have a bank fail?’” he said. “On some theoretical, abstract level it would be indeed have been good to remind people that banks can fail. And it would indeed have been important for the bankers to realize that they wouldn’t always be saved.

But Lehman Brothers did make one heck of a mess.

“The other point I make is that we now tend to glorify the past. The euro is a political construction, but it is a construction that arose not only for political reasons but also to solve an economic problem that Europe had with its different currencies. There were continuing tensions within the European common market as a result of different rates of devaluation, different monetary policies and different rates of inflation. It wasn’t the case that whatever they had before worked well.”

Fischer said the euro was a success.

“I think, despite the problems in peripheral countries, the creation of the euro is overall a remarkable success,” he said. “And I believe that no matter what happens, the euro will continue as a major international currency and that some of the most important economies in the world will continue to use the euro.”

Asked about his personal future and reports about a job at the World Bank, Fischer replied that he would be interested, if asked.

“My stock answer to your stock question is never accept an offer that you haven’t been given,” he said, adding, “I am very happy in my current job.”

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