In Paris and Berlin the lights in finance ministry buildings burn late into the
night, as officials in the euro zone’s core economies strain to contend with a
financial crisis that has lasted far longer than expected and threatens to drag
the region and perhaps the world into a major recession.
The euro crisis
is being watched very carefully by Israeli government officials and business
The latest round of bailout money to Spain, to the tune of €100
billion, barely managed to halt upward pressure on Spanish bond yields. It is
still unclear how the Greek election results will affect expected negotiations
between the Greek government and the European Union on renegotiating, yet again,
Greek debt repayment schedules.
Israel managed to withstand the world
economic crisis centered on the United States 2008 debt crisis to an extent that
surprised many. Positive GDP growth in Israel was regained as early as 2009,
unemployment dropped to historically low levels and the country maintained a
sterling credit rating while giants like France saw their ratings
Given this record of resilience in the face of international
crisis, can Israelis rest confident that they can weather the worst of any
financial storm emanating from Europe? Many Israeli analysts, noting that Europe
is the number one market for the country’s heavily export-oriented economy, fear
that a second consecutive smooth glide through troubled economic waters is too
much to expect.
Stanley Fischer, the governor of the Bank of Israel, is
very careful to avoid giving away details of any preparations by the bank to
contend with a significant European financial crisis, but he has gone on record
as stating that it is definitely a concern that he cannot ignore.
European banks crash, that will affect us too,” Fischer told the Knesset Finance
Committee earlier this year. Conservative Bank of Israel decisions on interest
rate levels and other factors seem to suggest that the mood among decision
makers is far from optimistic.
“Even under a positive future scenario,
Europe is headed towards recession as a result of austerity policies adopted
throughout Europe, including France and Germany. Growth will continue to
be weak,” Ori Greenfeld, head of the macro-economic department at Psagot
Investment House in Tel Aviv, tells The Jerusalem Report.
reports that a slowdown in Israel’s economy is already being registered,
especially in the export sector, as economic sluggishness in Europe and
uncertainty regarding the future of the euro hampers demand. “We are a small and
open economy, dependent on export markets. We are dependent on the European
economy,” says Greenfeld. “If the world sneezes, we will get wet. And that is
under a positive scenario.”
Ezra Gardner, co-founder and managing partner
at Omnium Capital Management, an Israel-based hedge fund, confirms that weakened
demand in Europe will undoubtedly have negative consequences for
“There is no question that Europe’s issues are affecting Israel –
indeed, they have been for over a year now,” says Gardner. “I spoke to an
Israeli software CFO yesterday and they are showing weakness in their business
because upwards of 40 percent of their clients are in Europe.” He says similar
patterns are likely across the high-tech sector.
Highly-placed sources in
major capitals in Europe stress to The Report that there is no reason to panic.
From the perspective of the forest rather than the details of the trees, they
say the euro will survive because too much is riding on its continued existence.
At the same time, a weariness can be discerned in their voices. In more candid
moments, the never-ending Greek tragedy emerges in particular as a source of
frustration. In official statements, all the European countries say they do not
want to see any euro country leave the currency; in private, there is a hint
that at this point if the Greeks on their own accord insist on leaving, no one
will make too great an effort to force them to remain.
“Frustration over Greek policy responses over the past two years has led quite a
number of people who started with good will a few years ago to become completely
frustrated and say, let them do whatever they want,” says a senior academic
economist in Germany, who has served as a consultant to the German government.
“The question is whether that frustration survives television pictures of things
turning really badly inside the country.”
Could Greece realistically go
back to the drachma as its currency? The German economist tells The Report that
in his opinion it is too late for that. “Suppose that the Greek parliament at 11
p.m. one day passes a law stating that as of one minute after midnight, all
euro-denominated contracts under Greek jurisdiction are held to be concluded in
drachmas,” he says. “And suppose this law was passed without anyone leaking the
information beforehand. Then they could have done it.”
scenario, he says, is now impossible. By switching back from the euro to the
drachma, Greece would find it even more difficult to pay off its renegotiated
What makes the euro crisis so complicated is that it is not
one crisis but three interlocking crises that are difficult to disentangle: the
Greek foreign debt problem, the crisis in countries such as Ireland, Portugal
and Spain, where states are on the hook for covering bank debts, and a potential
crisis in Germany and France, whose banks are exposed to a staggering amount of
foreign debt that would need to be written off under the worst-case scenario.
These complications put France and Germany in the unenviable position of needing
to choose between two unpalatable options: the financial burden of bailing out
ailing peripheral euro-zone countries will mostly fall on them, but if they
refuse to do that they may end up paying even more if their banking systems
collapse as a result.
In addition, there is the burden of recent European
history. “For everything one might say about Greece, one can find a parallel in
the Weimar republic,” says the German economist, furrowing his brow. “I grew up
with the notion that the Weimar economy was completely stifled by reparations
payments. ‘All these foreigners wanting money.’ The fact is that prior to 1930,
in every single year capital imports, mostly from the United States, exceeded
reparation payments.In foreign currency considerations, Germany was
borrowing what it needed to pay. But domestic policy discussion in the Weimar
republic was dominated by an aversion to paying the tribute for the Treaty of
Viewed from Israel, the biggest fear is that paralysis in
Europe will lead to a financial contagion that take down Spain and Italy, which
together comprise one-third of the euro zone.
”If debt-repayment issues
in those countries get out of control, they can threaten a collapse of the
banking system, just as in the United States in 2008,” says Greenfeld, admitting
that this possibility makes him very uncomfortable. “The large European banks,
like Paribas for example, are not only European banks, they are global banks. If
they go down, they can drag down the entire global financial system, causing a
global economic crisis.
Refusing to rescue
“In 2008, the United States
poured money into the financial system to save it. But European governments
today do not have the resources that the United States had in 2008. The European
Central Bank (ECB) so far has not been willing to undertake a rescue role,
refusing to save European governments. But it may find itself having no
choice if and when a real crisis emerges. The likeliest scenario is one in which
the ECB will have to pour euros into the system, because it has no alternative,”
What can Israel do to protect its economy in case a serious
euro-zone crisis drags down most of the world? Greenfeld points out that Israel
is one of very few developed countries that has not suffered a bursting property
bubble in recent years.
“There was no credit bubble here. Banks were very
conservative and did not give out worthless loans and mortgages,” says
Greenfeld. “The Bank of Israel is very aware of the situation, and is taking
steps to protect the Israeli economy in case a European crisis occurs. One
explanation for the reason that the central bank is keeping interest rates at
around 2 percent is to give it room to effect a sharp reduction in interest
rates in the future, if a need arises.”
Greenfeld regards Israeli
government debt and deficit burdens as too heavy at the moment to enable a
significant fiscal policy response to a major crisis. “That has been the
situation for many years, so it is not really anything new,” he adds.
markets in Israel have also been taking steps to protect themselves. “Investment
portfolio managers are investing more in the United States to avoid exposure to
the euro zone,” says Greenfeld. “If they must invest in Europe they are placing
money in France, Germany and Scandinavia, avoiding other countries. Another
response we have seen to the European situation is an increase in relative
Israeli exports to emerging markets in Asia and South America, to avoid
overreliance on the European market. It will be interesting to see if that trend
Joseph Zeira, a professor specializing in macroeconomics at
the Hebrew University, tells The Report that a crisis can affect Israel in
several ways. Overexposure by Israeli banks to European assets could trigger
financial contagion; overinvestment by Israeli tycoons in Europe could weaken
their position; a reduction in European demand for Israeli exports might be
offset by a change in fiscal policy from the Bank of Israel.
Zeira was a
prominent economic adviser to the 2011 social justice protest
He regards the potential danger of the effects of a painful
euro crisis as yet another argument in favor of greater income
“In the long run, the best protection is a more equal
distribution of income,” he says, “because it increases aggregate demand and
serves as a cushion to reductions in global demand.