|US Capitol building in Washington DC 390.(Photo by: Kevin Lamarque / Reuters)|
Analysis: Washington’s financial troubles and J'lem
If US fiscal cliff deal were to fall, Israel's economy would feel ripple effects both directly, indirectly.
Brinksmanship has a new name, and it is Congress.
Over New Year’s, the US
legislative body not only teetered along the edge of the “fiscal cliff,” it
actually stumbled over it, sliding down to a less dangerous lower tier. Instead
of putting its financial house in order to avert a series of devastating
automatic tax increases and budget cuts, the Senate managed only to pass an
agreement on taxes and several smaller issues, kicking the can on government
spending down the road by two months, and creating a miniature fiscal cliff in
As of press time, the House of Representatives had not yet decided
whether to pass even the compromise bill or balk, which could throw America the
whole way over the cliff and back into a recession, dragging much of the world
along with it.
Like many countries watching from the sidelines and
praying that the world’s largest economy does not self-immolate, Israel has much
at stake – both economically and security-wise – but little influence on the
The scenarios, from worst to best, are: 1) The Senate’s
tentative deal to avert the cliff fumbles in the House and no deal is passed; 2)
The deal passes the House, but no agreement is made in time for the newly
created mini-cliff; or 3) A full-on deal gets squared away to responsibly reduce
US spending by March.
If, for some reason, the House manages to fell the
deal brokered between Vice President Joe Biden and Senate Minority Leader Mitch McConnell, which passed in
the Senate by a margin of 89-8 at 2 a.m. on New Year’s Day, chaos would ensue.
Stock markets around the world would plunge, not just because the lethal
combination of tax increases and spending cuts would pull the rug out from under
America’s recovery, but also because the US would have proven that politics
trumps effective governance.
Israel’s economy, which maintained a healthy
growth rate of 3.3 percent in 2012, would feel the ripple effects both directly
A shrinking American economy would mean less Israeli
trade with one of its two major trading partners.
The other, the European
Union, would also be hit hard by recession in the US. The Jewish state may not
be as resilient to such a shock as it was to the 2008 financial
More directly, without a deal, the automatic spending cuts the
White House outlined to “sequester” the budget would axe between 9.4% and 10% of
non-exempt defense funding, some $55 billion for the next year alone. The Office
of Management and Budget called the potential cuts “deeply destructive to
national security, domestic investments and core government
Fortunately for Israel, monies already committed for projects
like the Iron Dome are unlikely to be affected.
“Long-term projects which
are already committed are difficult to affect. What can be hurt are the more
flexible things like off-shore procurement and investment in Israel,” says Oded
Eran, a senior researcher at Tel Aviv University’s Institute for National
But as long as those defense cuts are in effect, Eran
says, new defense contracts will be much harder to come by, robbing Israel of
one of its major exports.
Should Congress pull itself together and avert
the current fiscal cliff, the same defense sequestration will still lurk behind
the new mini-cliff on March 1, though passing that threshold would not induce
the same deep recession promised by the current cliff.
scenario, Eran says, there is a third way in which American fiscal folly could
“The glue that holds together the peace between Israel and
Egypt is green – the color of the dollar,” he says.
Should the US be
forced to cut back its spending, it could spend less cash incentivizing Israel’s
neighbors to stay on good terms with the Jewish state.