'Europe crisis likely to harm Israel’s competitiveness'

Euro depreciation, European wage cuts could hurt exports, Steinitz says.

By SHARON WROBEL
June 18, 2010 07:05
3 minute read.
Finance Minister Yuval Steinitz.

steinitz 311. (photo credit: Ariel Jerozolimski)

 
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Finance Minister Yuval Steinitz warned on Thursday that a depreciation of the euro and planned wage cuts in major European countries could make local goods less competitive and workers in Israel more expensive.

“It is quite clear that the crisis in Europe and the devaluation of the euro will have an impact on the Israeli economy in general and more specifically harm exports as a result of lower global demand for local goods,” said Steinitz at the 18th Caesarea Economic Policy Planning Forum 2010, organized by the Israel Democracy Institute in Nazareth on Thursday.

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“In addition,” he said, “in countries in the south and west of Europe, such as Ireland, France, Spain, or Portugal, wages in the public sector are set to be cut in the near future, which can be expected to affect salaries in the private sector. These two parallel developments are creating a problem for Israel’s competitive power versus Europe and the rest of the world.”

Steinitz emphasized that, in light of these two developments, within a short period of time European employees could become 15 to 30 percent cheaper or Israeli workers more expensive than just a year or two ago.

“Our competitive power will shrink, which will harm the Israeli economy and its citizens,” said Steinitz. “We have to be cautious to maintain a certain discipline in the future in order to preserve achievements and uphold the relationship between employers and employees.”

Speaking about the current state of the economy, Steinitz said that although Israel has weathered the global economic crisis much better than other countries, the heightened uncertainty in Europe presents a warning signal to be cautiously optimistic.

“The strategy of a two-year budget, which we adopted is vital even in good times,” said Steinitz. “It will give us an edge over other countries who are only starting to understand the importance of this concept.”

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Speaking at the economic forum on Wednesday, Bank of Israel Governor Prof. Stanley Fischer said that updated figures of economic growth in the first quarter were significantly better than initial figures. Revised figures published by the Central Bureau of Statistics showed that GDP in the first three months of the year grew at an annual rate of 3.6% and exports by 7.3%.

“Encouraging growth figures were reported in Asia, the US, and even Japan. Currently there is uncertainty created mainly by the situation in Europe,” said Fischer. “At present the forecasts of the international institutions do not indicate that the crisis will have a serious impact on Europe’s real economy. This refers mainly to the stronger economies, and less to countries such as Greece.”

Fischer added that the effect on other economies, however, including Israel’s, will be negative, because the depreciation in Europe is expected to reduce their export surpluses to European markets.

“It is important to note that countries which encountered the crisis in a relatively sound fiscal situation, with a low deficit and debt-to-GDP ratio, could allow themselves to undertake fiscal expansion during the crisis without creating a debt crisis,” said Fischer. “That is why it is so important for Israel to continue reducing its debt-to-GDP ratio, so that fiscal policy can support the economy should the need arise if there is another crisis in the future.”

In support of Fischer’s recommendation, European department chief at the International Monetary Fund, Peter Doyle, on Thursday urged the government to make debt reduction one of its primary goals.

“Although Israel’s public debt has come down to below 80% of GDP, it is still too high and should come down,” said Doyle at the economic forum.

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