Athens and Jerusalem

Israel is not poised for a Greek-style debt crisis, but the spiraling situation in Europe will affect our economic growth, which is is led by exports. And guess which continent is our biggest trading partner?

By DAVID ROSENBERG
Trader watches the stocks 311 (photo credit: AP)
Trader watches the stocks 311
(photo credit: AP)
A specter is haunting Europe, the specter of Greece’s debt woes spreading across sunny Mediterranean shores to Italy and Spain, then moving up the Atlantic coast to Portugal and Britain, and then – perhaps scariest of all – crossing the ocean to America. Should Israelis be spooked, too?
The last financial panic that morphed into a global recession left this country barely scathed. It suffered just two quarters of negative economic growth and none of its banks came close to collapse, which is an encouraging precedent if Greece ends up setting off a second round of recession.
Then, we have reassuring words from Bank of Israel Governor Stanley Fischer: “Our situation is a lot better than most countries. I don’t foresee our having problems,” he said last week. Finance Minister Yuval Steinitz has been similarly sanguine. “We got through the first wave well,” he said from Shanghai, where Europe’s problems must seem pretty distant. “If there’s another wave, we’ll know how to handle it.”
On the other hand, the financial markets plummeted even after the joint European Union/International Monetary Fund package for Greece was unveiled last week. The Tel Aviv Stock Exchange’s main index has dropped close to 10 percent in the last month.
There are good reasons not to pay too much attention to policy makers or the markets. Central bank governors and finance ministers are supposed to radiate serenity under the most trying conditions; there is enough panic and they don’t want to make it worse by expressing doubt. And, in case you haven’t noticed in the last two years, the financial markets aren’t particularly prophetic. Adam Smith’s “invisible hand,” the one that is supposed to guide the mass of individual investors into collectively making the right decisions, is more like a hoof among a herd of panicked sheep. No one knows what is really going on, so the typical investor employs a strategy consisting of doing what everyone else does.
SO, WHAT works in favor of the Israeli economy’s survivability in case the lights do go out in Europe? Here is where the Athens-Jerusalem comparison comes in, albeit by switching the traditional worldview they symbolize.
Running up debt isn’t always a bad thing. When times are good, it’s a lever for boosting growth, demanding neither excessive talent nor creativity on the part of the borrower to invest it profitably and pay it back. When things turn sour, however, those debt heroes quickly become debt goats (think Lev Leviev of Africa Israel Investments).
Greece has experienced this trajectory, using debt to boost growth during the years of a booming world economy and getting into trouble when the big U-turn came. Here is a snapshot of its main features, as projected by the EU for this year: Debt/GDP: 124.9%, Deficit/GDP: 9.3%, GDP Growth: -3.0%.
The first figure refers to how much Greece owes versus how much the economy will produce this year; the second to how much the government will overspend, thereby contributing to a worsening debt/GDP scenario; and the third to how much the economy will grow, thereby enabling the economy in effect to grow out of its debt burden. Greece is in the financial equivalent of quicksand – and these forecasts predate the added blow of the rescue plan on growth. Its debt is so huge relative to its economy that it would have to run enormous budget deficits to cover repayments, pushing it deeper into debt. But by cutting other government spending to contain the deficit and debt, it will undermine economic growth, reducing its tax income and making it even more difficult to tackle its fiscal problems.
To put the Greek disaster into perspective, compare it to the average forecast for other EU economies: Debt/GDP: 84.7%, Deficit/GDP: 6.6%, GDP Growth: +1.2%.
And now, compare it to a pretty well-run economy: Debt/GDP: 79.4%, Deficit/GDP: 5.1%, GDP Growth: +3.7%. Surprisingly, this is Israel, which faces little risk of drowning in a Greek-style quicksand of debt and recession.
IN THE good years before the global recession, Israel actually reduced its debt and enjoyed strong economic growth based on exports of hi-tech and chemicals. Others enjoyed good rates of growth, too, but it was often fueled by increased debt and used to build unneeded homes (the US) or pay raises for civil servants (Greece). This is what put Israel in good economic graces in 2008 as the world went into recession and should serve it well again. Jerusalem symbolizes economic reason and probity; Athens – faith that somehow we’ll defy history and figure out a way to pay this back.
Good behavior like ours, however, isn’t always rewarded in a bad world. While no country in Europe is in as bad a state as Greece, the hysteria is sufficient today to push economies that shouldn’t necessarily be punished into a recession. Here’s a snapshot of the biggest problem economies in the EU: Debt/GDP: Spain – 64.9%, Italy – 118.2%, Britain – 79.1%; Deficit/GDP: 9.8%, -0.4%, 5.3%, respectively; GDP Growth: +0.8%, 12.0%, +1.2%, respectively.
Compared to Greece, these numbers aren’t horrendous, but in times likethese, they make an economy vulnerable to a debt crisis. Worse still,European countries, like the US, have already expended huge amountsbailing out banks and stimulating their economies to mitigate therecession. A second recession, or a double-dip, will find Europe (andthe US, if it comes to that) with far fewer resources with which tofight back.
Europe’s troubles are Israel’s troubles. The country’s economicresurgence this year and next is supposed to be led by exports, butEurope is our biggest overseas market. If Europe slides into recession,our exports won’t grow – and they may even decline. In the last halfyear, the euro has lost about 15% of its value against the shekel,which raises the prices of  exports to Europe and lowers those ofEuropean imports, striking a double blow to the economy.
French champagne may be cheaper, but there won’t be much to celebrate with it.

The writer is a financial commentator.