Analysis: Israel’s lesson to Greece

Middle Israel: By coincidence, the Greek default fell on the anniversary of the 1985 economic plan that saved Israel from a similar fate; what did Shimon Peres do right that the Greeks did wrong?

By AMOTZ ASA-EL
Updated: JULY 5, 2015 19:56
How will the Greek economy affect Israel?
Ancient Israel might never have lost its land had it not split into rival kingdoms.
That failure to unite would have been less intriguing but for what happened the century after biblical Jerusalem’s downfall – in Greece.
Watching a thousand enemy vessels cruise toward their shores in what still looms as the biggest Asian invasion of Europe, the ordinarily atomized Greeks joined hands. Led by their chief antagonists, Sparta and Athens, the vastly outnumbered Greeks confronted their Persian invaders at sea and on land, and though they suffered many setbacks, including the enemy’s torching of Athens, they ultimately won.
Ironically, this precedent is the opposite of current Greece’s response to crisis, while ancient Israel’s is the opposite of modern Israel’s deeds 30 years ago this week.
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No, military invasions were not at stake, but there was – and in Greece’s case, there very much still is – the prospect of economic demise. Though the economics at play were very different, both crises were about evaporating currency reserves and unending political paralysis, all of which brought the Jewish state to the brink of the same kind of bankruptcy where Greece this week effectively arrived.
It was there, in the political sphere, that Israel did what the Greeks had better emulate, if they are to salvage their dignity and hope.
Israel’s economic crisis was in many ways the Greek situation’s inversion. Whereas Greece’s problem is that by joining the euro it lost the ability to print money, Israel’s problem was that its politicians had license to print as much money as they wished.
That is why Greece has a depression whereas Israel had hyperinflation.
The lack of monetary sovereignty is the backdrop against which Greece’s GDP sank 25 percent and unemployment soared to 25% while debt skyrocketed to more than a quarter-of-a-trillion dollars. Had Athens been in control of its currency, it could have devalued it, printed it or lowered interest rates and thus incentivized exporters.
In Israel’s case, the politicians’ ability to print money made them use that tool so habitually that the economy became swamped with cash, which in turn made wholesalers and stores incessantly raise prices, so much so that 30 years ago this week inflation reached 415%.
Israel’s crisis was different in other ways. Tax evasion in Israel was not as severe as it was in Greece; employment throughout was high; growth, while stagnant, was not negative; and Israel never failed to return a loan.
Moreover, whereas Israel’s crisis was largely a result of its wars, Greece’s is a result of its peace, the millennial euphoria that made several rich countries generously share their currency with a poorer sibling that could not afford it.
The result was a Greek failure to meet that exclusive club’s economic standards, followed by unbridled borrowing of easily accessible credit, corrupt spending, forging of economic data, and a loss of the ability to repay old loans by taking new loans.
Hence the debt crisis that made creditors impose the austerity measures that now make Greeks feel colonized as they vote Sunday whether to accept more decrees in turn for some more financial oxygen.
The Greeks, in short, went to bed with a rich woman and woke up staring at a loan shark.
Israel’s crisis, by contrast, stemmed not from too much love but from too much war, as the bouts of 1973 and 1982 spiked defense spending exorbitantly.
Yes, like Greece, Israel by 1985 had accrued debt that was worth more than twice its entire economy, and Israel of 1985 was heavily dominated by the public sector which comprised some three-quarters of the economy. Yet there was no equivalent here of the quarter-trillion-euro in bailout packages the European Union poured on Greece.
The economic analogy, then, is at best flawed, except for its most important aspect: politics.
The special session for which prime minister Shimon Peres gathered the cabinet Monday morning, June 30, 1985, started at 9:30 a.m. and ended 9 a.m. Tuesday morning, July 1.
Wiping their eyes and fighting their yawns, ministers demanded that the meeting adjourn, but Peres would not budge.
“Either this meeting ends with decisions or it will end us,” he said tersely, as the protocol declassified this week reveals.
“This is the best time for decisions,” he asserted, “I have been awaiting it for a long time.”
And decide they did.
Having secretly assigned a team of Israeli and American economists with devising a comprehensive reform plan, Peres imposed on his cabinet what would later be celebrated as one of the most brilliant economic leaderships politicians ever displayed.
When the meeting was over, it turned out that the Bank of Israel would be forbidden by law to print money in order to finance the government’s deficits; that interest rates would be set independently by the Bank of Israel; that subsidies for food and public transport had been mostly abolished; that the government was cutting its spending by 5%; that it devalued the (old) shekel by 18.8%; that public- sector hiring was being frozen; that salary indexation deals with the unions were being canceled, effectively cutting most Israelis’ wages; that a slew of import duties were being slashed; and that consumer prices were being frozen for six months by special emergency decree.
The suddenly empowered Bank of Israel hiked interest rates, vendors stopped raising prices, the public ended its buying sprees, and the shekel, no longer printed at will, assumed value.
Inflation soon fell to 20% and, half-a-year on, three zeros were slashed from the shekel, as it was replaced by the new shekel.
The plan was not panacea. Unemployment began rising; GDP would take several more years to start rising; Israel’s largest employer, the Koor holding company, was going bankrupt and would later be sold while firing thousands; the Lavie fighter project would be canceled; and inflation would not be fully subdued until Jacob Frenkel’s tenure as Bank of Israel governor the following decade.
Even so, catastrophe had been averted.
What began in 1985 was but the beginning of a long departure from the Israeli founding fathers’ socialist legacy, a journey later highlighted by Yitzhak Rabin’s healthcare reform in 1994, which ended the Histadrut’s strangling of that industry, and then by Benjamin Netanyahu’s reforms in 2003, which cut taxes and social spending, raised the pension age, detached the longterm savings industry from the banks and the unions, decoupled the seaports, and sold a record number of state companies.
Yet none of that would have happened but for the events of summer ‘85, and they in turn would not have happened had Israel’s politicians not responded to what they faced the way the ancient Greeks responded when they saw an enemy fleet blanket their sea.
Peres would not have devised or passed his plan without the cooperation he mustered those days with his finance minister, the Likud’s Yitzhak Moda’i. Together, the two men cleared the main political obstacles their plan faced: Peres, as leader of Labor, imposed himself on the unions, while Moda’i delivered Likud’s populists, led by then-housing minister David Levy.
Moda’i, a wealthy cosmetics manufacturer, was never friends with Peres, who in fact later fired Moda’i, nor was Peres friends with Shamir, who later fired Peres. But at the crux, when staring into the economic abyss, they all did what the ancient Greeks did when they stared at the enemy’s approaching ships: they fought together. Israel’s politicians understood their crisis was so severe they had to set aside their differences, rivalries, and mutual revulsions or they would have no state to lead.
And that is what the modern Greeks have not done.
HAVING INITIALLY befallen a socialist government, the Greek crisis was, in the fall of 2011, in the lap of a professional economist, former Bank of Greece governor Lucas Papademos, who indeed imposed a unity government on the politicians and austerity measures on the public.
However, half-a-year on, the helm was back in the politicians’ hands. And the politicians would not unite, even while the people were aching under the yoke of mass unemployment, dwindling income, daily business closures, rampant bankruptcies, accelerating emigration, and a pervasive sense of national humiliation and social despair. Thus, the conservatives, who succeeded the socialists, were later succeeded by the populists, who are now leading an exhausted, divided, and hopeless Greece into the unknown.
It all would have been different had this decade’s Greek politicians, when looking out the window, seen the enemies that Israel’s leaders saw when they looked around their country in 1985, and that the Spartan generals and Athenian admirals saw when they stared into the Aegean Sea. But alas, when Greece’s leaders looked out the window, they saw no enemy. Instead, they saw their European partners, and were convinced they were seeing friends.
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