Warnings on Israel's economy continue as Netanyahu ignores them - analysis

Ever since the judicial reform was announced, economic experts have warned endlessly that it will have negative impacts on Israel's economy.

 PRIME MINISTER Benjamin Netanyahu addresses the Knesset plenum. ‘The executive sits in the legislature and dominates it.’ (photo credit: YONATAN SINDEL/FLASH90)
PRIME MINISTER Benjamin Netanyahu addresses the Knesset plenum. ‘The executive sits in the legislature and dominates it.’
(photo credit: YONATAN SINDEL/FLASH90)

On January 26, two weeks after Justice Minister Yariv Levin first unveiled his judicial reform proposals, Prime Minister Benjamin Netanyahu held a press conference and declared that the proposed reforms would not harm the country’s economy.

There were two striking elements about that press conference.

First, it marked the first time that Netanyahu commented publicly about the hue and cry that followed Levin’s announcement.

After Levin put forth his proposals, tens of thousands of people protested on consecutive Saturday nights, and numerous open letters warning of the consequences of a weakened judicial branch were published from a wide range of groups, including 1,200 IAF veterans, scores of academics, seven former attorneys-general and 100 retired judges.

None of that, however, nor the hyperventilated rhetoric from opposition MKs sounding the alarm of a coming dictatorship moved Netanyahu to respond.

 Prime Minister Benjamin Netanyahu gives a press conference about the judicial reform following warnings from many economic experts. (credit: YONATAN SINDEL/FLASH90) Prime Minister Benjamin Netanyahu gives a press conference about the judicial reform following warnings from many economic experts. (credit: YONATAN SINDEL/FLASH90)

Rather, he called a press conference to address the elephant in the room only after a letter from a couple of hundred economists – including some who Netanyahu holds in high esteem – and an op-ed from two former Bank of Israel governors, as well as a meeting with the current central-bank governor, warned of economic consequences. That made an impression.

The message of the economists was simple: Measures that weaken the judiciary will negatively impact the economy. Not only will it lead to a lowering of Israel’s credit rating, something very important when the government borrows money for massive projects, but it will also scare away potential investors and chase away some of those already here.

The second striking element about the press conference was that while Netanyahu shared the stage with three government ministers, including Finance Minister Bezalel Smotrich, no leading economists were on the dais with him to substantiate his claim that the reforms would not harm the economy and that Israel remained a good investment.

Economic warnings continue as judicial reform continues

Six weeks later, Netanyahu still has not moved to put the brakes on the planned reform, and – as a result – even more warning signs of economic trouble up ahead keep flashing.

On Tuesday, Moody’s Investors Service maintained Israel’s high A1 credit rating, but it added an asterisk, saying that the planned judicial reforms could hurt the country’s economy and attractiveness to investors.

Fitch, another credit assessor, also maintained Israel’s A+ credit rating last week, but with a caveat of its own: “Fitch believes the reform could hurt Israel’s credit profile by weakening governance indicators or if the weakening of institutional checks leads to worse policy outcomes or sustained negative investor sentiment.”

Moody’s on Tuesday said the reform, if implemented in full, “could materially weaken the strength of the judiciary and be credit negative. The planned changes could also pose longer-term risks for Israel’s economic prospects, particularly capital inflows into the important high-tech sector.”

Moody’s also warned there is the risk that if the judicial reform goes through, Israeli companies will choose to locate elsewhere.

As if fulfillment of that prophecy, the CEO of fintech firm Riskified on Wednesday said the company was withdrawing its $500 million in cash reserves from Israel, will expand hiring for its R&D site in Lisbon, will offer some relocation packages for employees who want to work there and also “support individuals who are interested in making the move on their own.”

“The laws being passed can lead to the dismantling of our independent judicial system,” Riskified CEO Eido Gal wrote to his employees. “In high likelihood, this will lead to a meaningful and prolonged economic downturn in Israel.”

The firm’s concern is that as the financial situation in the country deteriorates, the government will limit transfers and withdrawals of large amounts of funds, he added.

According to a KAN News report earlier this week, due to concern over the impact of the reforms, in February, some NIS 8.1 billion was withdrawn from various mutual funds that invest in Israel and instead placed in mutual funds investing abroad.

Another warning of the dangers to the economy as a result of the reforms came from an unexpected source on Wednesday: Michael Sarel, the head of the economic forum at the Kohelet Forum, the think tank that has been credited or blamed – depending on one’s position – for inspiring many of the ideas in the judicial reform package.

Sarel warned in a letter that the reforms would have a deleterious impact on the economy because they would harm the country’s separation of powers and its system of checks and balances. He said there is a need for judicial reform, but the proposed one constitutes overkill.

“The proposed reform will create a situation in which there will be no separation of powers, in that it subordinates the legal system to the will of the coalition,” he wrote. “Through government ministers, the coalition will be able to ignore the advice of the legal advisers and advance policies as it sees fit.”

Regarding the economic implications, he continued: “If the reform paves the way to severe damage to liberal democracy, in the medium term there will also be severe damage to the economy. Furthermore, since investors’ and consumers’ expectations for the future affect the economy in the present, the harm to the economy will precede the harm to democracy.”

At the end of January, criticism from leading economists convinced Netanyahu of the need to address concerns about judicial reform for the first time. Ever since then, the warnings by economists and credit-rating services have continued to pile up.

Netanyahu and the coalition may be able to dismiss as overheated hyperbole the strident rhetoric sure to be heard en masse at Thursday’s “Day of Resistance to Dictatorship.” But consistent warnings by economists and financial institutions that cannot be accused of having a political agenda – as well as money leaving the country and a slumping shekel – may have an accumulative impact on the prime minister’s thinking and compel him to accept the compromise proposals President Isaac Herzog is expected to put forward in the coming days.

Then the question will become different: Can Netanyahu convince his coalition partners – including some members of his own party – to do the same?