Proposed legal reform 'compromise' unlikely to prevent impending economic train wreck - analysis

The government’s actions in the past few months have indicated that no amount of external pressure or warning of Israel’s economic downfall will sway them — but internal protest may have a chance.

 WORKERS FROM the hi-tech sector protest against the proposed changes to the legal system, in Tel Aviv, on Tuesday. (photo credit: TOMER NEUBERG/FLASH90)
WORKERS FROM the hi-tech sector protest against the proposed changes to the legal system, in Tel Aviv, on Tuesday.
(photo credit: TOMER NEUBERG/FLASH90)

A revision to the legal reform was proposed by Professors Yuval Elbashan and Daniel Friedman earlier this week which floated a few ways to soften the judicial overhaul’s revolutionary plan — but experts have suggested that no such compromise is likely to prevent the economic damage predicted by international credit rating agencies, hundreds of economists and dozens of leading Israeli hi-tech executives.

The reason is twofold: any compromise, however meaningful, will be cast aside by Justice Minister Yariv Levin unless it grants the Knesset complete control over Israel’s judicial branch; and any compromise that hands Levin the keys to the kingdom will do nothing to stop the destabilization of Israel’s system of checks and balances.

“They want to nominate the judges, they want to be able to overrule the judges, they want the executive branch to control the judicial branch — and they won’t agree to anything in the middle,” said Tel-Aviv University economist and head of the Shoresh Institution for Socioeconomic Research Professor Dan Ben-David. “What's on the table here isn't a reform of the judicial system. It's basically removing the checks and balances of a democratic government. And there's no halfway to do that.”

Economic consequences of judicial reform

On Tuesday, credit rating agency Moody’s released a report detailing its assessment of Israel’s rating in which it warned of the potential negative consequences of the government’s proposed judicial reforms, stating that, if implemented, “Could materially weaken the strength of the judiciary and as such be credit negative,” and they could furthermore “Pose longer-term risks for Israel's economic prospects, particularly capital inflows into the important high-tech sector.”

Ben-David noted that Moody’s warning highlights the absurdity of the government’s clear lack of regard for the future of Israel’s economy.

 The 'Agreement Tent' set up by Israelis encouraging for negotiations on the judicial reform. (credit: EIN PRAT ACADEMY FOR LEADERSHIP) The 'Agreement Tent' set up by Israelis encouraging for negotiations on the judicial reform. (credit: EIN PRAT ACADEMY FOR LEADERSHIP)

“Government marketing can only convince the blind – or those unwilling to open their eyes. When the emperor is naked and everyone can see, then all of the marketing in the world will not be able to convince people that he is actually clothed,” Ben-David said.

“The regime change that this government is trying to ram through can destroy Israel’s economic miracle. While we are already seeing evidence of this in the stock market and exchange rate, these are just the tip of the iceberg. The greatest damage will be in the long run,” he said.

Ben-David is a signee on a pair of cautionary open letters co-signed by nearly every academic economist in Israel. The letters were sent to the government and gave extensive details of the reform’s negative economic effects.

“The undermining of judiciary independence will greatly increase the likelihood of credit rating downgrades of the Israeli government and will increase capital costs for Israeli firms… A lower ability of the government and private sector firms to raise capital will cause a decrease in investments and is expected to harm the Israeli high-tech industry in particular, which is the growth engine of the Israeli economy,” the first letter, sent January 25, warned. “Furthermore, a combination of a decline in the tech industry and the reduction of civil rights due to the weakening of the legal system is expected to also cause a ‘brain drain’, which will have dire consequences for the economic resilience of Israel.”

The second letter sent on March 2, noted the government’s refusal to acknowledge warnings or voiced concerns from seemingly any source, including credit rating agencies, foreign investors, Israeli firms, President Biden and President Macron, the president of the OECD and international financial press including the Financial Times, the Economist and Bloomberg.

“Unfortunately, our warnings have not been heeded and the Israeli government is advancing the legislative reform while ignoring the warnings stemming from both within and outside of Israel regarding the expected economic damage,” the letter read.

Ben-David concluded that no amount of external pressure is likely to push the government to reconsider the compromise — but the loud and ongoing internal protest against it has a fighting chance.

“What's coming from the outside won't cause them to cave. We've been in tougher times in the past — Israel's been embargoed, it's been under all kinds of international economic pressure —and we've always withstood that. But what we're seeing internally, that's the big difference. That's the game changer,” he said. “This government has managed to unify all the parts of normal Israel, be they right wing, left wing, religious, secular — and that's ultimately going to determine if this is going to succeed or fail.”