Prime Minister Benjamin Netanyahu’s hastily called press conference Wednesday evening, to assure the nation that the government’s planned judicial reform would not impact the economy, clearly indicated concern.
What tens of thousands of people in the public square on consecutive Saturday nights protesting what they said was an imminent threat to democracy could not do; what various open letters from 1,200 IAF veterans, academics, seven former attorneys-general and 100 retired judges warning of the consequence of a weakened judicial branch were unable to accomplish; what overheated rhetoric from opposition MKs, present and past, sounding the alarm of a coming dictatorship did not achieve – a letter from a couple of hundred economists and an op-ed from two former Bank of Israel governors, as well as a meeting with the current BoI governor, did accomplish: It made an impression on Netanyahu.
Because if that were not the case, Netanyahu – flanked by Foreign Minister Eli Cohen, Finance Minister Bezalel Smotrich and Economy Minister Nir Barkat – would not have deemed it necessary to call the press conference to rebut the charges that the proposed judicial reform will harm Israel’s economy.
The letter signed by top-tier economists from the Left and the Right – including some whom Netanyahu holds in high regard, such as his former economic adviser Eugene Kandel and Omer Moav, an adviser to then-finance minister and Netanyahu ally Yuval Steinitz – hit a button. So, too, did the words penned by former BoI governors Karnit Flug and Jacob Frenkel, and apparently those said to Netanyahu by BoI Governor Amir Yaron in a private meeting.
Their message was the same: Measures taken to weaken the judiciary will deleteriously affect the Israeli 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. One Israeli hi-tech firm and a venture capitalist demonstratively announced Thursday they were pulling their money out of the country.
As Frankel and Flug wrote, a weakening of the country’s judicial system “is expected to lead to a decrease in the willingness of foreign investors to invest in Israel, and an increase in the cost of raising funds for the Israeli government as a result of a possible downgrading in the country’s credit rating.”
Why is the judicial reform causing concern for the economy?
The reason that investors will be less likely to invest in Israel, according to this reasoning, is out of a concern that if they get into some regulatory spat with the government that will then be taken up by the courts, they want to know that there is an objective judiciary – not one under the government’s thumb – that will give them a fair hearing.
A lower credit rating, meanwhile, is highly problematic because that will make it more expensive for Israel to borrow money. Higher interest rates mean that Israel will either have to do away with the money it wants to borrow because of prohibitive interest rates or pass on the cost of those higher interest rates to the citizens in terms of higher taxes.
The fear of Israel having to pay more to borrow money is not empty, as the Standard & Poor’s (S&P) credit-rating agency said earlier this month that the new government’s policies could negatively affect Israel’s credit rating.
Hungary and Poland faced downgraded credit ratings when they implemented dramatic changes in their judicial system that were viewed as undermining the independence of their courts. S&P downgraded Poland’s credit rating from A- to BBB+ in 2016, citing concerns about the changes to the judiciary, and Moody’s also downgraded Poland’s rating.
At the time, an S&P analyst issued a statement saying, “The downgrade reflects our view that Poland’s system of institutional checks and balances has been eroded significantly,” explicitly citing legislative changes to the constitutional court and public broadcasting under the new government.
The same thing happened in Hungary, with S&P downgrading its credit rating in 2019, and Fitch taking that step in 2018.
Why are the economic warning significant to Netanyahu?
Netanyahu is exceptionally proud of the Israeli economy and the critical role he has played over the last nearly 30 years in unfettering it and enabling it to flourish. Five years ago, during a visit to Washington, he was asked at a public event what he wanted his legacy to be. His reply: “Defender of Israel, liberator of its economy.”
By “defender of Israel,” he meant, more than anything else, stopping Iran from getting the nuclear capability to threaten Israel. And by “liberator of the economy,” he meant unshackling it from suffocating bureaucracies.
Tellingly, Netanyahu did not say “judicial reformer.”
Over the last week, the country’s leading economists essentially let Netanyahu know that his legacy as the man who “liberated” Israel’s economy is at risk if he goes through with the proposed judicial reform.
While Netanyahu could easily dismiss the protesters as being fired up by left-wing agitators, and while he could block out the exaggerated rhetoric of Yair Lapid, Meirav Michaeli and Benny Gantz as the desperate efforts of his political opponents to bring down the government, he could not just ignore the concerns coming from past and present BoI governors and economic advisers whom he respects. One reason he could not ignore their warnings is that financial institutions and potential investors have all heard their concerns. He needed to respond.
The response he delivered at the press conference, however, was that all those warnings of lower credit ratings and fleeing investors were wrong. He said that just as he had proven the experts wrong numerous times in the past – such as when it came to freeing up the economy, fighting to extract gas from the sea, and being stubborn about the idea that peace agreements with other Arab countries are possible even without a deal with the Palestinians – he will do so this time as well.
But there was a problem with the optics of the press conference: On the stage for his “I know better” pronouncements were no world-renowned economists or financial experts to back up his claim that the judicial reform would not cause any economic shocks – only like-minded politicians. And that is telling.