Who Needs the Shekel? (Extract)

Extract of an article in Issue 7, July 21, 2008 of The Jerusalem Report. To subscribe to The Jerusalem Report click here. "If it ain't broke, why fix it?" It's one of the most destructive sayings that management educators have to refute. The problem is, if you wait to fix a problem until it's full-blown, you incur enormous damage that could have been prevented by pre-emptive action. It is time for action like this regarding the shekel. Let's do away with it. Seriously, who needs the shekel? I know the shekel's on a roll. The number of shekels it takes to buy one American dollar reached its peak in January 2002, at close to 5. Since then the price of dollars in terms of shekels plummeted, to today's 3.32 shekels, a rise in the dollar value of shekels of about one-half, from 20 cents to 30 cents. The main cause? As U.S. stocks and real estate prices slump, Israeli investors who shipped boatloads of dollars abroad are now bringing them home, selling dollars for shekels. By the laws of supply and demand, a larger supply of dollars lowers their shekel price. Why are a strong shekel and cheap dollar a problem that needs fixing? Why not celebrate it instead? That's just the point. Israelis are celebrating - buying cars, traveling abroad and partying on cheap imports. Meanwhile Israeli exporters are squeezed. At January 2002 exchange rates, a Jerusalem hotel room priced at 800 shekels cost about $160. Today that's $241. Exporters either have to slash their dollar prices and swallow lower profit margins, or see demand for their product decline. For an export-driven economy like Israel's, this is a severe long-term threat. When you sell abroad in dollars but your costs are in shekels, you are squeezed. Top bankers told the financial daily The Marker on June 27 that "the strong shekel is a strategic threat to Israel's economy... many excellent companies and plants are in real danger as a result." The problem with the shekel is what I call the "Three Bears Syndrome." Like the Three Bears' porridge, the shekel is either too "cold" (weak) or too "hot" (strong), but rarely just right. If the price of dollars in shekel terms is too expensive, imported components and raw materials are very expensive, generating inflation and making the cost of Israeli goods expensive. If the price of dollars in terms of shekels is too cheap, exports are hurt and imports balloon. According to The Economist, of 50 currencies' exchange rates, only three dollar-exchange rates, those of Hungary, Colombia and Venezuela, are within 5 percent of their true underlying purchasing-power value. The rest are either too cheap or too expensive. So how can this problem be fixed, before the economy is broken? By reviving an old idea - linking the shekel to a major currency ("dollarization" or "euro-ization") and ultimately using only that currency in Israel. On two previous occasions, this idea was seriously proposed. The first was in 1983. After Menahem Begin resigned as Prime Minister, Yitzhak Shamir formed a new government. As inflation soared, Finance Minister Yoram Aridor announced a plan to fix the shekel to the dollar. The idea was sound. The Bank of Israel quietly supported it. But the emotional response was, "Israel is surrendering sovereignty and now becomes the 51st American state." On October 15, 1983, Aridor resigned in tears. The one good policy he proposed led to his downfall. In November 2002, then-foreign minister Benjamin Netanyahu suggested to then-Italian prime minister Silvio Berlusconi that the shekel be linked to the euro, at a fixed rate, as a step toward Israel joining the European Union. Under the so-called Copenhagen criteria, countries on the Europe-Asia border that "respect EU principles" may join. Ironically, as Israel staggers towards new elections, Netanyahu is favored to become the next prime minister, while Berlusconi has come back from scandal and disgrace to lead Italy again. Perhaps in the future the two has-been come-back politicians, joined by France's Sarkozy and Germany's Merkel, can lead the charge for close Israeli integration with Europe. Israel wouldn't be the first. Consider Cyprus, technically in Asia, but widely regarded as "culturally European." This tiny land of 750,000 people joined the European Union and adopted the euro on January 1. No longer will it have to worry about exchange rates or interest rates, now set by the European Central Bank. No longer will tourists have to worry about exchange rates or cash euros for Cyprus pounds. Israel, too, though geographically in Asia, is culturally European. Even tiny Malta joined the EU. Sleepy old Europe can gain much from Israel's entrepreneurial energy. So here is my proposal. Israel is quietly pressing for membership in the OECD - Organization for Economic Cooperation and Development. Former U.S. trade negotiator Clyde Prestowitz says Israel should also try to join EFTA - the European Free Trade Association. This is the group of countries who chose to accept zero European tariffs but reject fully adopting the euro (Norway, Switzerland and Iceland). Why? Zero tariffs on exports to Europe would be a huge advantage for Israeli exporters. In the first third of 2008, Israel bought 1 billion euros more from the EU than it sold; that huge trade deficit can only improve. Extract of an article in Issue 7, July 21, 2008 of The Jerusalem Report. To subscribe to The Jerusalem Report click here.