Grecian fallout

It might serve us Israelis well to recall that in 1985, we were on the precipice of an even worse catastrophe than the one Greece is facing.

Greece financial crisis (photo credit: AP)
Greece financial crisis
(photo credit: AP)
The European Union’s unfolding Greek tragedy finds analysts outdoing each other in scripting hyperbolic doomsday scenarios. Time will tell whether they are right or exaggerating.
But it might serve us Israelis well to recall that, back in 1985, we were on the precipice of an even worse catastrophe, but managed to pull back and have since achieved unprecedented economic security and prosperity. As far as we can tell, which may not be all that far in this unstable and unpredictable financial environment, Israel is now sitting in a much better position than many Western economies.
The Greek economy – one of the EU’s smallest – is roughly the size of Israel’s. But that’s where the comparison ends.
While Israel has built impressive monetary reserves (despite military burdens that, proportionately at least, no EU country comes close to shouldering), it has also opted for conservative financial management. Much as this was criticized by local politicians, it has kept Israel relatively safe from the ravages that have afflicted the global economy especially since mid-2008. Our healthy GDP and focus on hi-tech research and development have also rightly elicited recognition worldwide.
Greece’s behavior has been very different. Its woes are primarily homemade, rather than the product of force majeure. Greece borrowed irresponsibly and built up a national debt which must raise suspicion that its financial leaders were either in unfathomable self-denial or somehow counted on the EU to pick up the tab. Moreover, the Greek economy, greatly dependent on tourism and shipping, saw both these mainstays heavily hit since the 2008 crisis.
The sacrifices now being asked of Athens are in fact less stringent than the edicts imposed on Israel’s population by the 1985 national unity government. Israelis accepted those decrees willingly. The Greek government and populace are apparently not so inclined.
But this is also a glaring European failure. The EU super-structure, in which separate economies are excessively interconnected, couldn’t prevent one country with an oversized public sector from messing up its books to the collective’s detriment.
Germany, the EU’s powerhouse, faces a particular conundrum. Should German taxpayers bail Greece out or refuse – like Washington did with Lehman Brothers in 2008?
Greece apart, other European dominoes may fall too. The entire euro-zone may be terminally destabilized. There is, unfortunately, no facile formula for the EU’s worst-ever economic predicament.
ONE THING is certain: Nothing we took for granted thus far can be relied upon as an ongoing premise. There are no fundamentals to count upon – and that goes for Israel as well. No matter how much we congratulate ourselves for the apparent Israeli economic miracle, we must constantly remember that no state is an island, and least of all not one with as many EU business ties as Israel has.
What happened to exporters who earned incomes in US dollars now threatens exporters earning euros. Falling foreign currency values detract from profits and can result in the shutdowns of production lines and layoffs. If Europe were to suffer a new credit crunch, Israel might experience secondary slowdowns, reduced growth and increased unemployment. A full one-third of our exports go to Europe.
The Greek fiasco is playing havoc with foreign currency rates,generating dangerous volatility. The Bank of Israel’s recent decisionto leave interest rates unchanged should also be evaluated against thisbackdrop. With both the dollar and euro unsteady, higher local interestrates could trigger a free fall of both currencies against asuper-strengthened shekel, inflicting further hardships upon exporters.
Plummeting values of European state bonds could additionally impactupon those Israeli banks which invested in such assets. This could sendyet more shockwaves through our economy.
Some experts may judge such worries as grossly inflated, but the fearsshould not be dismissed out of hand. Contingency plans must be in placein case Israel’s forecast 4% growth rate is rendered unrealistic.Israeli exports to Europe have already somewhat decelerated in recentmonths and this trend may now significantly worsen.
In short, this is the time for Israel to gear up for potential neweconomic trouble. We cannot afford to be complacent spectators. For inthe shattering new global economic reality, there may be no sidelinesand no safe vantage points.