E is for Economics Part III: Slipping Backwards

Since the Netanyahu government started pushing for judicial “reform” with an enormous number of changes that would turn the judicial system upside down, the domestic and foreign political situation has deteriorated and that has had an enormous impact on the Israeli economic outlook. The most significant indicator of the downward trend has been the downgrading of Israel’s rating by Moody’s in mid-April 2023, just a little over three months into the life of the Netanyahu government. Moody’s Investors Service published an annual rating update on the state of Israel’s economy. In its April 2023 report, it described the effort to overturn the existing judicial system, without the concurrence of a significant part of the opposition, and even without majority domestic public support. President Isaac Herzog’s attempt to get Moody’s to moderate its report was unsuccessful.

In assigning scores and default probabilities to state issued bonds with a detached perspective, it described the weakness of the Netanyahu government. There has also been a significant loss of trust in Netanyahu by Americans. Only 8% retained a lot of confidence in him.  An April Pew survey indicated that though one quarter of Americans had never heard of Netanyahu (not surprising), the remaining two-thirds were divided between those who had some confidence in him (24%), not too much (25%) and none (17%). The Moody report seemed unaffected by the government’s call for a pause in pushing the legislation, for in its assessment, Netanyahu seemed determined to complete the legislation largely intact. He has said as much, arguing, ironically, that the legislation will strengthen Israel’s democracy. Obviously, Moody’s did not take him at his word. But others did. “On the eve of Israel’s 75th birthday, when the country should be celebrating Israeli innovation, inspiration and impact, (Yossi) Vardi said he is concerned. Following weeks of countrywide protests against a government-proposed judicial overhaul that brought the country to the brink of civil war and threatened to downgrade Israel’s credit rating, the hi-tech community remains on edge.”[i]

The state of the economy was deemed uncertain.  Investors around the world had been spooked with the view that harming the independence of the judiciary would be a severe blow to Israel’s democracy and the stability of its institutions. At first glance, there seemed to be no decline in the rating since the country still received an A1, but the downgrade came in replacing “positive” with “stable”.  “[T]he change of outlook to stable from positive reflects a deterioration of Israel’s governance, as illustrated by the recent events around the government’s proposal for overhauling the country’s judiciary… The manner in which the government has attempted to implement a wide-ranging reform without seeking broad consensus points to a weakening of institutional strength and policy predictability. As a result, the risks on Israel’s rating are now balanced, leading to a stable outlook.”

But not a positive one. And a negative one seemed to be on the horizon. Prospects looked like it might become much worse, especially since Netanyahu has been connected and compared to the Polish and Hungarian leaders of right-wing governments. As Polish minister Paweł Jabłoński said in a Warsaw radio interview, “Of course, we are talking with Israel, and to some extent we shared our experiences in this regard. I’m telling the honest truth. Israel was interested in what was happening in Poland.”[ii]

If the larger domestic and foreign situation had been assessed, there is a strong possibility that the report would have been worse. Government ministers repeatedly and blatantly lie. For example, one minister accused Aharon Barak of directing police to arrest 14-year-old children. Members of the government accused pilots, who protested against the proposed judicial coup by not showing up for weekly practice runs, of fomenting anarchy. On social media, the Efrat Local Council head ​​​​​​​Oded Revivi had to deny the false report that the organs of Lucy Dee were donated to a Palestinian Arab terrorist by order of the Supreme Court. However, when the Pentagon documents were leaked in the US that alleged that the Mossad in Israel was backing the protestors, Netanyahu vehemently denied the claim. It is very ironic that the treasonous activity of an American teenager seeking to impress like-minded gamers would, like the butterfly effect, lead to enhanced divisiveness both within Israel and between Israel and the United States. 

If verbal exchanges were not bad enough, the situation of the march on Evyatar in the West Bank by Jewish settlers during Ramadan (that I documented in an earlier dispatch) led to IDF and other forces guarding the march to fire rubber bullets and throw tear gas cannisters at Palestinians who had been throwing rocks at the marchers. Chaos, clashes, and more conflict hardly seemed even to support a Moody appraisal of “stable”. If these actions were not enough, the Haredi from his cabinet threatened to withdraw their support of Netanyahu if he did not ensure that the IDF Draft Bill to reduce the exemption of ultra-Orthodox youth from national military serviced from 26 to 21, was withdrawn or significantly altered to their satisfaction. Passing that legislation would cancel their ability to gain exemption even though they had been attending a Yeshiva before they turned 26. Currently, by studying at a yeshiva until the age of 26, Haredi men avoided serving in the Israel Defense Forces for three years. Since they had a practice of marrying young and having children – many of them – that allowed them to be exempt from army service altogether. Lowering the exemption age to 21 would cancel that exit route.

In the Arab sector in Israel, violence was still increasing, not so much against Israeli Jews but against other Palestinians, including many cases of honour killings of Arab girls who were accused of going astray by kinsmen, especially brothers. The mafia within the Arab sector seems to have grown, contrary to the promise to increase policing in Arab towns and villages. As one Arab young man said, there is no rule of law in the Israeli Arab sector.

Further, although tens of thousands turned out on Saturdays to protest against the assault on the judicial system, the Arab sector has by and large remained aloof, insisting that unless the protesters also insisted on equality for all Israeli citizens, the only appropriate Arab response was a pox on both sides of the dispute.  But the independence of the judiciary is crucial to the protection and move towards equality of Palestinian Israelis. They should be delighted that the most extreme right-wing government in Israel is increasingly losing support. A mid-April 2023 poll showed that Netanyahu‘s Likud party would lose one-third of its seats and only elect 24 members of the Knesset if the election were held then. Benny Gantz’s National Unity Party would become the largest party in the Knesset with 28 seats. Religious Zionism, led by Finance Minister Bezalel Smotrich, and Otzma Yehudit, led by National Security Minister Itamar Ben-Gvir, would only get 11 seats compared to their 13 at the time of the poll. Aryeh’s Deri’s Shas would decline from 10 to 9, but United Torah Judaism, led by Housing Minister Yitzhak Goldknopf, would stay steady at 7 seats. Clearly, the religious parties by and large held their support, but neither Likud nor, to a much lesser extent, the more extreme right wing.

But most of the opposition, other than the National Unity Party, has nothing to gloat over. Lapid’s Yesh Atid would drop to 20 seats. Yisrael Beytenu, led by MK Avigdor Lieberman, Hadash-Ta’al, led by MK Ayman Odeh, and Ra’am, led by MK Mansor Abbas, all would barely pass the threshold; each would only win 5 seats. Meretz and Labour would change places, with the former passing the threshold and Merav Michaeli Labour’s vote, would decline to 2.8% of the total vote. It seems that voters wanted to punish the Labour Party for making the mistake of not pooling its votes with Meretz to ensure that Netanyahu only won a bare majority for his coalition.[iii]

As a reminder, internal divisions within Palestine are even more divisive than in Israel, not only between Hamas in Gaza and the Palestinian Authority (PA), but within the West bank as faith in the PA continues to decline. Independent new rebel groups have emerged and exert their authority independent of the PA. For example, the Lion’s Den in the West Bank executed a young Palestinian charged with collaborating with Israel. PA Security Forces did not intervene.

On the external affairs front, relations with Jordan had deteriorated, largely in response to how Israel had handled the Al-Quds situation. Jordan even accused Israel of blocking Christian holy sites, such as the Church of the Holy Sepulcher. It so happened that there was also a spike in Jewish attacks on Christians, which instigated a Roman Catholic denunciation. Israel, in return, accused Jordan of fanning the flames and fomenting violence and not carrying out its responsibilities on the Temple Mount/Haram al-Sharif compound. These and other incidents triggered widespread condemnation in the Arab world.

And the attempt to include Saudi Arabia in the Abraham Accords seemed to have been set back so much that Saudi Arabia was once again exchanging ambassadors and resolving issues with Iran under the ostensible mediation of China. Israeli Prime Minister Benjamin Netanyahu, in a meeting in Jerusalem with U.S. Republican Senator Lindsey Graham, still insisted that, “We want normalization and peace with Saudi Arabia…a giant leap towards ending the Arab-Israeli conflict.” While Reza Pahlavi, the son of the last Shah of Iran, was visiting Israel, for the first time in years, Hamas political chief Ismail Haniyeh was about to meet with officials in Saudi Arabia. Under the tutelage of the Iranians, Hamas in Gaza and Hezbollah in Lebanon, resumed their rocket attacks on Israel in a clearly coordinated operation. This was the most serious escalation between Lebanon and Israel since the 2006 war.  Even forces in Syria joined in by using drones to try to attack Israel. This was a new state of affairs: the Palestinian and Shiite axes of resistance had converged.

In one week in mid-April, there were three terrorist attacks by Palestinians against Israelis:

• two ultra-Orthodox driving back from morning prayers at the Tomb of Simon in the Sheikh Jarrah in East Jerusalem were shot at close range, but only moderately wounded; the assailant, a 15-year-old Palestinian boy, was identified and captured.
• an Israeli male was stabbed and wounded by a female Palestinian at the Gush Etzion Junction; the terrorist was shot by the IDF.
• a Palestinian Islamic Jihad (PIJ), planning to imminently launch a terror attack, was disrupted; three, two of them explosive experts, were arrested, but in the firefight, five people were wounded, one in serious condition.

According to the Shin Bet Security Service, Ronen Bar, more than 200 ‘significant’ terrorist attacks thus far in 2023 were thwarted, including “about 150 shooting attacks, 20 bomb attacks, car-rammings, suicide bombings, kidnappings and more.” But some were not, most notably, the shooting of three members of the British-Israeli Dee family.

However, the biggest story is probably the new role that China has adopted in the Middle East as mediator extraordinaire as indicated above. China is not satisfied with positioning itself as a regional mediator after getting the credit for brokering the restoration of ties between Iran and Saudi Arabia. China is now on board with an offer to broker peace between Israel and Palestine. Chinese foreign minister, Qin Gang, contacted Israeli Foreign Minister Eli Cohen and Palestinian foreign minister Riyad Al-Maliki to offer Chinese services in reconvening peace talks. 

The Chinese initiative was but another indicator of the most dangerous situation, the deterioration in relations with Western countries. Joe Biden, probably the most pro-Israel American president in decades, gave Netanyahu the cold shoulder. When even Canada raised its voice to reprimand the Israeli government both for the way it was pushing judicial change and the radical character of the proposed laws, then you know that Israel is in deep trouble with its Western allies. Though not nearly as important, a majority of American Jews had also become very critical of the Israeli government.

Inflation! Stagflation! Recession! Depression! Israel is one of a very few developed countries where politics is probably significantly more important than purely economic indicators in determining the state of the economy.

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[i]  The Jerusalem Post, April 17, 2023.

[ii] BICOM Morning Brief, April 17, 2023.

[iii] Maarive Online, Jerusalem Post, “Gantz widens lead on Netanyahu in latest election polls,” April 17.