Seth Freedman
The Guardian (Opinion)
April 12, 2010 - 12:00am

The beauty of Israel's economy is in the eye of the beholder: some sceptics routinely sound the death knell for the country's finances, while their optimistic opponents claim the state's coffers have never been in ruder health. Last week, traders and investment funds delivered a resoundingly clear verdict in the latter camp's favour, driving the benchmark TA-25 index to an all-time high.

The TA-25 has now more than doubled since November 2008, when the global credit crisis was at its height. While the rebound on the Israeli exchange is in line with a general trend of recovery on bourses around the world, what sets Israel apart from its peers is the minimal effect the credit crunch had on the state's economy.

Thanks to a culture of low risk-taking among Israel bankers and investors, both individuals and institutions were far less exposed to asset bubbles and speculative purchases than their counterparts in other developed countries. Consequently, no bailouts were required of Israeli banks, nor did the economy implode in anything like as spectacular a fashion as occurred in the US, the UK and mainland Europe.

The still-booming hi-tech and pharmaceutical sectors also helped the Israeli economy ride out the storm, contributing to the reaching of the latest financial milestone being predicted by economists: a per capita GDP of $30,000, up from $20,000 less than a decade earlier.

Foreign investors continue to pour money into Israel, buoyed by the stellar performance of its stock market as well as unwavering confidence in the stewardship of those at the helm of the finance ministry. The Bank of Israel governor, Stanley Fischer, has been widely praised for his role in keeping the economy afloat, as was Binyamin Netanyahu during his spell as minister of finance.

However, pressure is now mounting on Netanyahu in his current incarnation as prime minister, with calls emanating from a variety of quarters urging him to strike a peace deal with the Palestinians for the sake of Israel's economy as much as Israeli society as a whole.

Fischer believes the country could see growth of almost 7% per year if the conflict with the Palestinians was resolved, which – set against current levels of around 3% – provides a massive financial incentive to sign a final-status agreement. But far more pressing are the consequences of not reaching a lasting accord with the Palestinians in terms of the Iranian problem.

In the absence of an Israeli-Palestinian peace deal, Israel will have far less leverage to persuade the world to halt Iran's drive towards developing nuclear weapons, and the spectre of an Iranian attack on Israeli soil would see investors flee Israel in droves. On top of such an outflow of foreign money, Israel would need to spend a fortune on defence and to bolster its own nuclear weapons arsenal, which would deal a crippling blow to the state's finances.

Israelis already know the benefits to be gleaned when all is quiet on the Palestinian front: the current state of relative calm in major Israeli cities has been a substantial boon to local economies which are heavily reliant on tourist expenditure. The further into the past that the second intifada recedes, the more tourists flock to Israel, injecting vast amounts of money into the country as well as a heavy dose of confidence into owners of Israeli businesses.

Should the tranquillity be shattered by another outbreak of violence from Palestinian militants or their Hezbollah peers, the ramifications on the Israeli economy will be swift and sharp. As such, even those for whom the idea of granting statehood to the Palestinians is political anathema should realise the practical benefits of making concessions that will pull the rug from under the radicals' feet.

As journalist Aluf Benn pointed out in an article last week, there is a great deal to be gained from further incorporating Israeli Arabs and ultra-Orthodox Jews into the mainstream Israeli workforce. This is another area in which Netanyahu and his advisers need to allow pragmatism to triumph over prejudice for the benefit of Israeli society, rather than adopting their usual policies of scoring cheap short-term points that do no favours for the country in the long run.

The Israeli economy has survived one of the toughest challenges to face it, and every other developed nation, in recent times – and investors at home and abroad have been quick to congratulate the country in the form of a massive flow of funds into Israeli stocks. But the next major hurdle is looming, and how it is handled will play a large part in dictating the nation's economic fortunes for years to come.

If the TA-25 and the wider economy are to drive on to even greater heights, Netanyahu needs to think with his finance-minister hat on rather than his prime-ministerial one. That way, he'd be doing Israelis and Palestinians a great service, and both sides can only come out winners as a result.


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