Central bank chief said to warn economic crisis could break out at any moment
At state budget meeting, Amir Yaron cautions of potential severe economic fallout from judicial overhaul; Barkat urges dialogue, says he has been warned ‘economy is going to crash’
Bank of Israel Governor Amir Yaron is said to have warned ministers on Thursday that an economic crisis could break out at any moment, amid mounting concerns over the government’s pursuit of sweeping changes to the judiciary, which has spooked investors and entrepreneurs in recent weeks and sparked fears of an economic downturn.
Yaron and the Finance Ministry’s chief economist Shira Greenberg were asked for their observations Thursday on the potential harm to the economy at the discussion session by Economy Minister Nir Barkat, who also reportedly relayed warnings he had heard directly from figures in the tech and business industry of serious economic fallout.
“A snowball [effect] may begin,” Greenberg reportedly responded, adding that there was “significant danger” to the economy. Earlier, Greenberg warned in a report accompanying the multi-year budget draft 2024-27 sent to Prime Minister Benjamin Netanyahu’s hardline coalition government on Thursday that the judicial overhaul was “perceived by the market as damaging the strength and independence of state institutions and increases uncertainty in the investment environment.”
“This may harm economic activity and in particular private investments,” she wrote.
Netanyahu has repeatedly waved off such warnings, including on Thursday when he said those making them were driven by political motivations and hysteria and insisted they would be proven wrong.
In her report, Greenberg cited studies that found a positive relationship between the strength and independence of state institutions and economic growth, scope of private investments, and in particular the scope of foreign direct investments. “Also, the credit rating agencies are likely to react to these developments,” Greenberg cautioned.
According to a separate report Thursday by Israeli data and credit firm BDI, one in five large companies based in Israel has seriously considered moving money out of the country or has already done so. The study, cited by Channel 12, surveyed more than 900 companies across sectors such as tech and real estate, with almost 60% reporting that their revenues took a hit from recent market jitters and a weaker shekel that makes imported goods more expensive and hikes consumer prices.
As the government passed initial votes on legislation Tuesday marking the first significant steps in its divisive effort to shake up the judiciary, the shekel depreciated to the weakest level in three years against the US dollar and Tel Aviv shares declined.
The vote came despite fierce opposition and massive protests against the government’s plans, which would grant it total control over the appointment of judges, including to the High Court, all but eliminate the High Court’s ability to review and strike down legislation, and allow politicians to appoint — and fire — their own legal advisers.
Over the past month, the shekel has lost over 7% of its value amid the mass protests and the dampened market mood.
In his comments at the discussion session on the state budget, Barkat — a former tech entrepreneur and venture capitalist who is a member of the ruling Likud party — relayed warnings of serious economic fallout by leading Israeli business figures whom he said told him that the government “can shred the budget” as it “won’t have the money to implement it anyway.”
“The Israeli economy is going to crash,” he said he was told.
Barkat said he was in favor of the judicial overhaul but urged for negotiations and dialogue. “Even if we don’t get everything we are after, it won’t be so terrible,” he reportedly said.
At the session, Finance Minister Bezalel Smotrich, whose far-right Religious Zionism party is one of the driving forces behind the shakeup of the judiciary, said the hard-right government has taken into account that things “may develop in negative directions” with a drop in government revenues. “Therefore we need to be responsible with the budget,” Smotrich was quoted as saying.
The budget discussion session came days after the central bank hiked its key lending rate to the highest level since 2008, as it seeks to battle inflation and a weakening shekel.
Yaron reportedly called an emergency meeting late Wednesday to discuss stabilizing the country’s financial picture after this week’s market rollercoaster.
On Wednesday, former Bank of Israel chief Jacob Frenkel joined a growing list of economists inside and outside Israel to sound the alarm over the judicial overhaul.
Frenkel, who served as bank governor from 1991 to 2000, urged the government in an interview with Channel 12 on Wednesday to rethink its plans, warning that “irresponsible decisions could ruin it all.”
“We have a situation of total uncertainty: economic uncertainty, political uncertainty and a lack of certainty in institutions, which affects all aspects of the economy,” he said.