A group of hundreds of Israeli economists issued a fresh warning on Thursday that a financial meltdown could occur more “powerfully and faster” than they had originally forecast when they penned an “emergency letter” cautioning that the far-reaching judicial shakeup being advanced by the government could have grave implications.
“Since we published our first petition, there are many growing indications that the damage to the economy could manifest itself more powerfully and faster than we expected,” the second letter warned. “In recent weeks we are seeing the first signs of capital flight that compels the Bank of Israel to continue raising interest rates at a fast pace.
“Even if the markets eventually stabilize in the short term, experience from other countries where judicial and financial institutions were harmed, and research from recent decades, shows that we can expect long-term damage to economic growth and Israelis’ standard of living,” the experts warned.
“It is still not too late to stop the train before it leaves the station,” they said.
Recent weeks have seen the shekel value drop to a three-year low, Tel Aviv’s stock exchange underperform and leading companies pulling their money from Israeli accounts.
Among the signatories of the letters were both right- and left-leaning senior academics, including Nobel Prize winner Prof. Daniel Kahneman; former Netanyahu economic adviser and National Economic Council head Prof. Eugene Kandel; Prof. Omer Moav, a former adviser to the finance minister; Prof. Avi Ben Bassat, a former director of the Finance Ministry; and Prof. Manuel Trajtenberg, who held a string of key government positions.
Also signing the letter was former two-term Bank of Israel governor Jacob Frenkel, who was appointed by Netanyahu for another term in 2013 before withdrawing his candidacy amid a scandal over alleged attempted shoplifting in a Hong Kong airport duty free store that he said was a misunderstanding.
The second letter came a day after Fitch Ratings affirmed Israel’s A+ credit rating with a stable outlook, citing the country’s “diversified, resilient” economy, but warned that the government’s planned judicial changes could have a “negative impact” on the country’s credit profile.
Fitch cautioned that the judicial overhaul could weaken institutional checks, leading to “worse policy outcomes or sustained negative investor sentiment.”
Prime Minister Benjamin Netanyahu’s hard-right coalition has prioritized the controversial proposals to transform the justice system, which are being spearheaded by Justice Minister Yariv Levin. The proposed legal overhaul would grant the government total control over the appointment of judges, including High Court justices, and severely limit the High Court’s ability to strike down legislation.
Despite mass protests and opposition from leading economic voices and former policymakers calling for the protection of Israel’s democracy and system of checks and balances, the government has declared itself determined to press ahead with advancing the overhaul package at full speed.
“Some countries that have passed major institutional reforms reducing institutional checks and balances have seen a significant weakening of World Bank governance indicators (WBGI), the most influential indicators in our Sovereign Rating Model (SRM),” Fitch said in a statement. “It is unclear at this stage whether the proposed reforms in Israel would have a similarly large-scale impact.”
In their first letter, the economists warned that the radical measures could lead to reduced investments in the booming local tech industry, one of the most reliable engines of economic growth.
They also invoked the risk of a “brain drain” and the relocation from Israel of research and development centers, as well as the danger of a reduction in the country’s credit rating.
The judicial overhaul plan has sparked weeks of mass protests against the government and warnings from lawyers, economists, business people, professionals and even the international community that the reforms will undermine Israel’s democracy, economy and security.