'Every day the situation worsens, but it's not too late yet'

Ex-Bank of Israel chief warns government’s moves harming economy, weakening shekel

‘Wake up before the country goes downhill’: Jacob Frenkel escalates rhetoric against ‘irresponsible’ advance of legal overhaul, threat to central bank’s independence

Michael Bachner is a news editor at The Times of Israel

Former Bank of Israel chief Jacob Frenkel, left, during a Channel 12 interview of February 22, 2023. (Screenshot: Channel 12; Used in accordance with Clause 27a of the Copyright Law)
Former Bank of Israel chief Jacob Frenkel, left, during a Channel 12 interview of February 22, 2023. (Screenshot: Channel 12; Used in accordance with Clause 27a of the Copyright Law)

A leading economist who formerly set Israel’s monetary policy escalated his rhetoric Wednesday against planned government moves to weaken the judiciary, impassionedly warning they could leave the economy in shambles and dismissing the current attempts by the coalition to calm the mounting economic concerns as “an insult to people’s intelligence.”

Jacob Frenkel, who headed the Bank of Israel from 1991 to 2000 and until recently chaired JP Morgan Chase International, lamented that each day of the government’s legislative blitz made the situation worse, as Israel’s international image is dealt a serious blow and major companies and investors move elsewhere.

“It should worry us very much,” Frenkel told Channel 12 news when asked about the weakening of the Israeli shekel (NIS), which over the past month has lost almost 10 percent of its value relative to the US dollar.

“The [value of the] shekel is a reflection of the reality behind it. We have a situation of total uncertainty — economic uncertainty, political uncertainty and institutional uncertainty, which affects all components of the economy: Consumers, manufacturers, investors, the ordinary citizen,” he said. “And this uncertainty is homemade, it isn’t an external shock.

“We’ve had an amazing run with years of stability, and with one fell swoop, with irresponsible decisions, all that can be damaged.”

Frenkel has repeatedly sounded the alarm over the past month, but none of his past remarks were as blunt as those in Wednesday’s TV interview.

He was asked about the recent call by Foreign Minister Eli Cohen on the government to intervene in the Bank of Israel’s work after its Governor Amir Yaron once again increased the interest rate, to 4.25%, the eighth time it has been hiked in 10 months in attempts to rein in inflation.

Bank of Israel Governor Amir Yaron speaks during a press conference at the Bank of Israel in Jerusalem, January 2, 2023. (Yonatan Sindel/Flash90)

Cohen’s urging of government intervention destabilized matters even further, forcing Netanyahu to issue three statements in as many days aimed at promising that the Bank of Israel will remain independent.

“I thought this argument was behind us,” Frenkel said. “Today, someone questions the [central bank] governor’s authority? We have inflation in Israel, and the government decided it wants stability in prices. The primary tool to achieve that is the interest rate, and the governor must be allowed to work. Every noise of this type… increases the inflationary pressure and will force the governor to continue using the interest rate tool.

“The main question is whether we want to be a proper country, with separate authorities that have roles, responsibilities and professionals — and not everything is political,” Frenkel said heatedly.

The legal overhaul would grant the government 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.

A broad and vocal chorus of criticism stretching from the judiciary through civil society and the business community has warned that the overhaul moves will essentially neuter Israel’s democratic system of checks and balances. Meanwhile, local officials and foreign allies have expressed worries that the moves could leave minority rights unprotected, and the business community has warned that the turmoil could sour the investment environment in Israel, heaping more pressure on the government to enter talks and water down the plans.

Former Bank of Israel Governor Jacob Frenkel, left, and Prime Minister Benjamin Netanyahu at a press conference at the Knesset in Jerusalem, June 24, 2013. (Miriam Alster / Flash90)

Asked about the impact of the process on the country’s economy, Frenkel said: “It endangers it, but it’s not too late yet. We can stop the carriage from going downhill. But every day, the situation worsens, because our image is suffering very serious blows.”

Frenkel said that not only are major companies and investors increasingly moving their money outside Israel, but the country is also losing its human capital, and with it, critical knowledge in various fields.

“For years we were proud that we are a ‘startup nation.’ Why endanger that?” he said, adding that the expedited manner in which the government is advancing its sweeping reforms gives the distinct impression of “underhanded opportunism.”

Asked about widespread claims by members and backers of the government that the economic scare is being purposely created and fanned by political rivals, Frenkel became even more impassioned, saying the question wasn’t about the legitimacy of a democratically elected government, but about calming down large parts of the public that genuinely fear its moves will harm the economy.

“If the public isn’t convinced, please convince it. And if the public is right, please listen to it,” he said, citing President Isaac Herzog’s plea to halt the legislative process and hold negotiations to forge a widely accepted judicial reform. “How can you so blatantly degrade the president’s request?”

President Isaac Herzog delivers a message to the nation from his office in Jerusalem, February 12, 2023. (Haim Zach/GPO)

“It isn’t right to accuse anyone who asks a question of having a political agenda. Politicians must understand that investors are independent and are capable of managing their affairs without the government,” he said. “Not everything is political. People have real patriotism, investors and Jewish communities in Israel and abroad care about the country, and they don’t want to see destruction.

“Please wake up, before the country goes downhill. There is a good chance of reversing the trend because the infrastructure is strong. We have much to lose, and we shouldn’t lose our compass.

“People have intelligence — it is an insult to their intelligence to come and tell them: ‘Trust us,’ when they don’t trust them. Please, prove it.”

Netanyahu didn’t directly respond to Frenkel’s interview, but during a cabinet meeting Thursday he rejected the mounting economic concerns voiced by him and many other prominent critics.

“There are some who are trying to destabilize Israel’s economy and to create hysteria for political reasons, hysteria that has no ground in reality,” he claimed during the meeting, which discussed the upcoming state budget.

“Israel’s economy is strong and it will keep getting stronger. Thanks to our power, thanks to the independence of the Bank of Israel, which will be preserved, and thanks to the responsible and active economic policy we are leading. Those who sow hysteria and fear will be proven wrong.”

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