ISRAEL AT WAR - DAY 140

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Ex-Bank of Israel chiefs warn judicial overhaul ‘could deal severe blow’ to economy

Jacob Frenkel, Karnit Flug say ‘strength of judicial system a central factor determining Israeli economy’s status in world’; dozens of companies plan strike Tuesday

A combination of photos showing former Bank of Israel governors Karnit Flug (L) and Jacob Frenkel. (Yonatan Sindel and Yossi Zeliger/Flash90)
A combination of photos showing former Bank of Israel governors Karnit Flug (L) and Jacob Frenkel. (Yonatan Sindel and Yossi Zeliger/Flash90)

Two former Bank of Israel governors, Karnit Flug and Jacob Frenkel, joined warnings Sunday that the government’s plans for a sweeping overhaul of the country’s judiciary could negatively affect Israel’s credit rating, and “deal a severe blow to the economy and its citizens.”

In a joint op-ed in the Yedioth Aharonoth daily, Flug, who served a five-year term as the central bank chief ending in 2018, and Frenkel, who was in the role between 1991 and 2000, cautioned that the changes proposed by Justice Minister Yariv Levin are expected to have a snowball effect.

“The weakening of the judiciary system (…) is expected to lead to a decrease in the willingness of foreign investors to invest in Israel, and an increase in the cost of raising funds for the Israeli government as a result of a possible downgrading in the country’s credit rating,” Flug and Frenkel explained.

Levin’s wide-ranging and controversial overhaul of Israel’s judicial and legal system would severely limit the authority of the High Court of Justice, give the government control over the judicial selection committee, and significantly limit the authority of government legal advisers. The changes advanced by Levin have in recent weeks been criticized by senior executives in the high-tech industry, as well as by money managers, for posing a clear and present danger to Israeli democracy and the system of checks and balances on government power.

Flug and Frenkel stressed they wrote the op-ed “out of deep concern for the economic consequences and risks” inherent in the proposed changes to the country’s legal system. The two clarified that their positions are based on many years of experience and personal involvement in dealing with the economic challenges of the Israeli economy, including experience and close familiarity with how international economic bodies and institutions — such as credit rating agencies — work.

They highlighted examples in recent years of countries such as Turkey, Hungary, and Poland, where a judicial review and a deterioration of the status of the legal system have weakened checks and balances, and state authorities have been undermined, vastly increasing the powers of governments. The countries have suffered from drops in foreign investments and a downgrading of their sovereign credit ratings.

“Israel’s situation is still far from that of countries like Hungary and Poland, and its situation is immeasurably better than that of Turkey, but it is important to understand that there is a connection between seemingly unrelated processes such as the judiciary’s ability to criticize the government and trust in the economy, which affects economic performance,” Flug and Frenkel wrote. “The proposed moves to weaken judicial review increase the risk of a harsh and painful reaction.”

Incoming Prime Minister Benjamin Netanyahu (right) with incoming Justice Minister Yariv Levin in the Knesset on December 13, 2022. (Yonatan Sindel/Flash90)

They stressed that “the strength, professionalism and independence of the judicial system is a central factor determining the Israeli economy’s status in the global economy.

“In the modern world, economic growth and prosperity necessitate stability… and clear and stable rules of the game that allow a long-term planning horizon.”

They said that “it’s enough for doubt to rise regarding the government’s commitment to the ironclad principle of separation of powers for Israel’s image — critical to investors in the country and abroad — to be hurt.”

“At the present time, when geopolitical and economic uncertainty prevails throughout the world, precisely in such a sensitive period it is very easy to destroy an economic image, and very difficult to restore,” they warned.

Meanwhile, dozens of Israeli companies, including workers at multiple high-tech companies, were expected to hold a one-hour strike Tuesday against the government’s legislative plans.

The credit rating agency Standard & Poor’s (S&P) said earlier this month that the judicial makeover plans, as well as the new government’s hardline policies in the West Bank, could negatively affect the country’s rating.

S&P’s Director of Global Ratings Maxim Rybnikov told Reuters: “If the announced judicial system changes set a trend for weakening Israel’s institutional arrangements and existing checks and balances this could in the future present downside risks to the ratings.”

However, he added, “we are not there yet.”

Speaking to Channel 12 Sunday evening, Frenkel said his and Flug’s op-ed was “an alarm clock saying ‘Wake up… you are playing with fire here. There’s a real danger.'”

Frenkel added that the Israeli economy “is very dependent on the global economy, in foreign investors. The greater the investments, the more we grow and the higher the standard of living becomes for citizens.

Former Bank of Israel governor Jacob Frenkel speaks to Channel 12, January 22, 2023. (video screenshot; used in accordance with Clause 27a of the Copyright Law)

“The reason investments come to Israel is Israel’s credit rating… That’s our calling card… investors look at this calling card and ask themselves, ‘Does this country — beyond the usual things like economic management, the deficit, the budget etc. — does this country have a system of appropriate balances, is there appropriate judicial oversight of the government, is its democracy vibrant?”

Frenkel said Israel had built its strong international image slowly, over many years, and indelicate handling of major changes to the country’s system of government could be disastrous.

“The rating is not simply a medal… The rating determines the interest Israel pays and will pay for taking on debt from abroad. This interest is not just the state, it’s us. If the rating goes down, the interest we pay will go up,” and life will become more expensive and difficult,” he elaborated.

Last week, Tel Aviv-based venture capital firm TLV Partners joined those saying the judicial overhaul plan is poised to harm the thriving local tech industry.

“If Israel’s democracy is harmed, the hi-tech industry will wither or flee abroad. The best minds will leave, Israeli entrepreneurs will establish companies outside of the country’s borders, the country’s credit rating will be affected (S&P [Standard & Poor’s] has already announced that the legal reform could lower Israel’s credit rating), and so on,” the VC’s four partners — Rona Segev, Shahar Tzafrir, Adi Yarel Toledano and Eitan Bek — warned in a letter to the public.

At Saturday night’s mass protest in Tel Aviv, which drew over 110,000 people, co-founder and CEO of payment management platform Papaya Global Eynat Guez said foreign investment into Israeli companies would be threatened if Israel’s democracy is eroded.

People march in a protest against Prime Minister Benjamin Netanyahu and his government’s judicial overhaul plan, in Tel Aviv, January 21, 2023. (AP Photo/Tsafrir Abayov)

Citing $54 billion as the amount of foreign money invested in Israel in the last three years, Guez said a weakened Israeli democracy will scare away investors. “Those $54 billion won’t be here and the tens of thousands of workers who joined high tech won’t be here.”

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