Top economic aide: With right policies, Israel avoided Greece’s fate
Just a decade ago, says Professor Eugene Kandel, the Israeli and Greek economies were on a par. Not anymore
Is there a lesson for Israel in the Greek tragedy playing out in Athens? There is, according to outgoing National Economic Council Chairman Prof. Eugene Kandel.
“Long-term fiscal credibility is a critical component for any economy,” Kandel told ministers at Sunday’s cabinet meeting. Over the past decade especially, he said, Israel has been a model of fiscal stability, as it has cut its public sector, reduced debt, and — most importantly — encouraged foreign investments.
Many of those foreign investors have been the multinational corporations that have helped make Israel a world tech center. Currently, about 300 large international corporations have R&D centers in Israel, pumping billions of dollars a year into the country’s economy.
One company alone — Intel — is responsible for no less than approximately 30,000 jobs, according to numbers from the company, which have been confirmed by government statistics agencies.
At the meeting, Kandel outlined the progress Israel has made over the past 30 years, and especially the last decade. In 1985, inflation was running at over 500% a year, and Israel was mired in debt. By cutting the public sector, devaluating the shekel, and opening up the economy to foreign investors, policymakers laid the foundation for Israel’s current prosperity — which is evident, according to Kandel, when comparing the Greek and Israeli economies in recent years.
According to World Bank data, GDP per capita in 2004 was higher in Greece — $25,837 — than it was in Israel, at $21,796. However, the Greek GDP per capita has not grown in the past decade, while Israel’s GDP per capita has risen by approximately 50% to $32,691 (in 2015 dollars).
In addition, unemployment in Greece rose from 8.4% in 2002 to 26.5% in 2014, while unemployment in Israel dropped from 12.8% in 2002 to 5.9% in 2014.
Most important, in terms of international credit — the lifeline that sustains economies in the modern world — Israel is also doing far better than Greece, where the debt-to-GDP ratio climbed from 94.1% in 2003 to a world’s worst 177.2% in 2014. Israel’s debt-to-GDP ratio, meanwhile, fell from 93.9% to 68.8% in the same period. At the same time, Greece’s credit rating (Moody’s) declined from A1 (2002) to Caa3, while Israel’s rose from A2 to A1 (2015).
Why has Greece fallen on such hard times? All one needs to do, stated Kandel, is to examine the economic policies of Athens. Strong unions forced the government to provide all manner of social benefits, such as a full retirement pension at age 57.
While that kind of thing could be controlled as long as Greece was in charge of its own currency — as a sovereign government, it could print all the drachmas it wanted in order to fund the pensions or any other social program — it doesn’t have access to a euro printing press. And as a result, the ambitious social programs have cost the government “real” money — hard currency — since 2002, when the euro became legal tender.
Unable, or unwilling, to cut the budget, the government has consistently borrowed to fund its obligations — and that avenue has now been closed off. Foreign investment has, as a result, fallen to near-zero levels, and Greece has been shut out of bond markets since 2010.
Israel should not be too affected by the situation in Greece, explained Kandel; there is little direct trade between the two countries, with Greece mostly a tourist destination for Israelis. The Greek government has taken great pains to ensure that the tourist trade remain as unaffected as possible by the crisis.