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Europe’s Financial Crisis Weighs on Israel’s Economic Outlook

EU Foreign Minister Catherine Ashton holds a press conference together with her Israeli counterpart Avigdor Liberman

EU Foreign Minister Catherine Ashton holds a press conference together with her Israeli counterpart Avigdor Liberman
Photo Credit: Miriam Alster/Flash90

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The austerity package passed by Spain’s parliament last Thursday has done little to calm economic jitters worldwide, with the effects being felt in Israel as the Bank of Israel (BoI) is set to decide today whether to lower its key interest rate for a second straight month.

Spanish Prime Minister Mariano Rajoy’s conservative People’s Party pushed through the controversial plan to cut state spending by some $80 billion, despite stiff resistance from opposition parties. The package includes a rise in the Value-Added Tax (VAT) rate from 18 percent to 21 percent and the reduction of unemployment benefits. Spain is struggling with an unemployment rate of around 25%, and has sought to ease its banking crisis by obtaining a bailout from the Eurozone.

On the same day that the austerity package was passed, German parliament approved an aid package for the Spanish banking sector worth approximately $146 billion. Many commentators in Germany expressed concern over the utility of another bailout. German daily Frankfurter Allgemeine Zeitung commented: “The reality is that Spain is getting aid with loosened conditions. Soon Italy will ask, too. And the other reality is that, instead of investors, once again (mainly German) taxpayers will have to pay for the faulty speculation of banks.”

In Israel, the opening of the trading week on Monday morning saw the shekel-dollar exchange rate crossing the NIS 4/$1 line. The current shekel-dollar rate is at a three-year high, while the shekel-euro rate is 0.68% lower, at NIS 4.8705/€1. Later on Monday, the BoI is expected to announce its key interest rate for August, with some analysts speculating that the rate will be lowered for a second straight month, from 2.25% to 2%. Last month, the BoI cut the rate from 2.5% to its current rate.

Moti Bassok and Ram Ozeri, writing in Haaretz, explained that while a cheaper shekel makes Israeli imports more enticing, lower interest rates diminish foreign demand for shekel-based investments – which in turn tends to lower the shekel’s value. Supporters of an interest rate cut cite recent slower economic growth and weak foreign trade figures. The recent performance of Spanish government bonds have heightened fears that Spain will require much more assistance than last week’s $146 billion bailout, and Spain’s fiscal difficulties are causing the Euro to tumble, reaching a new low of approximately $1.2083/€1.

Israel is watching the continuing European debt crisis warily, as the European Union is Israel’s top trading partner. But despite Europe’s economic woes and trepidation in Israel, the EU is set to intensify relations with Israel by approving up to 60 new cooperative initiatives, according to AFP.

The initiatives are expected to be endorsed on Tuesday at the the annual Israel-EU Association Council meetings in Brussels. Predictably, they are sparking indignation from certain corners, as they come only two months after the EU’s statement condemning Israel for actions that “threaten to make a two-state solution impossible” – ie. settlement building, “settler extremism,” and “provocations against Palestinian civilians.”

According to AFP, the initiatives will include heightened cooperation in the energy and transportation sectors, and more closely-coordinated relations with a variety of EU agencies.

A European diplomat, speaking to AFP on condition of anonymity, was critical of increasing bilateral relations, saying: “Once again we’re hearing critical words on the one hand but it’s business as usual on the other…EU statements on the peace process are no more than theatre.”

Paul Hirschson, deputy spokesman at Israel’s foreign ministry, pointed out that the increased cooperation “is related to the existing work plan rather than some sort of upgrade, because that way the EU would have to find a way of delinking it from the peace process.”

In 2008, Israel’s attempt to enhance ties with the EU was stifled when the bloc suspended discussions because of Israel’s offensive against the Hamas regime in Gaza. It thereafter declared that any progress in bilateral relations would be conditional on progress in the Middle East peace process.

Israeli Foreign Minister Avigdor Liberman left for Brussels on Monday and will be attending a meeting of the Israel-EU Association Council.

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