Saving Israel from the Euro crisis

To grapple with the impending crisis, Israel’s government must improve the nation’s competitiveness.

Filed under:

public policy • world affairs

Even if the euro bloc is miraculously saved, it is still likely that Israel will have to deal with an economic contraction in the countries to which it exports. With nearly half of Israel’s Gross National Product deriving from exports, a world economic contraction that will shrink Israeli exports will cause sharply reduced Israeli economic activity and growing unemployment. There is also some fear about the stability of the international monetary system, for which we ought to prepare nationally and individually.

The Finance Ministry and the Bank of Israel are, of course, both preparing plans to meet a possible crisis, but that is not enough. These institutions are not designed to launch essential reforms in the anti-productive structure of the Israeli economy. They are too preoccupied with preserving “stability”. But to face a damaging economic contraction such reform are essential, especially the cutting of our bloated government which is the source of most of the inflated costs in our economy. Reforms must also be made to tackle the gross misallocation of credit, destabilizing labor relations and a dysfunctional land allocation system and housing sector.

To grapple with the impending crisis, we must improve our country’s competitiveness. Only comprehensive reforms that will increase economic efficiency and significantly reduce production costs, can achieve this. Here are few essential steps that must be taken:

A sharp cut in our wasteful government can save us billions and streamline the economy. This would also allow us to reduce taxes before the coming contraction instead of raising taxes, as the Treasury is now proposing, thus threatening to strangle economic growth. The government also ought to cut cumbersome bureaucratic regulation, which causes excessive costs and harms mostly small businesses, our engines of growth. The Israeli economy should also be exposed to competitive imports, especially of food and other essential consumer items which sell in Israel at highly inflated prices because The Ministry of Trade and Industry is protecting Israeli monopolies ostensibly to protect employment.

A combination of increased competitiveness and efficiency can lead to a quick reduction in the costs of doing business in Israel and strengthen our competitive edge. Costs in Israel today, including the cost of labor to the employer (which has a major tax component in it) and the cost of raw materials and services (inflated by monopolies and high taxes) are much higher than abroad.

There are also national projects whose acceleration could be most beneficial. Moving army bases from prime locations in city centers to the Negev will cut the defense budget, free much needed land for housing and thus reduce its prohibitive cost and also cut urban congestion and the cost of transportation. It will also give a big boost to the development of the Negev, as the many thousands of soldiers and officers manning these bases and their families settle there.

As for individual preparedness, Israelis unfortunately believe that the government is not only the source of all wealth and happiness, but can also protect them from every misfortune. This, despite the fact that successive Israeli governments have created and perpetuated a concentrated politico-economic and social system that harnessed a most talented people (note the number of Israeli start-ups) with serious economic problems. Skilled Israeli workers often earn a meager salary. All public sector systems, including security, education, law and health, don’t function properly. The massive gaps between the rich and the poor as well as corruption are widening.

Individuals would do best not to trust the government, but rather take responsibility and prepare for the impending crisis by themselves. Today there is an abundance of accessible and trustworthy information on how to protect our savings, from investing in relatively safe bonds to investing what is customary during a crisis: gold coins and precious metals (or their ETFs). These have traditionally protected assets from rampant inflation, eventually the most likely result of the printing of massive amounts of money by most governments, especially the US.

Finally we must never forget that is it our responsibility to demand from our elected officials that they use the crisis as an opportunity to make the necessary changes in the Israeli economy, changes that will not only help us overcome the present crisis but also the underlying problems of our anti-productive system, a system that has kept us from fulfilling the enormous potential of Israel workers and entrepreneurs and that endangers our long term survival as a viable state.

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