Government crisis hitting Israel's once-flourishing economy

A demonstrator waves an Israeli flag smudged with red coloring during a protest.

By Melanie Lidman and Tracy Wilkinson

July 25, 2023 4:03 PM PT

TEL AVIV —

Full-page ads in solid black covered the fronts of Israel’s major newspapers Tuesday. Doctors walked out on strike, and the Israeli currency and stock market sank as the country braced for dangerous economic fallout from the government’s efforts to weaken courts.

Political turmoil that sent tens of thousands of protesters into the streets for the last six months is also pulling down Israel’s economy, investors and experts said Tuesday.

A law passed by Prime Minister Benjamin Netanyahu’s far-right coalition government stripping power from the Supreme Court brought warnings from critics about a slide into autocracy — and from international credit agencies and the country’s high tech industry about Israel’s economic future.

Since the judicial reform crisis began six months ago, the value of the shekel, the Israeli currency, has fallen to a three-year low and the stock market has fallen by 10%, according to Reuters. In the last 48 hours, the TA-35 Index, the top 35 companies with the highest market value on the Tel Aviv Stock Exchange, dropped 4%.

“The last few months have literally broken the spirit of a lot of people who now don’t believe their future is in Israel,” said Eynat Guez, co-founder of an international payroll company called Papaya Global and a leader in the Democratech movement. “The government is sending a clear message: You’re not welcome here. We don’t care about your future.”

The law passed Monday, the first of three proposed judicial overhauls, strips the Supreme Court’s ability to nullify government decisions it finds “unreasonable in the extreme.”

Opponents believe it will gut Israel’s judiciary and destroy a central pillar of its democracy. Supporters want to limit the power of liberal judges to overturn laws created by an increasingly extremist and ultranationalist legislature.

The efforts by Netanyahu, who is on trial on corruption charges, brought a rebuke from Israel’s most loyal ally, the United States, where President Biden and major U.S. Jewish organizations urged the prime minister to reconsider the law and seek more consensus. Netanyahu ignored those entreaties, although the Israeli Knesset, or parliament, is entering a long recess and won’t be able to take further action until returning in October.

The Knesset’s moves also threaten to jeopardize Israel’s attempts at rapprochement with Arab nations, especially Saudi Arabia, and further erode chances of peace with the Palestinians living under Israeli occupation.

The reverberations prompted a warning Tuesday from the credit agency Moody’s about a “significant risk” likely to cause “negative consequences for Israel’s economy and security situation.” Morgan Stanley also predicted “increased uncertainty about the economic outlook,” though neither agency downgraded Israel’s credit rating, which helps guide international investment.

Netanyahu and Finance Minister Bezalel Smotrich dismissed the economic concerns raised by Moody and others. “This is a temporary response, and when the dust settles it will be clear that Israel’s economy is very strong,” they said in a joint statement Tuesday.

Especially hard-hit, analysts warn, is the high-tech industry, a roaring engine of Israel’s modern economy.

The newsstands awash in black Tuesday morning were the work of the Democratech movement, a coalition of high-tech workers opposed to the judicial overhaul. It paid for ads — with the words, “A dark day for Israel’s democracy” — in five of the country’s largest papers, including the pro-Netanyahu Israel Hayom.

“This is killing the high-tech scene in Israel,” said tech investor Itzik Fried, who has attended the chanting, flag-waving demonstrations weekly. “Money is like water, it flows where it’s easy. And it’s about to stop coming here.”

The tech sector has been leading the way in Israel’s economic decline as more workers and companies relocate, although the country is not yet in recession and unemployment has not soared, said Yannay Spitzer, associate professor of economics at Hebrew University.

Almost 70% of local Israeli startup companies have taken legal or financial steps toward relocation, including withdrawing cash reserves, moving headquarters outside Israel, and relocating employees or conducting layoffs, according to a report this week from Start-Up Nation Central, an independent nonprofit focusing on the tech sector.

“It took years to build a high-tech sector in Israel, and high-tech has two fundamental pillars,” said Spitzer. “One is the institutional make up, that it’s sound to make business here and safe to invest in Israel, and the other is the human capital. And the judicial overhaul is about to destroy both of them.”

The high-tech sector has been an influential part of the protest movement over the last six months, including joining general strikes on several occasions. In March, widespread strikes from the tech sector, the country’s largest labor unions and airport workers forced Netanyahu to temporarily shelf the judicial overhaul for a number of months.

Spitzer estimates that the Israeli economy has lost some $81 billion, or 15% of the country’s GDP, because of the judicial reforms and the impact on the economy. Israel’s stock exchange had been a close mirror of the S&P 500 index. But in the last year, the Tel Aviv Stock Exchange has dropped 26.5% lower than the S&P.

For the masses of demonstrators who formed an opposition movement unprecedented in Israel’s 75-year history, there was a sense of defeat and dismay after Monday’s vote. Many were returning home Tuesday, and streets here and in Jerusalem were largely back to normal routines.

Still, leaders of the movement, which grew to encompass mostly secular students, progressive academics, business entrepreneurs and the elite of Israel’s security establishment, vowed not to surrender.

Netanyahu’s allies have vowed that the law passed Monday is only the beginning. They plan to exert Cabinet control over judicial appointees and take steps to ensure legal advisors throughout the government are partisan loyalists.

Without the protest movement, writer Noa Landau said, “all state systems would have long since been completely recruited in service of a prime minister who is on trial for corruption” and his “ultranationalist and theocratic” cronies.

“The greatest struggle is still ahead,” Landau, an editor at the liberal Haaretz newspaper, wrote Tuesday. “The appetite of the victory-drunk coalition will only increase in the Knesset’s fall session. The civil protest is therefore more important than ever.”

Critics of the judicial overhaul have begun to file petitions challenging it at the Supreme Court. But since the law specifically targets the Supreme Court, it is unclear how these challenges would play out, setting Israel on an uncharted institutional clash.

And many in Israel worry that the instability at home weakens their country in the face of its enemies, such as Iran, raising alarms over security.

Lidman is a special correspondent. Times staff writer Wilkinson reported from Washington.