Governor of the Bank of Israel Prof. Stanley Fischer spoke about the tent protest for the first time today, 18 days after it began. At a press conference he admitted that he was surprised by the social protest, and said that four issues must be dealt with: high home prices, the high cost of living, taxes, and the government's ability to provide the services that the public needs and expects to receive efficiently.
"The situation is very dramatic. The recent developments in the Israeli economy came as a surprise to me, and I assume that is true for most people, because there were no prior signs," said Fischer in his opening remarks. "This was also a surprise because the economy is in very good shape by every measure, with a low unemployment rate. But it is impossible not to be impressed by what is happening in the tents and in the 150,000-person demonstration," said Fischer
Fischer began by reviewing the global economic situation and the debt crisis in Europe. "There is a debt problem in the periphery. There has been in attitude to small countries; they are prepared to thinking about cutting debt in countries with very high debt. The Europeans can deal with the small countries, but it will be much harder to deal with larger countries if they face more serious problems. Growth forecasts for Europe are starting to be lowered. The current situation is even worse than we thought a few months ago."
Fischer warned against the consequences about the global economic conditions for the Israeli economy, which is export oriented. As for the diplomatic situation, he said, "We're not seeing any progress in peace talks with our neighbors, the Palestinians, and this is not good for the future of the Israeli economy."
Fischer then moved on to the most burning issue of the past two weeks - the middle class protest, and he called for budget changes, while keeping budget discipline. "We mustn’t pull solutions out of a hat within a day or two. We must examine the issues, and analyze them, because they are complicated. We must form an operational plan and implement it," he said.
Fischer sent a barb at Prime Minister Benjamin Netanyahu, saying, "We sometimes announce plans, but we don’t implement them. We must monitor the plans and carry them out."
Fischer called for the establishment of monitoring teams "like we did in 1985" as part of the economic stabilization plan that dealt with Israel's hyper-inflation of the early 1980s.
As for the housing shortage and increase in housing starts, Fischer said, "Things have begun to move. We're building at a rate of over 42,000 apartments a year, but housing starts are not housing completions. We must wait for two years. We're still at around 34,000 housing completions a year, but there is a supply response in the market, and that's very important."
For the first time, Fischer responded to criticism that the Bank of Israel's low interest rate was responsible for the housing bubble. "If we hadn’t slashed the interest rate and kept it at 4.25%, we wouldn’t have a housing problem. Instead we'd have had a high unemployment problem, like in the US and Europe where the unemployment rate is almost 10%. If the interest rate had been high, there would have been no work here, and people wouldn’t even have been able to contemplate buying a home. Had the interest rate been higher, there wouldn’t have been more homes, but fewer homes. I hope that we won't see a 30% fall in home prices in Israel."
Fischer said that the special team that Netanyahu appointed to review indirect taxes must first examine the increase in indirect taxes compared with the drop in direct taxes. "We've seen direct taxes fall 25%, which caused a change in the income distribution. Income taxes paid by the wealthy fell," he said.
Fischer praised the tent protesters, but hinted that some of their motives were political. "They are the nation's backbone. They are the people who greatly contribute to the economy and the country. We must seriously examine their demands, assess the cost of the demands, and decide what to do - responsibly. I hope that they will consider what they want and make the serious analyses that are needed now. Some of their demands are political, and I won't talk about them, but they contribute to the quality of politics in Israel. But people who want to influence politics cannot only work through protests. If none of the protesters enter politics, both they and we will lose."
Fischer summed up on a pessimistic note. "We're entering a difficult time because of the global economic conditions. Therefore, we must not breach the budget framework, because we'll pay a very heavy price. We did that in 1995 and it cost us dearly. We mustn’t do it again. We see what's happening in countries that didn’t deal with their budgets. We're in good shape, but we must not become complacent."
Published by Globes [online], Israel business news - www.globes-online.com - on August 1, 2011
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