Will new BoI governor just be rubber stamp?

The latest chapter in the great fiscal adjustment saga that the Ministry of Finance is planning occurred last Thursday when Prime Minister Benjamin Netanyahu asked Minister of Finance Yair Lapid to secure the blessing of Governor of the Bank of Israel Prof. Stanley Fischer for the proposal to raise the deficit target to 4% of GDP from 3%. It is very doubtful whether Netanyahu imagined that Fischer would save Lapid from his political dilemma, but the step lifted from Lapid, for the moment, the responsibility for a measure which appears to be highly problematic.

Fischer will leave the Bank of Israel at the end of June, and we cannot expect that his last big decision would be to deviate so sharply from what he has preached for months, as reflected in the Bank of Israel's Annual Report for 2012. Lapid, a political novice, and a finance minister who is learning on the job, received a lesson in political maneuvering. He must now decide whether to devote his efforts to seeking an additional NIS 10 billion in budget cuts and tax hikes, or to find a central bank governor who will bless his original proposal.

To escape the dilemma, Lapid will have to complete the budget with the current governor, to prevent the argument spreading to his successor. Anyone familiar with Israel, and how such decisions are made, knows that this is unlikely to happen.

The important question, therefore, is to what extent will the argument over the budget direction through the end of 2014 affect Netanyahu and Lapid's decision on who will be the next governor of the Bank of Israel. The fact is that, for now, the Israeli public still does not know who will head the central bank in just over two months. It is quite possible that this fact is not the result of any plan, but merely part of the country's governing culture to which Israelis are accustomed. But, in the end, the reasons for delaying the choice of a new governor are irrelevant. The main issue is whether the candidates who will be considered for the job will have to declare in advance that they support the new finance minister's policy.

Netanyahu will answer this question. He will have to approve the decision. If he insists on the appointment of an independent man who will not toe the line to Lapid's political expediencies, he will have to support a greater fiscal adjustment than the one Lapid and the Ministry of Finance officials are proposing. Lapid will not be the only political victim of a greater budget cut; Netanyahu will be too. If he decides to cooperate with Lapid in finding a candidate for governor of the Bank of Israel who is more amendable to the government, Netanyahu will lift a great political burden from Lapid's shoulders, but he will bear responsibility for a decision that will greatly damage the credibility of his new government.

Published by Globes [online], Israel business news - www.globes-online.com - on April 14, 2013