Israel is in the midst of a perfect storm, warned Minister of Defense Ehud Barak at the "Globes" Israel Business Conference today. "The Arab Spring is the most important event in the region since the fall of the Ottoman Empire a century ago. Whole nations are rising up and bringing down their tyrants, and there is the threat of the Islamic movements."
Barak spoke of a "rising dimension of uncertainty", saying, "What is certain is that nothing is certain." He expressed the hope that, in the long term, democracy would rule in the Arab world, but that the current circumstances were dangerous. Firing a barb at Minister of Finance Yuval Steinitz, he said, "Public figures who believe that the risks to Israel have been reduced - I've heard some of them - are wrong."
Barak called the social protest "an important and exciting event, a protest by the backbone of Israeli society, which feels that its contract with the government and state has been violated and is no longer honored, that the solidarity that characterized us as a society for decades has gone." He said that the social protest was an opportunity for "a New Deal for the economy and society".
Barak said that cutting the defense budget now would repeat the mistake in the run-up to the 2006 Second Lebanon War. "My position is clear - defense is the existential condition, and with all the pain, it precedes quality of life. There is always room for streamlining, but the response to basic needs is Israel's insurance policy against our nation's environment in the Middle East. However, with responsibility and care, it is necessary to first protect the human and economic tissue."
Barak called for increasing the deficit, increasing participation in the labor force, and fighting tax evasion. "I call to gradually raise the spending cap, and if that is not possible, to expand the deficit by 0.9%. This will create NIS 7 billion a year and NIS 35 billion over five years, which I believe will meet the needs of the Trajtenberg report and defense needs, part of which cannot be explained to the public.
"A country, like a household, cannot live beyond its means. But like a home, when the roof leaks, you first repair it and then settle the accounts. When a member of the family is sick, you first cure him, and then settle the accounts. To survive and thrive, we must first of all protect the human and emotional tissue, while listening to the markets - not vice versa."
Quoting Franklin Delano Roosevelt, Barak said, "We have nothing to fear but fear itself." Although Barak disagrees with Prime Minister Benjamin Netanyahu, Steinitz, and Governor of the Bank of Israel Prof. Stanley Fischer about expanding the deficit, he noted, "A former European central banker once told me, 'When central bank governors talk, they do not necessarily say what they think, but what they think a central banker should say."
After accusing Ministry of Finance officials of harming Israel's security, Barak launched an even sharper attack, "Keeping the budget framework at any cost reminds me more of religious dogma than macroeconomics. To me, this is a dangerous attitude. Just as in my business, you do not wait for the enemy to enter the canal to attack; you attack when you see him on the horizon - that is how it should be in economics too. The government should make a controlled expansion now, when it is clear that the measure is right."
As for Steinitz's doomsday scenarios, Barak said, "I read the columns of Roubini, Stielitz and Tiomkin in the foreign press…I hear what we are saying that we'll become like Greece. Come on, Greece is similar to what is happening in Israel? Iceland is similar to what is happening in Israel? Nothing is like us, each place is something else, and I am ready to go over the numbers with anyone. We have room to maneuver with the interest rate, as Stanley has said, we have good current accounts compared with other countries. Europe? We're not there.
"The Finance Ministry is wrong, and doesn’t understand economic reality. Unconsidered tightness is just as dangerous as unconsidered expansion. The focus is wisdom and practicality. Cutting the defense budget now in the face of the social protest borders on a misunderstanding of macroeconomics. Anyone who believes that the deficit cannot be increased under any circumstance now is liable to find himself facing a much more dangerous situation, because he will want the expansion when the government has lost the markets' confidence and lost control of the situation."
Published by Globes [online], Israel business news - www.globes-online.com - on December 12, 2011
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