If financial crash comes
No matter how many march for 'new Israel' and 'social justice,' government should burden budget as little as is politically possible
This analysis is easy to illustrate. The huge problems with the US subprime mortgages market were known long before the actual crash in September 2008. Yet no one foresaw that the crisis would be triggered through the bankruptcy of the Lehman Brothers investment bank.
Today there are many indications which make a financial crisis likely. Presently the focus is on Europe, where there are many structural problems and nobody has a clear view of how to successfully tackle them. The eyes of all experts are focused on Germany, the European Union’s largest economy. It will have to carry the main risks and financial burdens to keep a number of member states in the Eurozone afloat, if that is what is ultimately being decided.
Chancellor Angela Merkel tries to follow a prudent policy, yet receives criticism from all sides. Her Christian Democrat party colleague, Labor Minister Ursula von der Leyen — considered a competitor for the chancellorship — is pleading for a United States of Europe.
Some parliamentarians from Merkel’s party feel however, that she has already gone too far. There are dissenters also in the two other coalition parliamentary factions, the Christian Social Union and the Free Democrats.
German President Christian Wulff, also a Christian Democrat, said last week in front of a gathering of Nobel Prize winners that the financial markets remind him of playing dominoes. First some banks save other banks, than states save banks and ultimately a Union of States has to save states.
He wondered who would ultimately save the saviors. Wulff also heavily criticized the European Central Bank saying that its massive purchase of state debentures goes far beyond its mandate. He added that many governments do not even understand how serious the situation is.
Israel will encounter greater difficulty
But the crash may well be triggered elsewhere. The situation in Greece is disastrous. The country’s economy which in 2010 shrunk over 4% is likely to contract at an even higher percentage this year. Most likely its deficit will be larger than the budgeted 7.5%. The opposition New Democracy party says that the medicine prescribed by Greece’s supposed saviors is worse than the country’s illness.
Eurozone policy makers do not know what to do - continue to help the country, or let it go bankrupt? At the beginning of this week markets were even more nervous about Italy. Its economy is so big, that if it can no longer refinance its debt, the other Eurozone members cannot save it.
In the meantime there is huge opposition in Finland — one of the financially solid Eurozone countries — to lend money to near bankrupt Greece, unless it receives special financial guarantees. Austria and the Netherlands have said that they want similar preferential treatment if Finland gets it.
There are several other threats. If banks stop lending to certain other banks which they consider weak, a crisis could come from that side. Christine Lagarde, the head of the International Monetary Fund, said that the European banks need up to 200 billion Euro additional capital to prepare for an economic and financial crisis.
This list is not only far from exhaustive, but if a similar article were to be written in a few weeks from now — and there has not been a crash in the meantime — some hurdles may be overcome. Yet other problems will have emerged.
What can Israel do in times of such major financial uncertainty? Is it like a leaf floating in the air, subject to future hurricanes? Not necessarily. In times of major crises, being small is relatively beautiful or, better said, less ugly than being big. If the world economy has major problems, Israel will encounter greater difficulty in exports and its growth will decline.
Without the present social unrest and the Palestinian terrorist and rocket attacks, the shekel might well have become much stronger against the euro and the dollar, which would be disastrous for these exports.
One clear conclusion from all of this is: No matter how many march for what they call “a new Israel” and “social justice,” the government should burden the budget as little as is politically possible when giving in to them, even as part of their demands are justified.
By acquiescing too much financially to the demonstrators, this will foolishly weaken the economy ahead of huge financial problems around the world, which will also affect Israel in a major way.
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