Photo: Avishag Shaar-Yashuv
'Contrary to economic logic, a European boycott could help increase exporters' income'
Photo: Avishag Shaar-Yashuv
Dr. Adam Reuter

An EU boycott could be good for Israel

Op-ed: Thanks to the US dollar, European boycott threats could achieve the opposite outcome and improve Israeli export revenues

In 1946, during the Yishuv's battle against the British Mandate, General Evelyn Barker was appointed as the supreme commander of the British Army forces in the Land of Israel. Among the Jewish population, he was known as a blatant anti-Semite and hater of the Yishuv.


Among his many statements, the most famous and notorious one was "strike at the Jews' pockets," a declaration based on the anti-Semitic belief that the harshest way of hitting the Jews is economically. The Europeans appear to be mustering this belief right now to pressure Israel politically.



I'll start by saying that anyone slightly familiar with the issue is convinced that we are panicking for no reason. It's very unlikely that the European Union will impose a boycott on Israel as the Arab League did at the time. There will always be a country which will oppose a boycott of Israel and veto it, as well as huge international companies that have invested in Israel and have the ability to significantly influence governments to avoid taking steps which contradict the Europeans' own financial interests.


Moreover, when it comes to a European consumer boycott, unlike an official European Union boycott, its influence is close to zero, and I'll elaborate on that in a different article.


But let's assume that a European boycott is imposed nevertheless. Could there be an exactly opposite situation in which the European boycott will help Israeli exports? That sounds entirely impossible, but it could definitely happen! (And not that anyone wants us to be boycotted, not at all). In fact, the European boycott threats could achieve the opposite outcome and improve the situation of exports in Israel.


How is that possible? How can such a strange and odd outcome emerge from the European boycott? Here is an explanation on this possibility which contradicts economic logic (definitely the Europeans' logic).


Worst-case scenario: Exporters' income will drop 6%

Let's begin with a few simple facts. Israeli exports to the EU make up about 30% of all Israeli exports. It's hard to calculate Israeli companies' level of exposure to agreements with the EU, but according to Finance Ministry estimates published recently, the damage could amount to about 20% of the total income from exports to the EU.


It should be noted that this kind of damage is considered extremely serious in the world of business, very unusual, and indeed the Finance Ministry's worst-case scenario. According to these calculations, there would be a 6% drop in the overall income from Israeli exports (a 20% drop in income from exports to Europe multiplied by the percentage of exports to the EU of total Israeli exports).


Another fact is that all exporters in Israel are affected by the US dollar's exchange rate, either directly if their income is in dollars, or indirectly through the currency cross rates. For the purposes of illustration, an exporter receiving his income in Australian dollars translates the Australian dollar into the US dollar and then into shekels, as the foreign currency market in Israel is only traded in US dollars. So it's enough for the US dollar to appreciate against the shekel, even if the Australian dollar did not budge that day against the US dollar, for the Australian dollar to also appreciate against the shekel.


Another known fact is that when there are situations of significant geopolitical difficulties in Israel, the dollar appreciates against the shekel. It happened in the past during wars and intifadas, and it also happened when there were international economic crises, like the one in 2008.


Clearly, a European boycott could create a serious economic crisis of this kind, with mass dismissals and bankruptcies of Israeli companies. Like in the past, this background could serve as the exact catalyst for a process which would lead to a strong reaction in the dollar's exchange rate, which would appreciate sharply against the shekel. In fact, it's safe to assume at a high probability level, that the greater the damage caused by the boycott, the greater the depreciation, as there would be a strong correlation between the two scenarios.


Positive outcome: Exporters' income will rise 10%

How far will the dollar go up? It's impossible to know, but let's assume there will be a depreciation of around 10% and it will go up to NIS 3.85 per dollar (the depreciation can be smaller but it can also be much bigger of course), because many Israeli would be afraid and sell shekels and buy dollars in light of the difficult situation, and that would mainly be done by foreign speculators who would flee the shekel, because Israel has been hit with a boycott.


More importantly, Israeli institutional bodies, such as provident and pension funds, which would seek to protect their investments and make a profit from the dollar's appreciation, would sell shekels and purchase billions of dollars.


Today the dollar moves around an exchange rate of just under NIS 3.50, and all of the Bank of Israel and Finance Ministry's attempts so far have failed to raise it from this point. A depreciation of the shekel by 10% would help the income of all of Israel's exporters, as they would be able to convert their income by much higher rates, regardless of the foreign currency they receive, as we explained. In fact, their income in such a scenario would go up by 10%.


This means that all exporters in Israel would experience a rise in income by some 10% compared to the damage to their income which we calculated earlier, as a result of the EU boycott, by some 6%...


The hardest blow 

Of course one could say: What if the shekel were to depreciate at a rate lower than 10%? But to the same extent one could ask what if the damage to exports to Europe were lower than 20%. There could be a variety of interim scenarios. In any event, these processes would offset each other and there could definitely be scenarios in which exports would actually increase!


Still, it's important to stress that the group of exporting companies which would be negatively affected by the EU boycott would suffer a hard blow, on their own. A depreciation in the shekel's exchange rate, according to the aforementioned scenario, would benefit all exporters in a uniform manner, so that the overall picture would be strangely and paradoxically better, but individually there would be companies that suffered heavy blows, and in extreme cases even go bankrupt.


Dr. Adam Reuter is the chairman of the Reuter Meydan Investment House and CEO of Financial Immunities Ltd.


פרסום ראשון: 02.05.14, 09:12
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