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Friday, March 31, 2006

Two percent? It should have been 10 percent!

The Tel Aviv Stock Exchange dropped by about two percent today in response to the election results. I saw one article that attributed the drop to Kadima Achora's disappointing showing. But that's not the real issue.

Meirav Arlosoroff, one of Israel's top financial reporters, goes through the long list of real dark clouds on the economy that were created by Tuesday's election.

Make no mistake: Financially, the election results are somewhere between bad and very bad. Politically, the results are relatively simple; there is a clear majority supporting continued disengagement from the territories, and this is economically significant too. However, economic policy does not begin and end with disengagement, and anyone searching for such a policy will be hard pressed to find it in the coming years.

1. A fragmented coalition: The combination of Kadima, the Labor Party and the Pensioners Party (Gil) gives the coalition 55 seats. Thus, a fourth coalition member will be necessary to give the coalition a majority. Meretz, with four seats, will not be enough. [If Achora is 29 and Meretz is 5 - as I reported earlier this evening - that would make the total 61, which would be enough. Of course, Labor is more part of the problem than the solution and the Pensioners' party may be part of the problem as well. CiJ] Therefore, we can assume there will be no choice other than to add one or more of the religious parties. A coalition of four parties or more is necessarily a weaker one, which will have difficulty pursuing a decisive policy on anything. Such a coalition will certainly have trouble pursuing a determined economic policy, when the economic viewpoints within it range from Kadima's right-wing capitalism to the clear-cut social bent of Shas, Labor and especially the Pensioners.

2. Shas: Shas' financial situation is so bad there is a chance it will sacrifice almost anything to get into the coalition, to reconnect itself to government funding. This makes things simpler because Shas could agree to support continued disengagement as a condition for joining the coalition. However, it would also mean Shas would demand a large financial incentive for joining. A likely result would be turning back the clock on welfare payments, meaning the return of child benefits.

Pensioners: The enigma known as the Pensioners Party will become clear in the coming weeks. Until now, the party has not bothered to define its goals, apart from a general concern for pensioners' rights. They will now have to elaborate.

It is laudable that such a serious subject as pensions has come into the limelight thanks to the Pensioners Party. However, the importance of the issue does not lessen the danger inherent in handling it wrongly.

The party is composed of experienced former union leaders, and large Histadrut unions to boot. As we know, the Histadrut labor federation is vehemently opposed to pension reforms carried out by the previous government. We can assume the subject of turning the clock back on these reforms will come up in coalition negotiations.


Aside from this, the demand to raise old-age benefits, and possibly the imposition of a compulsory pension scheme, is likely to come up too. The price of these demands, whether or not they are justified, will be huge.

3. Labor: The Labor Party, the second-largest in the coalition, is expected to demand a senior portfolio. Finance is the most natural choice, assuming that the Foreign Ministry does not interest Amir Peretz. Peretz as finance minister again means a retreat from pension reform, and also a possibility of backtracking on capital market reform - the Bachar reforms.

It will certainly mean a rise in the minimum wage. And don't forget the remaining privatizations: Mekorot, the Israel Electric Corporation, the Israel Military Industries and the Israel Aircraft Industries. These will all fall by the wayside, as will any prospect of government reform, both local and national, and probably education reform as well. All of these reforms demand a greater level of job market flexibility.


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