Israel Faces Economic, Security Instability Following Contentious Legislation

Economic indicators dipped and Israel’s military readiness may be compromised

The dust has not settled on this week’s political drama in Israel. The Knesset, Israel’s parliament, approved the first law in a contentious government plan to overhaul the judicial system over the vehement objections of opponents.

In the immediate aftermath were violent street protests, thousands of doctors went on a wildcat strike, and labor unions threatened a broader strike. Israel’s currency, the shekel, weakened, and a leading credit agency, Moody’s, warned that the country was an investment risk.

Most critically, perhaps, military reservists began delivering on a threat to stop showing up for voluntary duty.

The law the Knesset approved Monday was an amendment to one of Israel’s 13 basic laws, which cumulatively stand in for the country’s constitution.

The new law revokes the Supreme Court’s power to review legislation, government policy, and personnel appointments based on the “reasonability standard.”

This standard enables the court, among other things, to stop government action when legislation is vague or does not consider all factors. It can also be used to block appointments or dismissals.

Recently, the Supreme Court used the reasonability clause to block the appointment of a prominent politician, Aryeh Deri, as a government minister.

As part of his sentencing, Deri was convicted of tax fraud and had promised not to hold ministerial positions. However, Deri is also a key government ally, and his appointment was part of a deal to retain his support.

The coalition believes the new amendment restores elected governments’ ability to govern while curbing the power of unelected justices.

Opponents believe it opens the way for civil service corruption, including political appointments to professional positions. They fear it will also pave the way for the firing of Israel’s chief legal officer, the attorney general, who has been a thorn in the government’s side.

The opposition also suspects the prime minister, Benjamin Netanyahu, may use the reforms to escape his indictment for alleged corruption.

The broader reform plan has divided the country since the government announced its intentions early this year, and Israel has endured months of impassioned protests. This week’s passing of the first law in the government’s agenda brought those tensions to a head.

The government, led by Netanyahu, a right-wing leader, seeks to weaken the Supreme Court, claiming it has accumulated too much power in recent decades.

Opponents see the court and its judges as the country’s primary check on executive power. Israel lacks a constitution, and the ruling coalition controls the country’s sole legislative chamber.

On Tuesday, Moody’s credit agency issued a report warning of “significant risk” if the internal turmoil persists and the government pushes forward with its agenda. The agency warned of “negative consequences for Israel’s economy and security situation.” Large banking groups also voiced concerns about stability.

Netanyahu and his finance minister, Bezalel Smotrich, dismissed the warnings, saying they were “momentary reactions” and adding that “when the dust settles, the strength of Israel’s economy will become evident.”

Warnings about the legislation’s impact on the economy existed from the get-go. Moments after the first law passed Monday, the Israeli shekel weakened against the dollar, and the stock market plummeted.

Israel will now move quite rapidly in the direction of a corrupt economy

According to Elise Brezis, professor of economics at Bar-Ilan University, Israel’s economy will soon suffer from rampant corruption. Companies dealing with infrastructure and energy with strong government ties will be unmoved, but those based on human capital will gradually steer their investments and employees elsewhere.

The most brutal hit will be Israel’s booming high-tech sector, the economy’s main growth engine.

“Israel will now move quite rapidly in the direction of a corrupt economy,” said Brezis, who also serves as head of the Azrieli Center for Economic Policy and director of Forum Macro, economic think tanks.

She told The Media Line, “If the government does not fall within the next year, slowly but surely, high-tech companies will move out of Israel, and the economy will decline.”

According to the Israel Innovation Authority, the volume of investments in Israel dipped by 45% since the second half of 2022, which is expected to continue.

Israeli tech companies reported negative returns in 2023 compared to technology companies traded on the NASDAQ, and the Tel Aviv Technology Index has declined by 1%.

“The long run forecast is obvious: The shekel will devalue further, and the Israeli economy will slowly enter a catastrophe,” Brezis predicted.

Israeli defense policy is also a consideration.

When the protests began, there was a trickle of dissent among Israel’s reservists. Former officers warned that they might not show up for volunteer reserve duty if the coalition proceeded with its reforms.

This was especially true for those serving in elite units such as the air force, cyber command, or commandos, which rely heavily on voluntary time donated by highly trained reservists.

Reserve duty is mandatory for many former soldiers, typically for a few weeks each year. However, many veterans of specialized units donate more days than required to maintain their training and staff key positions.

The Israeli military depends heavily on this volunteer ethos.

Reports now say many reservists have told commanding officers to take them off the roster.

Yaron Kramer, a 51-year-old attorney, is a former reservist now active in the Brothers and Sisters in Arms grassroots protest group. He estimates that hundreds of reservists have already refused to show up for duty.

The call to refuse by Kramer and others has come under intense criticism. In Israel, many Jews treat the army as a sacred institution above politics.

For many, the call to refuse was a red line that should not be crossed. Even some government opponents have condemned the move.

“What brings thousands, perhaps tens of thousands of people, to do this is an outburst of rage, frustration, and pain,” Kramer told The Media Line. “We could have continued to demonstrate and wave flags, but in the end, we face a government that doesn’t care about us.”

The ruling coalition, Kramer said, has “pushed people into a corner without any escape, and this has now blown up in their face.”

The reservists’ threats have raised concern within the Israeli defense establishment, which worries the country’s combat readiness will be impaired. The military depends heavily on reservists, especially in times of war.

In a rare statement Tuesday, the Israeli chief of staff, Herzi Halevi, pleaded with the public to focus “on what we have in common and what unites us: the mission of defending the State of Israel, our foremost obligation.”

Hours later, Hassan Nasrallah, leader of the Lebanon-based Islamist group Hizbullah, said Israel was on its way to “disappearing” because of its internal political crisis. Many in Israel fear the country’s enemies will seize the opportunity to attack.

Responsibility for Israel’s security lies with the prime minister and defense minister, not the reservists

Kramer and others remain steadfast, however.

“Responsibility for Israel’s security lies with the prime minister and defense minister, not the reservists,” he said. “They should have realized they had gone too far when we threatened to withhold service. We made this decision out of great distress and with tears in our eyes.”

Something in Israel appears to have cracked, perhaps beyond repair.

Ziv Shilon, an Israeli veteran who lost his hand in a 2012 battle, is an Israeli public figure. “My brothers in arms who died did not live to see the day when the place we fought for began to fall apart,” Shilon posted on Facebook. “I now wonder whether it was worth getting injured or I would have been better off dying.”

Israeli media reported Wednesday that the Knesset Foreign and Defense Affairs committee would convene for a closed meeting to discuss military preparedness.

“I am most afraid of the damage that cannot be repaired,” said Kramer, who vowed to continue opposing the government. “This anxiety fuels our struggle.”