16.06.2010
 
Summary of the Address by the Governor of the Bank of Israel, Professor Stanley Fischer, to the 18th Caesarea Economic Policy Planning Forum, Nazareth
 
The Governor of the Bank of Israel addressed the 18th Caesarea Economic Policy Planning Forum convened in Nazareth by the Israel Democracy Institute, and spoke about the following issues:
The macroeconomic situation. Updated figures published today of Israel's economic growth in the first quarter were significantly better than the figures published initially––GDP grew at an annual rate of 3.6 percent, and exports by 7.3 percent. Encouraging growth figures were reported in Asia, the US, and even Japan. Currently there is uncertainty created mainly by the situation in Europe. At present the forecasts of the international institutions do not indicate expectations that the crisis will have a serious impact on Europe's real economy, because the fiscal restraint which countries were obliged to apply will be offset, and to some extent even more than offset, by the positive effect of currency depreciation on the export surplus and GDP. This refers mainly to the stronger economies, and less to countries such as Greece. The effect on other economies, however, including Israel's, will be negative, because the depreciation in Europe is expected to reduce their export surpluses to European markets. It is important to note that countries which encountered the crisis in a relatively sound fiscal situation, i.e., with a low deficit and debt/GDP ratio, could allow themselves to undertake fiscal expansion during the crisis without creating a debt crisis. That is why it is so important for Israel to continue reducing the debt/GDP ratio, so that fiscal policy can support the economy should the need arise if there is another crisis in the future.
Israel's economy grew at exceptionally high rates for many years; in the last few years too, despite various problems discussed in this forum today, good growth rates were achieved prior to the crisis. The economy could grow at a rate of even 7 percent under certain conditions, such as peace with our neighbors, and an increase in the employment rate. In this context the issues discussed here today and the proposals put forward to improve the situation in the labor market are especially relevant and important. Certain sectors of the population cannot continue to grow and at the same time remain outside the labor force––the situation is unsustainable, and will not continue forever. Another issue worthy of attention is the high-tech industry, and last week the Ministry of Finance published an important support program for high-tech.
The eurozone. Recently views have oft been heard regarding the damages and high costs incurred by European countries due to the existence of the eurozone. Those expressing that view forget, however, the utility resulting from the creation of the euro, and the high interest rates that prevailed in countries in the European periphery, such as Italy, prior to their joining the EU. The euro will continue to exist, and even if not all current members remain within it, there are others still seeking membership, such as Estonia, which recently took a step in that direction.
The housing industry in Israel. An expansionary monetary policy always boosts demand for durables and houses. In Israel most durables are imported, so that prices are not affected by the Bank of Israel's deep cuts in the interest rate. Housing, however, reacted as in the text books: increased demand pushed prices up sharply, but unlike in the text books, that did not result in increased supply, due to many factors that make it difficult to increase the supply of land and houses in Israel. As long as these barriers remain––and the government has started to deal with this problem––prices can be expected to continue to increase. The Bank of Israel therefore had to start taking steps on the demand side. The measures it introduced were intended to preserve the stability of the banking system, and also to warn households of the risk of exposure to rising interest rates that would lead to steep increases in repayments on mortgages taken currently at a very low interest rate. The Bank of Israel will continue to use its powers to prevent the continued sharp increase in house prices and the risks that could derive from it.
Drawing conclusions from the financial crisis. The Bank of Israel has started a gradual process of introducing new rules for the banking industry, in part based on Basel 2 policy and recommendations received from the Financial Stability Board.
Senior managers' pay. The Governor observed that in Israel there are senior managers whose remuneration is far in excess of any logical pay scale. The Supervisor of Bank's proposal is to lay the responsibility for decisions in this area on the board of directors, together with an obligation to explain their decisions. Such policies have in the past resulted in reductions in previously determined over-generous pay to senior managers in various entities.
Concentration. Israel's economy is a highly concentrated one compared with other economies: about 20 business groups control half of the market in Israel. This has implications for the degree of competition, and in certain situations could damage the financial system; the Supervisor of Banks monitors this area closely, and the constraints he imposes on the degree of concentration in banks' credit portfolios are intended to address this issue. The handling of this matter must be based on exact data and correct information, and on a thorough analysis of the implications of all proposed solutions, and not on unfounded populist rhetoric.
Gas discoveries. The assessments are that the size of the natural gas fields discovered recently may well be significant relative to the size of Israel's GDP. The question of royalties must be examined very thoroughly, and the Minister of Finance was right to appoint a committee to review this matter. The state must honor agreements it has signed, but not all claims made by interested parties prove the existence of such agreements. From a macroeconomic viewpoint, if the gas discovered turns out to be on a large scale, it could cause the "Dutch Disease"––appreciation of the local currency as a result of the export (or reduced import) of gas, which would affect the exporting sector. Should this problem arise, a solution will have to be found, for example boosting domestic consumption, or adopting the Norwegian method of establishing a sovereign fund to invest most of the gas royalties in world markets, thereby considerably moderating the appreciation, and allowing the government to use only a small share of the royalties on a current basis.
The Bank of Israel Law. Judge Winograd has just been appointed to head the Candidate Search Committee to find candidates for the Bank of Israel Monetary Committee and Administrative Council. Hopefully the procedure will be completed quickly and effectively, and the implementation of the Law will start soon.
Arab employees in the Bank of Israel. There are currently five Arab employees working in the Bank of Israel. Although this is a jump from the number in the last few years, the proportion is much lower than the share of Arabs in the population, and this situation must change. The Governor stated that he is personally following the program to increase the representation of the Arab sector among Bank of Israel employees.