Institutional Turmoil:

For the seventh straight week, tens of thousands of Israelis demonstrated on February 18^th, amid the ongoing "judicial reform" crisis in Israel. According to The Jerusalem Post, nearly 250,000 Israelis turned out for these protests, including 135,000 on the streets of Tel Aviv alone. These demonstrations came a few days after massive demonstrations on February 13^th, outside the Knesset in Jerusalem and several Israeli cities, as the government began its first rounds of voting on parts of the proposed legislation in a stormy session of the Knesset from which at least 14 members of the opposition were expelled.

The protests come amid growing warnings by Israeli elites of the consequences of the continuation of the current crisis on the country’s economic conditions. Along with the decline of the Israeli shekel and a notable increase in balance transfers to foreign banks, there are fears of a downgrade in the Israeli economy’s credit rating and a reduction in foreign investment in the country.

Worrying Signs

The scope of the demonstrations and strikes in Israel has widened in recent weeks. The latest demonstrations coincided with a nationwide general strike. Although the General Federation of Labor in Israel (the Histradut) has not joined the demonstrations, and the government has tried to block the strike plans, hundreds of companies and municipalities have allowed their employees to be absent from work in order to participate voluntarily in the demonstrations. In addition, many universities, schools, technology start-ups, and private-sector companies have joined the strike and have provided buses to transport those protesting the "judicial reforms."

In tandem with the growing strikes in Israel, economists have continued to warn of the effect of the judicial reform plan on economic conditions in the country. The most recent warning came from the governor of the Bank of Israel, Amir Yaron, at a financial session of the Knesset. Referring to the High Court, Yaron warned of "the dangers of harm to independent institutions" for the country’s economic stability and credit rating.

It is worth noting that criticisms from business owners, economists, and industrialists have increased recently, led by two former governors of the Bank of Israel, Professor Jacob Frenkel and Professor Karnit Flug, who, in an article published in Yedioth Ahronoth, warned of the destructive effects of judicial reform on the Israeli economy. Furthermore, Moshe Hazan, a member of the Bank of Israel’s Monetary Committee, resigned in protest against the proposed project.

In addition, more than 270 faculty in the fields of economics and management at Israeli and foreign universities, along with former government advisors, have signed a document explaining the expected harm to the Israeli economy as a result of implementing the proposed reforms to the judicial system.

Possible Repercussions

The domestic political crisis and the ongoing demonstrations in Israel are expected to have the following negative repercussions on the Israeli economy:

1. Withdrawal of foreign companies and investors from Israel: The ongoing crisis in Israel may push more foreign companies to leave the country, especially amid mounting fears of reduced independence for judiciary and legal institutions. This may make Israel’s business environment unattractive to foreign investors and clients, especially since all signs, at least so far, confirm that the policies of the Netanyahu government have become a source of institutional turmoil and instability in the Israeli street, in addition to igniting tensions with the Palestinians.

Some reports indicate that more than 50 international institutions and companies have moved their business outside Israel recently, most notably WIZ, Unicorn, SKAI, and Papaya Globa. On February 14^th, the heads of Israeli banks also warned Minister of Finance Bezalel Smotrich that money is leaving Israeli banks at ten times the normal rate.

On February 16^th, in an effort to limit the departure of foreign investments from the country, the Israeli government held a conference for accredited foreign ambassadors in Tel Aviv to explain the "judicial reform" plan and convince them that the investment environment in the country will not be affected by those reforms.

2. Sharp deterioration in the stock exchange: The Tel Aviv Stock Exchange saw a sharp decline on February 12^th, amid the ongoing political crisis resulting from the project to restrict the powers of the High Court. The Tel Aviv-35 Index, composed of the 35 largest Israeli companies, fell by 1.92%, while the Tel Aviv-125 Index dropped 2.27%, and shares of the Tel Aviv-90 Index decreased 3.31%. Likewise, the real estate stock index dropped sharply by 3.43%.

3. Declining value of the Israeli shekel: The shekel has continued to decline against the dollar, with the exchange rate exceeding 3.56 shekels per dollar on February 16^th. According to the Bank of Israel, the exchange rate of the shekel in early trading on Wednesday, February 22, reached 3.69 shekels per dollar, its lowest since March 2020 and the beginning of the Coronavirus pandemic. On February 21^st, Citigroup also projected that the exchange rate of the shekel would decline to 3.95 against the dollar if the vote on the judicial reform plan went forward. Hence, the perpetuation of the crisis may lead to increased economic and political uncertainty in the country and thus to further decline in the value of the shekel and instability in the Tel Aviv Stock Exchange.

4. Extensive damage to the high-tech sector: One way or another, the current crisis—if it continues—is expected to harm the advanced technological industry sector in Israel, known as "high-tech," which is considered the backbone of the Israeli economy. This is especially true given the flight abroad of foreign investment, which constitutes the bulk of the money invested in this sector.

It is worth noting that hundreds of technology-sector workers went on a warning strike in Tel Aviv on January 24^th of this year, under the slogan "Without democracy, there is no high-tech." Likewise, hundreds of technology start-ups participated widely in a strike on April 13^th, and some high-tech investment funds withdrew funds from Israeli banks and transferred their business abroad. This confirms the damage this sector will incur if the current crisis continues.

5. Potential negative effects on financial donations to Israel: In conjunction with the escalating political tension within Israel, the Jewish communities in several European and American cities have recently held demonstrations denouncing the "judicial reform" plan. Such demonstrations are expected to grow in the coming days if the Israeli government insists on forging ahead with its plans.

The repercussions of the Jewish diaspora’s visible activity are not limited to offering moral and media support to the demonstrations inside Israel. Rather, its activity also contributes to consolidating the negative mental image of the current government, which is dominated by the extreme right wing. This in turn reinforces foreign companies’ fears of being present and investing in Israel, as well as concerns about the potential negative impacts on financial donations to Israel, especially in the US, and a downgrade to the Israeli economy’s credit rating.

Finally, despite the Israeli economy’s strong growth in recent years, the ongoing domestic crisis is expected to overshadow the country’s economic performance, especially in the high-tech sector. Capital continues to flee the country, and investors’ confidence in the Israeli business environment is declining, especially given the political uncertainty, the increasingly sharp internal polarization between the parties and the political and economic elites in the country, the serious threats felt by the business community, and the murky future afflicting the country because of the right-wing government’s plans for Israel’s judicial system.