As the likelihood of an Israeli attack on Iran grows, the need to assess the probable economic consequences to the Israeli economy grows as well. In an extraordinary move, compared with security events in the past decade, such as the 2006 Second Lebanon War, Operation Defensive Shield during the second intifada in 2002, and Operation Cast Lead in Gaza in January 2009, this time, most experts believe that an Israeli attack on Iran would not only have a massive impact on the domestic economy, but most of all, it would affect the global economy, through oil prices.
The experts say that such an attack would cause a sharp reduction in oil production, resulting in a jump in prices, which will affect manufacturing costs, reduce disposable income, and worsen the global slowdown and recession. Prof. Nuriel Roubini, for example, says that oil prices would jump by at least 50%. other economists add that an attack at a time of economic slowdown and falling business product would likely further worsen the situation and its effect on the economy.
Former Bank of Israel deputy governor Prof. Zvi Eckstein and Bank Leumi VP Prof. Daniel Tsiddon have written one of the most serious analyses of the economic impacts of Israel’s wars. They compared with the economic consequences of the 1973 Yom Kippur War and the second intifada and found that both conflicts were accompanied by severe external shocks to the Israeli economy: the oil crisis in 1973-74, and the dot.com bubble 2001-02. They also found that the economic damage in both times was severe, and included a fall in GDP by several percent.
The Bank of Israel and Ministry of Finance refused outright to requests by “Globes” for estimates and assessments about the expected blow to GDP in the event of an Israel-Iran war.
Another question is how would an Israeli attack on Iran affect defense spending, which already accounts for a substantial proportion of the state budget, especially at a time of huge fiscal challenges for the Israeli economy. Tsiddon and Eckstein say that the Yom Kippur War caused a permanent surge in defense spending as a proportion of GDP in general and in government spending, which resulted in huge deficits and jump in Israel’s debt-to-GDP ratio.
As for the second intifada, Tsiddon and Eckstein say that the defense budget rose by NIS 5 billion in 2003, which they describe as “relatively modest”. It should be noted in this context that the Brodet Committee, which was written in the aftermath of the Second Lebanon War, advised increasing defense spending by NIS 100 billion over ten years, from 2007 through 2017.
“The defense establishment has been riding the Iran wave for three years now, in order to ask for budget supplements. If an attack takes place in 2012, at least there is a chance for a drastic cut in defense spending in 2013,” a top economist, who has been involved in defense budget discussions for years, told “Globes” with a smile. “But, from what I know about the defense establishment, they have already found another reason why the budget must not be cut, but supplemented,” he added.
Governor of the Bank of Israel Prof. Stanley Fischer is leading the assessments of the effect of an Israel-Iran war. For years, the Bank of Israel has been holding discussions and scenarios about it.
The Bank of Israel assessments operated at two levels: technical and financial. The technical assessment is more related to its activities and functions in the event of a counterattack on Israel, including specific scenarios. At the financial level, “We have $76 billion in foreign currency reserves, which says it all,” a top Bank of Israel official told “Globes”. It does not conceal the fact that some of the reasons for its accumulation of foreign currencies over the past four years, from $27 billion to $76 billion, have been due to Israel’s geopolitical challenges.
One scenario in an Israel-Iran war is massive foreign investor flight, causing a sharp depreciation of the shekel against the dollar. The Bank of Israel’s large foreign currency reserves give it flexibility to deal with such a scenario.
Source: GLOBES ISRAEL BUSINESS