This is clearly a bad thing. One of the positives about living in Israel for secular Jews was that they didn't intermarry because there was almost no one in Israel to intermarry with. This has changed in the past decade because of an influx of non-Jewish Russian immigrants but is still not so bad. This latest decision muddies the waters even further where there will be now many more non-Jews living in Israel (who consider themselves Jewish).
This decision is not surprising at all for a number of reasons:
1. As the Jerusalem Post writes "Not 'who is a Jew' but 'who is a rabbi'", why should the state give more credence to an Orthodox rabbi as opposed to a Reform rabbi, they are both Rabbis. Once you accept a Reform rabbi as a rabbi then you need to accept his conversions
2. Being Jewish isn't that important to a significant sector of people living in Israel. They consider themselves Israelis more then Jews.
This should not change anyone's mind about living in Israel. In fact, the more religious people who come the more chance there is of establishing a government that is more in tune with Judaism.
In truth, this is not really a significant event for the average religious person who lives in Israel. He/she will marry someone religious and therefore check out the persons background. Worse comes to worse the person can really convert.
A much more worrying development will be civil marriage and especially divorce. Civil divorce will create a whole generation of mamzerim who will be stuck.