Saturday, April 01, 2006

Economic ramifications of the election

I am not a big fan of Harretz (to put it mildly), but on economic issues they are ok. Their analysis is the same as mine, the election results are bad for the economy.

Two percent? It should have been 10 percent!

Make no mistake: Financially, the election results are somewhere between bad and very bad
1. A fragmented coalition: The combination of Kadima, the Labor Party and the Pensioners Party (Gil) gives the coalition 55 seats. Thus, a fourth coalition member will be necessary to give the coalition a majority. Meretz, with four seats, will not be enough. Therefore, we can assume there will be no choice other than to add one or more of the religious parties
The party is composed of experienced former union leaders, and large Histadrut unions to boot. As we know, the Histadrut labor federation is vehemently opposed to pension reforms carried out by the previous government. We can assume the subject of turning the clock back on these reforms will come up in coalition negotiations.
Labor: The Labor Party, the second-largest in the coalition, is expected to demand a senior portfolio. Finance is the most natural choice, assuming that the Foreign Ministry does not interest Amir Peretz. Peretz as finance minister again means a retreat from pension reform, and also a possibility of backtracking on capital market reform - the Bachar reforms.

It will certainly mean a rise in the minimum wage. And don't forget the remaining privatizations: Mekorot, the Israel Electric Corporation, the Israel Military Industries and the Israel Aircraft Industries. These will all fall by the wayside, as will any prospect of government reform, both local and national, and probably education reform as well. All of these reforms demand a greater level of job market flexibility.

Structural paralysis, with everything it entails for the Israeli economy, which is in desperate need of continued reform, is the recipe Peretz is undoubtedly preparing for us. For the economy and the capital markets, this is very worrying news indeed.

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