The world gets nasty (Hamodia, November 7)
A fact of life that Israeli policy-makers have to accept as best they can is that Israel’s economy is very small in global terms. Like most things, this has positive and negative aspects so that, from a policy-making perspective, the goal is to maximise the advantages deriving from the positive aspects and to minimise the problems caused by the negative ones.
What is true of the Israeli economy as a whole is valid for every business firm in that economy. But it’s worth noting in this context that the simple fact of size is also critical to understanding the American economy — except that there, of course, the fact of life is that the American economy is huge, so that all the advantages and disadvantages of the Israeli case are reversed.
Just understanding how relative size affects strategy and tactics — and even mindset — at both the national and corporate level is an essential, but often forgotten, requirement when Israeli and American companies (or governments…) seek to do business together.
At the macro level the issue of size is perhaps nowhere more obvious than in exchange-rate policy. John Connally, Nixon’s Treasury Secretary, famously told European finance ministers in 1971 that “the dollar is our currency, but your problem” — in other words that the US was so dominant in the global economy that it could do what it liked and not care about the effects on others.
That was then, when American economic power was it its peak. Today, the dollar is one of several global currencies, including the euro — which was created, in large part, in direct response to the thinking that Connally so crudely expressed — the Japanese yen and, increasingly, the Chinese yuan.
These are the battleships of the global currency market. In comparison, the Israeli shekel is a mere destroyer which, while it is able to manoeuver more easily and respond quickly to changes, can be swamped by the big waves made by the battleships if it doesn’t look sharp.
Last week’s column noted that the dollar’s rise against other major currencies since May has been very helpful to the Israeli shekel — which had risen sharply in value over the previous years. True, the shekel’s strength reflected the economy’s successful performance during and after the Great Recession of 2007-09 — but the super-strong shekel was becoming a burden on Israeli exporting companies and hence a danger to the economy as a whole.
Fortunately, the Bank of Israel has manoeuvered the Israeli currency very smartly, even as the global waters have become extremely choppy. While the dollar been rising strongly both the Europeans and, especially, the Japanese, have been making efforts to push the value of their currencies down — against the dollar and against each other. They hope in this way to achieve a competitive advantage that will help their exporters, but this can only come at the expense of the competition, which includes the Americans, the Chinese and many small countries such as Israel.
With the battleships moving in different directions, the sea has become more dangerous than ever for the smaller boats. Theoretical economists are discussing whether the policies of the big economic powers are sensible or irresponsible — but the Bank of Israel cannot engage in this academic debate, it has to defend the interests of the Israeli economy as best it can.
That is why it cut interest rates twice in July and August, bringing them to record-low levels and why it announced last week that it was considering using “other tools” in its monetary policy — a clear indication that it, too, will soon adopt ‘quantitative easing’ (QE) policies.
The practical implication of these moves is that the shekel will fall further, certainly against the dollar and probably against the euro as well. Everyone in Israel or who does business in Israel — firms, non-profits and households — needs to adjust to this new reality. It also helps to understand why it is happening and to see this development, arguably the most important in the Israeli economy in 2014, in the wider global context that has caused it.