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Israel’s currency and stock market both performed relatively well on Monday following the government's decision to pause its controversial judicial reform plans. The legislation put forward by Prime Minister Benjamin Netanyahu, which was paused later Monday, is threatening the Israeli economy, according to some observers.
The rate of the US dollar to the New Israeli Shekel fell from 3.65 shekels to the dollar to around 3.59 shekels by around 11:30 a.m. ET — a decrease of about 2%. The Tel Aviv Stock Exchange’s two main indexes each rose about 2% on Monday.
Background: The Netanyahu government’s reform proposal would reduce the power of the Supreme Court to overturn legislation as well as assert stronger political control over judicial appointments. The Israeli right has long held the Supreme Court in contempt for thwarting its plans. The court has declared some Israeli settlements in the West Bank illegal, for example.
Supreme Court reform is a longstanding issue in Israel. At present, prospective justices are selected from a committee including current justices as well as members of the Knesset, the ruling Cabinet and the Israel Bar Association. The process has been criticized for being disproportionately influenced by the current court justices.
Netanyahu returned to office in late December and began pushing the reform legislation afterward. This has led to numerous protests in Israel. The legislation has yet to pass Israel’s parliament, the Knesset.
The situation escalated when Israeli Defense Minister Yoav Gallant called for the reform to be halted on Saturday. Netanyahu fired Gallant on Sunday, and this prompted the protests. A nationwide strike in Israel occurred on Monday including diplomats, doctors and students.
Reports emerged in Israeli media overnight that Netanyahu as well as the ultra-Orthodox Shas Party in his coalition favored pausing the reform. Netanyahu was due to address the issue in a speech on Monday and finally announced at night that he is pausing the reform.
Why it matters: The judicial reform has shaken confidence in the Israeli economy and high-tech sector. Several Israeli tech startups have threatened to relocate from Israel in response, and some have actually started doing so. The Israeli unicorn Riskified said earlier this month it was moving $500 million out of Israel and offered Israel-based employees relocation to a new center in Portugal.
The Wall Street giant JPMorgan warned about heightened investment risk in Israel due to the judicial reform, according to an internal memo leaked by Israel’s Channel 12 in February.
In March, credit rating agencies Fitch and Moody’s both issued warnings about the judicial reform.
Neither agency has downgraded Israel’s rating yet. However, another leading credit agency told the Israeli news outlet C-Tech in January that weakening state institutions constitutes a rating risk.
Know more: The economic ramifications of the judicial overhaul also come amid tensions between Israel and the Gulf. On Sunday, all six foreign ministers from the Gulf Cooperation Council (GCC) states sent a letter to US Secretary of State Antony Blinken urging the American official to respond and “play its role” in finding a resolution to the Israeli-Palestinian conflict.
GCC Secretary-General Jassem Mohamed Albudaiwi also condemned earlier this month comments made by Israeli Finance Minister Bezalel Smotrich calling on the Palestinian village of Hawara to be wiped out, calling them “racist."
The GCC further condemned Israeli National Security Minister Itamar Ben-Gvir’s January visit to the contested Haram al-Sharif, or the Temple Mount, in Jerusalem, along with other deadly Israeli raids in the West Bank this year.
These condemnations have not disrupted the United Arab Emirates' strong economic relations with Israel, however. The two countries signed a free trade agreement into effect on Sunday. The deal, which was first announced in May of last year, is set to reduce or remove tariffs on about 96% of goods traded between the countries and allow Israeli companies to gain access to UAE government tenders.
The protests over Netanyahu’s planned judicial overhaul have even reached the European Parliament. In early March, protesters gathered outside the parliament in Brussels and sent a letter to key EU institutions pleading for them to intervene.
Several European financial institutions have also sounded the alarm over the planned reforms, including British banks Barclays and HSBC, which published a report in February warning that the measures could negatively affect foreign investment in Israel.
The appetite to invest in the Middle Eastern country has dwindled among foreign investors as well as domestic investors. Most of Israel’s high-tech sector — which amounts to 15.3% of the country’s GDP — is funded by international investors. Furthermore, several Israeli companies are listed on European stock exchanges, such as CFD trader Plus500, cybersecurity startup Kape Technologies and online gaming operator 888 Holdings, which are on the London Stock Exchange.
The European Parliament summoned a special session on “the deterioration of democracy in Israel and the consequences for the occupied territories” on March 14.
“We are concerned about the deepening rifts in Israeli society and call for calm and a spirit of compromise,” Peter Stano, the spokesperson for the European Commission on foreign policy issues, told Al-Monitor on Monday.
“The European Union's relationship with Israel is based on common values such as democracy, rule of law, the right to protest and a vibrant civil society. We appreciate President Herzog's efforts to calm the situation and support all efforts to heal the rift we are currently witnessing."
The issue is clearly weighing on European leaders’ minds. After Netanyahu met with his British counterpart, Rishi Sunak, in London last week, a spokesperson for the UK prime minister said that he stressed "democratic values" to Netanyahu in reference to the Supreme Court reforms, but did not provide more detail.
