Israel’s currency and stock market performed relatively well on Monday following the government’s decision to put its controversial judicial reform plans on hold. The legislation put forward by Prime Minister Benjamin Netanyahu, which was put on hold later on Monday, threatens Israel’s economy, according to some observers.
The rate of the US dollar to the Israeli New Shekel fell from 3.65 shekels to the dollar to about 3.59 shekels around 11:30 a.m. ET – a decrease of about 2%. The Tel Aviv Stock Exchange’s two main indexes rose about 2% on Monday.
Background: The Netanyahu government’s reform proposal would reduce the Supreme Court’s power 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 has long been an issue in Israel. Currently, prospective judges are selected from a committee that includes current judges 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 judges.
Netanyahu returned to office in late December and began pushing the reform legislation thereafter. This has led to many protests in Israel. The legislation has yet to be passed by Israel’s parliament, the Knesset.
The situation escalated when Israel’s Defense Minister, Yoav Gallant, called for a halt to the renovation on Saturday. Netanyahu fired Gallant on Sunday, and this fueled the protests. A national strike took place in Israel on Monday including diplomats, doctors and students.
Reports emerged in the Israeli media overnight that Netanyahu along with the ultra-Orthodox Shas Party in his coalition government were in favor of suspending the reform. Netanyahu was due to address the issue in a speech on Monday and finally announced at night that he is putting the reform on hold.
Why it’s important: The judicial reform instilled confidence in Israel’s economy and high-tech sector. In response, many Israeli tech startups have threatened to relocate from Israel, and some have begun to do so. Israeli unicorn Riskified said earlier this month it was moving $500 million out of Israel and offered Israel-based employees to relocate to a new center in Portugal.
Wall Street giant JPMorgan warned of heightened investment risk in Israel because of the judicial reform, according to an internal memo leaked by Israel’s Channel 12 in February.
In March, credit rating agencies Fitch and Moody both issued a warning about the judicial reform.
Neither agency has yet downgraded Israel’s rating. However, another leading credit agency told Israeli news outlet C-Tech in January that the weakening of state institutions is a rating risk.
More information: The economic ramifications of the judicial reform also come amid tensions between Israel and the Gulf. On Sunday, the six foreign ministers from the Gulf Cooperation Council (GCC) sent a letter to US Secretary of State Antony Blinken urging the American official to respond and “play his role” to find a solution to the conflict between Israel and Palestine.
GCC Secretary General Jassem Mohamed Albudaiwi also criticized earlier this month comments made by Israeli Finance Minister Bezalel Smotrich calling for the end of the Palestinian village of Hawara, calling them “racist”.
The GCC further condemned Israeli National Security Minister Itamar Ben-Gvir’s January visit to the Haram al-Sharif, or Temple Mount, in Jerusalem, along with other deadly Israeli raids in the West Bank this year.
These criticisms have not affected the strong economic relations of the Arab Emirates with Israel, however. The two countries signed a free trade agreement in effect on Sunday. The agreement, which was first announced in May last year, is set to reduce or remove tariffs on about 96% of goods traded between the countries and allow Israeli companies to access UAE government tenders.
Protests over Netanyahu’s planned judicial reform have even reached the European Parliament. In early March, protesters gathered outside parliament in Brussels and sent a letter to key EU institutions asking them to intervene.
Many European financial institutions have also sounded the alarm about the proposed reforms, including British banks Barclays and HSBC, which published a report in February warning that the measures could have a negative impact on foreign investment in Israel.
The desire to invest in the Middle Eastern country has decreased among foreign investors as well as domestic investors. Most of Israel’s high-tech sector – which accounts for 15.3% of the country’s GDP – is funded by international investors. In addition, several Israeli companies are listed on European stock exchanges, such as CFD trader Plus500, cyber security startup Kape Technologies and online gaming operator 888 Holdings, which is on the London Stock Exchange.
The European Parliament held a special session on “the decline of democracy in Israel and the consequences for the occupied territories” on 14 March.
“We are concerned about the growing divisions in Israeli society and we ask for calm and a spirit of reconciliation,” Peter Stano, the European Commission’s spokesman on foreign policy issues, told Al-Monitor on Monday.
“The European Union’s relationship with Israel is based on shared values such as democracy, the rule of law, the right to protest and a vibrant civil society. We appreciate President Herzog’s efforts to calm the situation and we support all efforts to heal the rift we have seen at the moment.”
It is clear that the issue is weighing on the minds of European leaders. After Netanyahu met his British counterpart, Rishi Sunak, in London last week, a spokesman for the UK prime minister said he stressed “democratic values” to Netanyahu in reference to Supreme Court reforms, but he did not provide more details.
