Even Israel's central bank governor admits conflict with Iran would mean higher defence spending
A protest in Tel Aviv last month to mark the first anniversary of Israeli demonstrations against the spiralling cost of living. If Israel were to mount a military strike on Iran's nuclear facilities, some fear the ensuing conflict could deal a costly blow to the Jewish state's struggling economy, despite claims by bank officials. © Jack Guez - AFP
Even Israel's central bank governor admits conflict with Iran would mean higher defence spending
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Jean-Luc Renaudie, AFP
Last updated: August 16, 2012

Iran war talk sends jitters through Israel economy

If Israel were to mount a military strike on Iran's nuclear facilities, some fear the ensuing conflict could deal a costly blow to the Jewish state's struggling economy, despite claims by bank officials.

Talk of an imminent strike has dominated the press in recent weeks, but the Israeli establishment has remained tight-lipped, with only Bank of Israel Governor Stanley Fischer speaking publicly on the issue.

He insisted the central bank had contingency plans.

"One could imagine a situation of a wide-scale war with which it could be very difficult to deal," he said in a recent TV interview.

"We are ready to deal with the consequences of any event. We are prepared for all kinds of crises, we are prepared for a major crisis, for a far worse security situation," Fischer said, without elaborating.

"It's not my job to frighten anyone," he said, while pointing out that such a conflict would necessitate an increase in the defence budget.

"The main responsibility of any country is to ensure the security of the state and if there is a need to spend more money on national defence, we'll need to do that and to pay for it," Fischer said.

A central bank official told AFP that Israel had a "comfortable" foreign exchange reserve of $75.3 billion (61.28 billion euros).

"This gold mine should allow us to smoothly finance our imports in case of war and if necessary defend the shekel," he said, speaking on condition of anonymity.

The Manufacturers Association of Israel, the umbrella organisation of Israeli industry, said the European economic downturn was a more immediate worry.

"Right now, business leaders are more concerned about the risks of recession caused by the Euro crisis," said Danny Catarivas, the Association's head of international relations.

He recalled that during the 2006 summer war between Israel and Lebanon's Hezbollah, the Shiite militia fired over 4,000 rockets into northern Israel, forcing one million Israelis to take refuge in bomb shelters or move south.

"The economy experienced a slight slump before rebounding with a better-than-expected year-end result," Catarivas said.

Local media, however, took a more pessimistic view, noting in particular that trade on the Tel Aviv Stock Exchange had been very nervous lately.

Commentators warned that the shekel could be the "first victim of a war that has not yet begun," and said it was showing signs of weakness against the dollar and the euro.

An official at the Hoteliers' Association, meanwhile, said "the impact of rumours of an imminent war is beginning to be felt" in the tourism industry.

Military experts quoted by Israel's private Channel 10 TV have estimated that 50,000 rockets and missiles, fired either by Iran or Hezbollah, could fall in Israel.

And the cost of each day of war is estimated at $370 million (300 million euros) on the assumption that only half of the Israeli economy would be paralysed by such attacks.

Such an expense would force the treasury to slash civilian spending in order to boost the military's coffers, even though the defence budget, originally set at $13 billion this year, is set to rise to $15 billion even if no conflict erupts.

Last month the government began to put in place an austerity plan, which included a 1.0 percent increase in VAT and other measures that look set to affect the poorest sectors of society, to address a gaping budget deficit.

Tax revenues have fallen because of a slowdown in economic growth, which is expected to be 2.3 percent this year, compared with 4.7 percent in 2011, according to forecasts by Bank Hapoalim.

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