david klein : israel ’ s economy after the elections speech by mr david klein, governor of the bank of israel, for the israel - japan friendship society and chamber of commerce, 9 january 2003. * * * following the elections we will have a new government. this may be an opportunity to assess the economic and social policy for the term of the next government. a reasonable starting point would be to ask where the economy will be heading if the present background factors – namely the world slowdown and the conflict with the palestinians – will endure, and we continue with present policies. a not improbable answer would be that : - the economy will keep contracting, - the rate of unemployment will increase, - more families will find themselves below the poverty line, - the government debt will increase, - tnterest rates, short and long, will remain high. none of these is unavoidable if policies will be adjusted there is a good chance to steer the economy away from continued recession with all its repercussions. what, then, are the required changes? i will sum them up for you, but not before stating that we are fortunate not to have on our plate two major constraints that limited our ability to grow in the past, namely : - shortage of foreign currency, - inflation. foreign currency we don ’ t have a problem of foreign currency because we abolished exchange controls on one hand, and let the market determine the daily exchange rate on the other. when a foreign analyst wants to convey the salient features of the israeli economy from this perspective, this is what he says to - day : - foreign currency reserves are high and stable. in the last six years they reached a level of 5 - 6 months of imports, some usd 24 billion, - net foreign debt of the economy as a whole is low and declining. in the last two years it amounted to a negligible 2 % of gdp, - short - term assets of the economy exceed by a wide margin its short - term liabilities, meaning that we should not expect any liquidity problem, - the foreign currency market, created by the bank of israel in mid - 94 ’, keeps widening in terms of daily turnovers and number of participants, operating at reasonable spreads and characterized by relatively low volatility. inflation when one is reviewing the progress we have made in taming inflation, the noteworthy landmarks are : - we have succeeded in going down from three - digit inflation in the first half of the 1980s

forget : our primary mandate is price stability in the euro area as a whole. interest rates are set according to this medium - term objective. and the intervention programme is such as to allow the best possible transmission of our policy in the euro area as a whole. why did you say that you would prefer the european financial stability facility ( efsf ) to buy government bonds rather than the ecb, if what is at stake is restoring monetary policy transmission? it is because certain governments, individually, have behaved in an abnormal manner, and because all governments have fallen short in their collective supervisory duties that we are seeing anomalies in the behaviour of certain markets. the governments have to meet their responsibilities. it is for this reason, in particular, that i have asked for the efsf to be enhanced, in quality and quantity. the possibility for the efsf to purchase government bonds is part of this thinking. the euro area has gone through a rocky period because of the sovereign debt crisis in certain countries, to the point of doubt being cast on the sustainability of the single currency. do you believe the measures being taken concerning the efsf are appropriate to avoid a similar situation arising again in the future? the euro is a currency which inspires confidence. it is credible for the next ten years, and beyond. moreover, the situation in the euro area as a whole is in many respects better than that in comparable economies. our current account is in balance, which is far from being the case in all major industrial countries, and our consolidated annual government deficit for 2011, as a proportion of gdp, should be half those of the united states and japan. the monetary union part of economic and monetary union ( emu ) is working well, thanks to the fact that we are constantly on our guard. on the other hand, there is still much to be done as regards economic union. this is because some countries have not had satisfactory budgetary policies, and because the supervisory system in place since the creation of the euro has not functioned correctly. our message has always been that, in the context of a single currency without political federation, there has to be an extremely strong framework of budgetary stability. we signalled this again most forcefully when in 2005 a number of major member countries, including france, germany and italy, tried to weaken considerably the stability and growth pact by denouncing what they said to be its excessive orthodoxy. having lived through the recent challenges, both individual and collective, nobody