Israel’s new government coalition has not been in office for long. Nevertheless, it is already facing its first crisis. A scenario in which Prime Minister Benjamin Netanyahu exits the agreement is now conceivable. While it carries negative economic implications, such a move could end up securing his own political future.

Yet Another Election for Israel?

Israel’s governing coalition is less than three months old. Nevertheless, new elections are now a possibility. It would be the fourth within 18 months.

When forming the government in May, Netanyahu and coalition partner Benny Gantz promised that they would overcome previous hostility in a joint effort to steer the nation through the coronavirus crisis together. The price was significant. The agreement stipulates that Gantz will first become defense minister and then replace Netanyahu as leader after one and a half years.

Some Differences Aren’t Bridgeable

The harmony was short-lived. Both men remain so different that specific gaps cannot be bridged, such as the country’s reform of the judiciary or Netanyahu’s annexation plans for the West Bank.

The financial budget is the latest point of division. Netanyahu insists on a one-year budget, limited till the end of this year only. Gantz, on the other hand, insists on setting the budget until the end of 2021. The coalition agreement states that the government will adopt a two-year budget.

The coalition may have been a noble undertaking, but remains forced and thus highly volatile. Now, the time has become of the essence. Netanyahu and Gantz have until August 25 to find common ground and pass the state budget in parliament. If they fail, new elections will automatically be due, which would take place in November.

More Pressure on Israel if Budget Doesn’t Pass by August

If Netanyahu prevails with his demand, Israel could find itself on the watch-list of the rating agencies. The result would likely be higher interest rates on Israel’s national debt.

Since the government takes on a large part of the corona-related new debt abroad, the latter would put additional pressure on the country’s growth prospects. In April, the rating agency Moody’s gave Israel an A1 rating of “stable”. The political situation now is sending dubious signals with regard to the management of the fiscal policy. The latter will, in all probability, be reflected in the reports of the rating agencies.

Gantz’s plan has the support of various renowned economists. More than a dozen economists had formulated their arguments for a budget until the end of 2021 in an open letter in the past few weeks.

Netanyahu’s Short-Term Budget is Risky

And indeed, Netanyahu’s demand to pass a budget for only four months may be dangerous because investors insist on a longer-term framework. A budget that is only set for the remaining months of the current year may radiate uncertainty and lack of direction.

The opposition is now accusing Netanyahu of putting his personal interests above those of the country. If new elections come in November, Netanyahu can rule with a transitional government until the next coalition is sworn in.

Moreover, the government crisis prevents the formulation and implementation of a coherent economic policy. Given increasing poverty and high unemployment in Israel, however, it is urgently needed. According to Israel’s employment agency, 21.5 percent of Israelis are currently unemployed.

Can Netanyahu Push Gantz Out and Stay in Power?

Tens of thousands have been protesting against Netanyahu for weeks and accusing him of mismanagement during the crisis in addition to his alleged cases of corruption. Nonetheless, polls indicate he would again have a solid chance of staying at the head of the cabinet with his religious partners without having to share power with Gantz.

According to the coalition agreement, Netanyahu would have to vacate the prime minister’s office in the summer of 2021 and let Gantz move in. The budget dispute is a Machiavellian route for Netanyahu to thwart the agreed replacement by Gantz.

Gantz rightfully fears that Netanyahu could utilize the budget discussions as a pretext for new elections. In order to prevent new elections, politicians have worked out a compromise proposal that should make the impossible possible and prevent the dissolution of parliament.

That compromise is for the government to pass a two-year budget to satisfy Gantz, while parliament would only pass that part that is supposed to be implemented by the end of December. This would give parliament until March to approve the budget for 2021.

Whether the latter can be sufficient to circumvent new elections and sabotage Netanyahu’s option to stay in power is doubtful.

It's a tough moment
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