EMBASSY VIEWS ON 2009 JEDG

C O N F I D E N T I A L TEL AVIV 001329

SIPDIS

NEA/IPA FOR GOLDBERGER, LENTZ, SACHAR AND FRELICH; EEB/IFD
TO JACOBY; TREASURY TO BALIN

E.O. 12958: DECL: 06/18/2019
TAGS: ECON EFIN IS
SUBJECT: EMBASSY VIEWS ON 2009 JEDG

Classified By: Economic Counselor D. Burnett for reasons 1.5b and d

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Summary
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1. (C) The June 29 Joint Economic Development Group (JEDG)
meeting presents the opportunity to discuss the eventual
severance of the JEDG from its connection to the 2003 Loan
Guarantee Agreement (LGA),and its continuance as an annual
bilateral economic consultation between the two countries.
This would serve several U.S. policy goals, including
increasing the GOI,s confidence in its ability to take risks
for peace. On substantive issues, the USG delegation should
strongly emphasize the importance of the GOI returning to a
policy of fiscal restraint, even while expressing
understanding for the extreme budgetary measures that have
been necessitated by the current global financial crisis.
The USG should also support the adoption of a fiscal rule by
the GOI tied to the debt-to-GDP ratio as a way to help it
make and enforce prudent spending decisions, less subject to
the political winds of the moment. The USG should continue
to call for budget transparency, but be mindful of the
sometimes conflicting forces at play with regard to the
issue. Finally, Post supports stressing the importance of
GOI modernization and transparency of implementation of food
standards by focusing on it as one of the key U.S. conditions
for the release of the next tranche of JEDG funds for
borrowing by the GOI.

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Make JEDG Independent of the LGA
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2. (C) Embassy discussions with Ministry of Finance (MOF)
officials over the past year have indicated that the MOF
would like to put the JEDG on a more solid footing,
independent of the 2003 Loan Guarantee Agreement. Bank of
Israel Governor Stanley Fischer also strongly supports that
idea. Recently, there has been a realization on all sides
that the LGA program will effectively end if Israel borrows
against the funds released by the US for the program and the
USG takes deductions from those funds due to Israeli
settlement spending. This has caused the MOF to consider
ways to institutionalize the JEDG as an annual high-level
economic consultative mechanism, akin to the other annual
strategic dialogues on military and political issues between
the two countries.


3. (C) Israel,s economy is not large and does not play a
major role in U.S. international trade. However, for several
reasons, Post supports continuing the JEDG regardless of the
fate of the LGA and suggests that the issue be addressed at
the meeting. First, Israel,s high-technology and research
and development sector is world-class and of major importance
to the U.S. economy. Israel has more companies listed on the
hi-tech-heavy NASDAQ than any country outside of North
America. Second, Israel,s economy has performed extremely
well over the past five years, and was the only developed
economy to experience growth greater than five percent for
four consecutive years. At least a part of this success is
attributable to U.S. pressure via the LGA to control spending
and lower deficits. Continued USG involvement is crucial to
maintaining the GOI,s commitment to such policies. Third, a
continued and comprehensive economic dialogue would
contribute to furthering our peace process goals. USG
interest in Israel,s economy would emphasize the
comprehensive nature of U.S. support for Israel and
potentially make it more willing to take risks for peace.
Furthermore, it would give us another avenue to work with the
GOI on Palestinian economic development issues, which are key
to the success of our policy.

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Emphasize Fiscal Restraint
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4. (C) The 2007 JEDG term sheet, and the 2008 Ariav letter
commit the GOI to numerous fiscal targets that appeared
reasonable and achievable at the time they were written.
However, the worldwide financial crisis has dramatically
changed the economic environment and made achievement of most
of the targets impossible. Nevertheless, Post suggests a
strong U.S. emphasis on the importance of returning to a path
of fiscal restraint as soon as possible. By describing the
3.05 percent spending increases called for in the 2009-2010
budget as a 1.7 percent increase with an additional 1.35
percent temporary increase, it,s clear that the GOI is
nodding in the direction of the need for fiscal
responsibility. However, the way the budget was arrived at,
with the MOF officials most interested in restricting
spending exercising minimal influence at best, is a danger
sign for the future. Therefore, it would be worthwhile to
take the opportunity of the JEDG to reiterate that while the
worldwide financial crisis has brought about a unique
situation which necessitated extreme measures, it does not
justify the long-run abandonment of the prudent fiscal
policies which contributed so much to Israel,s strong
recovery from the 2002 recession and put the country in a
strong position to deal with the present crisis.

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Adopt a Clear Simple Fiscal Rule
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5. (C) Part of the GOI,s plan for a return to fiscal
restraint involves the adoption of a clear and simple fiscal
rule to govern spending. The MOF and Bank of Israel have
both been working on developing such a rule and hope to have
one in place in time for the 2011 budget deliberations.
While there are some differences in their approaches, both
agencies foresee spending somehow being tied to the debt to
GDP ratio, with the ultimate goal being to lower it to OECD
levels. The ratio, which hit as high as 103 percent in 2003,
was down below 80 percent before the financial crisis hit and
is now inching it way back up to the mid-eighties. Post
strongly suggests that one of the main JEDG conditionality
planks should involve the adoption of a simple, clear fiscal
rule tied to the debt-to-GDP ratio.

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Flexibility on Budget Transparency
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6. (C) Post supports continued emphasis on the issue of
budget transparency, keeping in mind, however, that the MOF
has conflicting interests on this issue. On the one hand,
transparency serves MOF officials in their attempts to
exercise greater control over the defense budget. On the
other hand, too much transparency would make it more
difficult for the MOF to restrain spending by other
ministries, which are often unable to withstand MOF dictates
due to being in the dark about the details of the GOI,s
overall budget situation. Therefore, while transparency
should remain a JEDG issue, the MOF should have some leeway
in addressing the issue.

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Focus on Food Standards
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7. (C) Finally, Post believes strongly that addressing the
issue of food standards in the JEDG could serve to focus
high-level GOI attention on this bilateral trade irritant.
For over three years, U.S. food importers have been subject
to a confusing regime of licensing and registration
procedures that have only worsened with the indictment this
past summer of several Ministry of Health workers in the
Remedia baby formula case. Guidelines for food products such
as infant formula are not published. Labeling and ingredient
requirements have been subject to arbitrary delays, and, in
some cases, have been outright rejected without prior warning
at Israeli ports of entry. In addition, the requirement to
store perishable foodstuffs to facilitate batch testing of
every product entering the ports has resulted in losses of
hundreds of thousands of dollars for U.S. importers. We are
requesting that the GOI come up with clear, published,
written guidelines on licensing and registration procedures
across the board for all U.S. imported food products in
compliance with Israel,s WTO commitments.

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