SCENE SETTER FOR DEPUTY SECRETARY LEW'S VISIT TO

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 000279

NOFORN
SIPDIS

FOR DEPUTY SECRETARY LEW FROM AMBASSADOR CUNNINGHAM

E.O. 12958: DECL: 02/04/2020
TAGS: IS ECON EFIN KWBG PREL PGOV
SUBJECT: SCENE SETTER FOR DEPUTY SECRETARY LEW'S VISIT TO
ISRAEL

Classified By: AMBASSADOR JAMES CUNNINGHAM, reason 1.4 (b) and (d)

1.(C) Summary: I am pleased to welcome you to Israel on your
first official visit as Deputy Secretary of State. You will
see that despite some difficulties we have a strong and
dynamic bilateral relationship. In addition to looking into
the effect of USG resources spent in the region, I am pleased
that you will meet with U.S. Mission members, the stewards of
those resources. Your visit will also encourage the Israelis
you meet to ponder their future within a context of peace and
security, capitalizing on a very valuable asset -- their
culture of innovation. The current atmosphere of political
and military calm is clouded by uncertainty in an
international environment that feels markedly more hostile to
Israelis within the last year. While the discussion has
become more reasoned, Israelis in and out of government seek
constant reassurance about the commitment of the Obama
administration. With engagement with the Palestinians
stalled, regional relationships have suffered. Economic
growth returned relatively early in Israel, and the primary
lingering effect of the global financial crisis,
unemployment, continues to subside. Growing the economy and
increasing the participation of all segments of Israeli
society are priorities for the current government, and they
are striving to remain fiscally conservative while pursuing
these goals. End Summary.

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EMBASSY TEL AVIV MANAGEMENT
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2. (U) Embassy Tel Aviv manages a 50 million USD portfolio
of allotments for its 27 ICASS subscribers. We employ 583
locally engaged staff and 185 Americans across the various
agencies. In 2009, Tel Aviv supported 59 VIP visits;
including two SecState, 34 CODELs, eight General Selva, nine
Senator Mitchell, six FPOTUS and 8700 other official TDY
visitors. Space is one of the major management issues for
Embassy Tel Aviv. Since 2005, post has grown 35 percent in
the number of American positions alone, with 12 new NSDD-38
requests already made in 2010.

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POLITICAL LANDSCAPE
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3. (C) Overall, Netanyahu,s government is solid. He has
carved out a position solidly within the Israeli consensus,
and he is not under any serious political pressure to change
course. The opposition, led by former Foreign Minister
Tzipi Livni, has had a difficult time finding traction for
its argument that it generally agrees with Netanyahu,s
policy of a demilitarized Palestinian state next to Israel
but claims his commitment to peace is weak and argues that
lack of international confidence in his approach is leading
Israel to disaster. Israelis remain concerned about what they
see as increasing attacks on their legitimacy from the
Goldstone Report, potential criminal prosecutions in Europe
under universal jurisdiction, and increased calls for
boycotts.


4. (C) Netanyahu is serious in his calls for a resumption
of negotiations, and he is aware that the lack of progress
in the peace process is fueling much of the international
hostility towards Israel, as well as putting some strain on
the relationship with the United States. The limited freeze
on settlement construction, while short of both the
Palestinian and USG expectations, was a difficult decision
that carries a real political and financial cost. Israelis
believe that this limited freeze, combined with the actions
the GoI has taken to improve conditions in the West Bank,
should be sufficient encouragement to the Palestinians to
restart negotiations. The GoI is not anxious to offer any
more gestures, and has doubts that any future gestures will
yield a different response from the Palestinians.


5. (C) The Goldstone report is back in the headlines with the
upcoming UN Secretary General report on the subject and the
recent Israel submission of an update on its own
investigations regarding incidents during the war. Israeli
leaders have developed a virtually obsessive reaction to the
report, which they see as an assault on both the State of
Israel and its democratic institutions, and an attempt to
deny their right to self-defense against terrorism.
Assistant Secretary Michael Posner recently visited Israel
and engaged with them on this issue in-depth. The
Palestinian Authority's (PA) handling of the Goldstone report
has further complicated Israel,s relations with the PA and

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poses a threat to both the potential for negotiations and the
efforts to improve the situation in the West Bank. In the
meantime, Israelis express satisfaction with both Fayyad,s
efforts to reform the PA and with the much improved
performance of PA Security Forces, although they believe the
PA,s assessments of its abilities on both fronts are overly
optimistic. In Gaza, Israel policy is caught on the horns of
a dilemma over Gilad Shalit and Hamas, continued control
within the Strip.


6. (C) With regards to Iran, the GoI has accepted our policy
of engagement, but Israel, particularly PM Netanyahu and DM
Barak, continues to regard a nuclear Iran as an existential
threat and a catastrophe for regional stability. The GoI has
pushed for immediately enacting tougher sanctions and insists
on keeping a military option available. Iran was the main
point of discussion during last month,s visit of NSA Jones.
Israeli experts within and outside government argue that how
the Iranian nuclear issue is resolved over the next two years
will determine the perception of U.S. power for years to
come.


7. (C) Deteriorating relations with Turkey are also a
concern, and many Israelis believe that Turkey will continue
to move inexorably away from Israel and the West and closer
to Syria and Iran due to internal politics and a new regional
strategy. On Lebanon, most GoI officials believe another
war with Hizballah is just a matter of time, but they are in
no rush to provoke anything and believe Hizballah, at least
for now, also has no interest in a fight. However, they
repeat both publicly and privately their belief that all of
Lebanon will be held accountable for Hizballah actions now
that Hizballah is a partner in the government.

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ECONOMIC LANDSCAPE
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8. (SBU) The Israeli economy weathered the global downturn
relatively well, registering GDP growth of 0.5 percent in

2009. GDP per capita in nominal terms was USD 26,075 and
growth forecasts for 2010 are in the 3.5 percent range. The
deficit in 2009 was 5.15 percent of GDP, lower than the 6
percent target set by the GoI primarily due to higher than
expected tax venues. Ministry of Finance officials believe
that the external nature of the global crisis -- primarily
hitting exporters of financial goods and markets such as
derivatives -- limited damage to the local economy.


9. (SBU) In addition to a relative lack of sophistication in
Israel's banking sector, the country's status as a high-tech
goods exporter allowed for quicker rebounding than in the
U.S. and Europe. Although total exports declined 13.2 percent
for the year in 2009, imports declined more sharply, by 15.4
percent. However, industrial exports (excluding diamonds)
as a percentage of exports of goods increased, accounting for
83 percent of the total according to data from the Central
Bureau of Statistics. This appears to be due to a sharp
increase in shipments of electronic components and computers,
mostly accounted for by the opening of a new Intel production
site in Kiryat Gat in early 2009. A return to export growth
in Israel depends on the rate of global recovery, and the GoI
recently announced an export guarantee plan to encourage
exports and take on a measured part of the risk exports face.



10. (SBU) With a two-year budget in place, a measured and
balanced monetary policy carried out by Bank of Israel
Governor Stanley Fischer, and a fiscal program that has
brought the debt-to-GDP ratio down to 78 percent from a
height of close to 100 percent in 2003, Israel feels its
admission to the OECD is all but guaranteed. The extended
fiscal outlook for 2011 remains shaky, given planned tax cuts
and the need to meet several budgetary obligations coming
due. Nonetheless, the government is considering another
two-year budget (2009-10 was its first) in hopes of retaining
political stability and locking in multi-year budget
commitments. Pending admission to the OECD has brought about
many positive outcomes, including a push to reach an
break-through IPR agreement and the impetus to address
several socio-economic issues that endanger Israel's future
economic success.


11. (SBU) Israel,s economy, despite strong pre-crisis
growth, is weaker than it appears. There are two economies:
a progressive knowledge-based economy that engages 9 per
cent of the workforce, is globally quite competitive, and
highly productive; and a far larger manufacturing and

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services economy which faces risks from globalization, with
productivity stagnant. Israel's labor participation rate at
55% is among the lowest of developed countries, largely due
to uniquely Israeli socio-religious factors. Engaging more
people in productive employment will be key in coping with
the growing number of retirees as the post-WWII baby
generation leaves the workforce. However, engaging the
underemployed groups -- chiefly Arab-Israelis and
ultra-orthodox Jews -- poses a major challenge.
Demographically these groups provide a growing percentage of
the young Israeli population, and both groups lag in terms of
education and civic engagement. The Ministry of Finance has
announced its intention to ensure that expected growth
reduces social gaps, in contrast to 2004-2008.


12. (SBU) Investing in its culture of innovation is also
primary goal for the GoI, and creating linkages to
under-represented groups within Israel, as well as regional
linkages, provides one of the discussion points we hope you
will explore with your interlocutors here. The combination
of human capital and strong government support that has made
Israel a world leader in renewable energy and information
technology requires preservation. As the GoI investigates
venture capital fund support in the field of life sciences,
and the Tel Aviv Stock Exchange inaugurates a biomed index,
it will be useful to encourage the GoI to extend the global
reach of the solutions they implement. Global health,
renewable energies, and food security are but some of the
issues that stand to benefit from the continued enhancement
of Israel's high-tech prowess. Much as the IDF has recently
exemplified the best of Israel's exercise of global
citizenship in its mission to Haiti, the fruits of her
innovation culture address global needs as well, improving
agriculture through water technologies and bringing
affordable renewable energy possibilities to underdeveloped
markets.


13. (SBU) I believe your visit will advance discussions for
partnership in many arenas, and I extend a warm welcome to
you and your staff.

CUNNINGHAM
Cunningham