SUB: Israel – New Government Ends Economic Instability, but Tensions Over Key Policy Areas Remain

Overview

On 13 June, the Knesset voted in a new coalition government, officially ending former prime minister Benjamin Netanyahu’s 12 consecutive years in power. Leader of the ultra-right-wing Yamina party, Naftali Bennett, and leader of the centrist Yesh Atid party, Yair Lapid, successfully formed a government consisting of Arab, left-wing and nationalist parties, representing one of the most diverse coalitions in Israel’s history. Notably, it enjoys the support of the United Arab List (Ra’am), marking the first occasion in which an Arab party has played a major role in government. Bennett is due to hold office for the first two years, before handing over to Lapid under a power-sharing arrangement.

The March polls were the fourth elections to be held in two years, all of which produced inconclusive results, underpinning the elevated level of uncertainty and instability that has shaped Israeli politics over the past two years. Nevertheless, Sunday’s Knesset vote that finally led to the formation of a government does not equate to political stability, as the fragile coalition secured the narrowest of margins in the Knesset – 60 to 59 votes – with the long-serving former premier Netanyahu now sitting as leader of the opposition.

Bennett’s government will prioritise the economy, but decision-making on socio-religious issues will be strained

Despite considerable ideological disparities, economic recovery is a clear priority for the new government, as Israel has been without a state budget since 2019. The lack of state budget has seen a rise in national debt and severe cuts to public sector investment, harming returns for government-linked companies and inhibiting foreign investment due to market uncertainty. The new finance minister, Avigdor Lieberman, has stated that he will not increase taxes, and will focus on boosting the labour market and reducing government deficit. Arab Ra’am leader Mansour Abbas also hopes to secure considerably greater investment for the Arab population. However, investment in housing and other benefits for Arab communities will represent a contentious issue for Bennett, who has already faced a public backlash among far-right and religious groups for forming a government with the support of an Arab party.

Moreover, positive rhetoric from Bennett in dialogue with Arab leader Abbas may be short-lived. The right-wing, nationalist leader is known for his stance against a two-state solution and pro-settlement policies, raising concerns that the new coalition will heighten existing tensions. In light of elevated tensions following violent clashes between Hamas militants and Israeli security forces in May, and considerable unrest around East Jerusalem over evictions of Palestinians, policy matters such as settlement construction and the potential for renewed conflict with Gaza will test the stability of the new government.

As such, the end of Netanyahu’s reign will do little to address the Palestinian question, but instead widespread protests and demonstrations led by right-wing activists who oppose the government’s inclusion of Arab parties remain likely in the short term against a backdrop of heightened ethno-religious sensitivities. Netanyahu, as leader of the opposition, will continue to exploit right-wing grievances and use them to rally support against an already fragile coalition he maintains is damaging both Israel’s domestic and foreign policy. Therefore, despite winning Sunday's vote, Israel’s new government is insecure due to a razor-thin majority and conflicting political ideologies. Such fragility casts doubt over the survival of the “change coalition” and their ability to implement legislation beyond a state budget and Covid-19 policy.

Regional implications for Arab leaders and opportunities for Washington to re-engage

 The Israeli government will remain focused on countering the growing influence of Iran, as well as disrupting any kind of nuclear agreement between the US, Iran and the other signatories that does not address Iran’s proxy activity and ballistic missile programme alongside its nuclear ambitions. The strength of Israel’s defence establishment means that the make-up of the new government will have very limited impact on this foreign policy priority. Moreover, it represents an opportunity for Israel to bolster relations with other Arab neighbours, specifically Saudi Arabia, based on their mutual desire to isolate Iran. As such, the new government is unlikely to shy away from future tit-for-tat hostilities with Iran.

However, the Palestinian question remains a source of tension between Israel and its Arab neighbours, as the recent conflict between Gaza-based factions and Israel attracted criticism from influential players such as the UAE and Saudi Arabia. Nevertheless, peace treaties with an economic focus have remained intact despite heightened tensions in the Palestinian Territories, as these provide mutual trade and financial benefits. The focus on pursuing further normalisation treaties where possible is therefore likely to continue, as the government seeks to prioritise economic and development opportunities. A deal with Saudi Arabia appears unlikely, however, due to a range of complicating factors, including the Palestinian issue.

Separately, the new coalition may represent a chance for the Biden administration to restore relations that became increasingly fraught under Netanyahu. With centrist Lapid scheduled to hold the position of foreign minister for the first two years, this could allow for a slight recalibration of relations. Nevertheless, Biden’s desire to address Palestinian rights, limit West Bank settlement construction, and to reach an agreement with Iran over its nuclear activities will act as a strain on bilateral relations and in particular with Prime Minister Bennett.

Ultimately, the Israeli-Palestinian conflict will continue to challenge US-Israeli and Arab-Israeli diplomacy. Biden’s liberal administration faces pressure to take a less tolerant stance than his predecessor, particularly amidst the renewed conflict between Hamas and Israel and severe tensions around the West Bank and Jerusalem. In parallel, the Palestinian question and recent conflict threatens to stymie new relations with Arab neighbours, while the presence of right-wingers in government could cause friction with Egyptian and Qatari negotiators.

Alerts form part of Sibylline’s World Risk Register, a ground-breaking analytical service designed to help organisations of all sizes navigate an uncertain world.

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