Chronicle of the Middle East and North Africa

War on Gaza: Israel’s Economic and Political Challenges

The Israeli government faces an interplay of economic and political challenges as the war in Gaza underscores the imperative for a strategic shift.

Israel's Economic Political Challenges
Israeli Prime Minister Benjamin Netanyahu. RONEN ZVULUN/AFP

Ali Noureddine

This article was translated from Arabic to English

Since the onset of the Israeli war on the Gaza Strip in October 2023, Israel has set ambitious objectives, including the dismantling of Hamas infrastructure within the territory and the subsequent disbandment of the movement itself. This aims to pave the way for the establishment of a new security administration in the Gaza Strip in the future.

As it was evident from the start that accomplishing such significant goals requires full control over the territory, the Israeli government approved the current ground operation being conducted by the Israeli army.

Israel’s goals, and diplomatic and political challenges

However, despite the initially declared ambitious goals, some two months into the war the proportion of territory under Israeli control within the Gaza Strip remains limited, comprising no more than 20 per cent of its total area. Notably, most of the territory under Israeli army control is concentrated in open, uninhabited spaces. Meanwhile, the ground invasion has slowed down as Israeli tanks entered residential neighborhoods.

This situation aligns with the analysis of former Israeli Prime Minister Ehud Barak, who indicated from the beginning that achieving the stated goal of completely defeating the Hamas movement through ground operations would require significant time, possibly exceeding a full year. This view is consistent with the warnings from the chairman of the U.S. Joint Chiefs of Staff, General Charles Brown, who noted the unrealistic nature of eliminating the Hamas movement, describing it as a “very big thing.”

Nonetheless, the Israeli government faces numerous challenges that could hinder the continuation of the ground operation for an extended period to achieve its stated goal of eliminating the Hamas movement. One such challenge is international political pressure, particularly from many Western countries, which have started to experience the political repercussions of persisting in supporting the Israeli ground operation.

This is evident in recent statements by French President Emmanuel Macron, who opposed the notion of continuing the war until the “elimination of Hamas.” He expressed concern about an “endless war” and called for clarification regarding the goals of the ground invasion. Similar statements came from Spanish Prime Minister Pedro Sanchez, who called for a complete ceasefire in Gaza, while Belgian Prime Minister Alexander De Croo condemned Israel’s “siege of an entire region and withholding humanitarian aid.”

In essence, the increasing dissatisfaction in Western countries with the distressing scenes of violence and devastation in the Gaza Strip is eroding Israel’s diplomatic standing with these nations. This pressure is likely to compel Israel to reassess and adopt more pragmatic goals in its military campaign.

Signals of this shift may already be reaching the Israeli government from high-ranking officials in the U.S. administration such as Vice President Kamala Harris, who on December 3 expressed concern about “the extent of civilian suffering and the images and videos emerging from Gaza.” Similarly, U.S. Secretary of Defense Lloyd Austin emphasized that safeguarding civilians is both “a moral responsibility and a strategic necessity.”

While the U.S. administration has not yet insisted on a ceasefire, or a complete halt to the ground operation, in contrast to France, Spain, Belgium, Scotland, and other Western nations, American officials have begun expressing concerns about the potential “strategic defeat” facing Israel as a result of civilians in Gaza being thrown into the “arms of the enemy.”

Austin, in particular, criticized the Israeli ground operation, highlighting the risk of civilians in Gaza being pushed into the “arms of the enemy.” Harris also voiced dissatisfaction with the “very large numbers of innocent Palestinians being killed in Gaza.”

These stances from American officials suggest that Israel may not be able to sustain its war without a defined endpoint, especially considering the critical role of U.S. financial and military support in the Gaza ground operation. The Israeli military is acutely aware that continuing the ground invasion, impacting densely populated and besieged neighborhoods in Gaza, would inevitably result in significant civilian casualties. This poses a challenge in light of repeated warnings from the United States.

It is worth noting that despite the U.S. administration’s evident favoritism toward Israel throughout the conflict, it is taking into consideration a range of other factors. Diplomatic missions in the Arab region have issued warnings and telegrams predicting that the United States could alienate “the Arab masses for an entire generation” due to its “strong support for Israel” in the war on Gaza. Correspondence from these missions also emphasized the potential repercussions of heightened Arab anger against U.S. policies on American interests in the region.

The war and the challenges of economic pressure on Israel

On the economic front, Israel is grappling with internal challenges and pressures that may curtail the prolonged pursuit of the government’s ambitious objectives in the ongoing conflict.

As of late November 2023, the Central Bank of Israel estimated the economic toll of the Gaza war to be over 198 billion Israeli shekels, equivalent to $53 billion. This staggering cost, roughly 10 per cent of the size of Israel’s economy, as estimated by the International Monetary Fund, encompasses military expenditures, compensation for mobilized reserve soldiers and expenses related to evacuating settlers from areas surrounding Gaza and the northern border adjacent to Lebanon. In addition, it accounts for anticipated declines in tax revenues due to a slowdown in economic activities.

Based on Israeli government projections, Bloomberg anticipates a rise in the Israeli public budget deficit to 9 per cent of the gross domestic product in 2023. This is expected to trigger an equivalent increase in the national debt, potentially leading to higher future interest costs and, consequently, concerns about a credit rating downgrade, especially following the negative reviews by Fitch and Standard & Poor’s at the conflict’s onset.

Unlike past conflicts, the current war poses unique economic risks. Israel has initiated its largest reserve call-up since the 1973 war, involving over 350,000 individuals. This move has caused over 8 per cent of Israel’s workforce to stop working, particularly impacting the technology sector, which is heavily reliant on the country’s youth. Furthermore, the closure of crossings to the West Bank has resulted in the loss of more than 140,000 Palestinian workers, exacerbating the crisis in sectors like construction, which rely on this labor force.

The labor market crisis is further compounded by the departure of more than 230,000 Israelis and 17,000 foreign workers who were meeting the needs of the agricultural, construction and nursing sectors inside Israel. Many of the departures were due to official evacuation calls from foreign embassies, as was the case with thousands of Thai workers.

Consequently, the Israeli economy is grappling not only with the direct costs of hostilities but also with the economic paralysis stemming from the labor market crisis. Projections by J.P. Morgan suggest an 11 per cent contraction in the Israeli economy in the last quarter of 2023, while non-performing loans in Israel surpassed $13.3 billion in October 2023, according to the Central Bank of Israel.

In the face of these substantial economic risks, concerns are mounting about the possibility of an economic crisis, or even collapse, should the war persist over the coming months. Exclusive leaks from Israeli financial officials to The Washington Post have alluded to a potential “economic collapse” if the ground offensive in Gaza extends beyond the next three months.

The need for political exits

Given the time needed to achieve Israel’s ambitious objectives, coupled with economic, political and diplomatic challenges hindering the war’s continuation, it is evident that the realization of these goals is an unrealistic prospect. It is inevitable that the Israeli government will eventually have to shift back to political alternatives, while concluding its ground offensive and initiating negotiations for the release of all captives in the Gaza Strip.

While Israel may leverage any progress on the ground in negotiations, attaining the overarching goal of dismantling the Hamas movement entirely seems improbable. It’s important to consider American red lines, which reject any attempt to alter Gaza’s size or revert to permanent occupation, as was the case before 2005.

It is worth noting that Israeli Prime Minister Benjamin Netanyahu, along with senior officers in the Israeli army, seem to have personal motivations to pursue the ground invasion, irrespective of Israel’s broader interests. This is despite the considerable economic, human and political costs associated with the ongoing invasion. Their actions carry a certain level of responsibility for the apparent shortcomings during the October 7, 2023 operation, which is expected to undergo investigation post-war.

Consequently, Netanyahu and the senior officers will naturally seek to offset these failures by achieving minimal on-the-ground successes to bolster Israeli public opinion. This strategy is likely aimed at preemptively addressing accountability, assuming responsibility and potentially safeguarding Netanyahu’s political future.

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