Israel has been in political gridlock ever since its elections on Oct. 27, with neither bloc of parties having achieved the clear 61-seat threshold for a majority in parliament. But it’s become evident that financial markets had been hoping for a change of government, with stocks, bonds, and the shekel currency having fallen sharply since the vote. The broader economic implications of the election are also increasingly coming into view.
How have financial markets reacted to the election results? Why has the Israeli economy held up so well during three years of war on multiple fronts? And if Israel suffers further political isolation, how would its economy be impacted?
Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.
Cameron Abadi: Going into the election, Israel’s economic baseline in the country seemed pretty strong. The Bank of Israel said it expects the economy to grow by 5 percent next year, and the country still has a low debt-to-GDP ratio. Are there other governments that come to mind as a comparison with this combination of a paralyzed state with such a strong economy underlying it?
Adam Tooze: The obvious parallel is the United States. And I don’t even mean that just simply as sort of a formal comparison, but there is a real connection between the two. The Israeli economy is driven fundamentally by a tech boom at this point. And obviously the links between Israel and the United States are deep, not just at the level of policy and at the levels of subsidy from the U.S., but also culturally between the universities, between the tech ecosystems. The big AI players in the U.S. all have a big presence in Israel and are proud and committed to that. And they are together involved in this war against Iran, which is one of the principal disturbing factors in the world economy, which, if it has a kind of rationale from [Israeli Prime Minister Benjamin] Netanyahu’s point of view, it’s hard really to see as a sustainable strategy for Israel’s geopolitics going forward and is even more absurd and self-destructive from the American point of views. So in a sense, they’re joined at the hip.
The Israeli economy is really a remarkable story. Its current growth rate is 5.6 percent. The forecast for next year is 7.5 percent. So this is extraordinary growth. Since the Hamas attack on Israel of October 2023, and despite Israel’s then-multiyear project of mass destruction and mass murder, by the October 2026 election, the Tel Aviv stock market gained roughly 130 percent compared to only 80 percent in Wall Street, and the shekel appreciated by 25 percent. So if you had bought Israel on the day of the Hamas attack, you would have made out like gangbusters in the interim. It’s a truly staggering demonstration—as the United States is in its current moment—that there is simply no correlation between capitalist prosperity, growth, speculative gains, technological progress, and any, I think, conventional understanding of political rationality, geopolitics, sustainable politics, conformity to basic standards of law, or, I’m going to say it, human decency. Like, this is a pretty shocking indictment of anyone who comes to the game with a naive assumption that those things go together well. It ain’t true.
So the short answer is, we shouldn’t probably see this as a contradiction. You know, this is what the Germans will say, “ungehemmt,” like unfettered kind of techno-industrial project looks like. Is it sustainable in the long run? Well, almost certainly not. But can it work over the short run? Absolutely, it can. And are we in the United States living in a slightly less excessive version of what’s going on in Israel? In some senses, yes. And our tax dollars, after all, have helped pay for it. And now we’re actually involved in a war side by side with Israel against Iran. So yeah, that’s the obvious analogy.
CA: Obviously there’s been a market reaction to the lack of clarity coming out of this election. And I’m curious to unpack the perspective of financial markets. What was informing those hopes for a change of government? From the perspective of financial markets, what are the relevant considerations here in this election?
AT: Yes, I think there was, generally speaking, a slight favor in the Israeli markets for Gadi Eisenkot’s opposition coalition over Netanyahu’s bloc. And on the day of the election results, the index fell by between 2 and 4 percent. What were the factors driving that preference? Well, there was some hope that an Eisenkot-led government would aim toward geopolitical deescalation. But really how much room is there for that? Maybe on the settler side, there was some hope, because of the different composition of the coalition, that there would be more concessions. But the war with Iran actually has powerful majority backing. And the broader escalation of Israeli hostility toward the Palestinians is now a cliche. I think there’s also deep doubt on the part of financial markets about institutional credibility. And Netanyahu’s utterly ruthless willingness to just put the institutions of the Israeli state and Israeli government through the meat grinder of political opportunism and his own personal political survival is, after all, remarkable.
And what the markets are worried about, as they are in the U.S. as well, is the role of the central bank. The Israeli central bank is a powerful institution and is relatively independent. Netanyahu has shown his willingness to subvert all the other institutions of the Israeli state. And so there’s real worry about that, I think. And then from that follows another liability, which is that Netanyahu, when it comes to actually staying in power and staying out of jail, he’s a man who will not shrink from any bargain. And his coalition partners are not responsible actors by a stretch of anyone’s imagination. So that combination of cynicism on his part and the need to put together small-party coalitions with radical Jewish groups, Orthodox Jewish groups leveraging their small stakes of the overall electorate for outsized gain is very worrying from the point of view of anyone interested in the long-run stability of government there.
Then finally, there’s international isolation that may follow from this. There’s no real appetite in either Europe or the United States to take strong action against Israel. I mean, for heaven’s sake, how much more evidence do you need of that? They’re not on the knife’s edge here. This is not the 1980s, when Israel was in desperate trouble and was seriously actually in the doghouse after its assault on Lebanon. We’re in a different world from that. Nevertheless, the actions of the Netanyahu government and its broader circle notably in the West Bank are beginning to raise heckles. And that’s uncomfortable.
So I think in all of these respects, there’s a sort of preference for the same but just slightly less cynical and slightly less radical and slightly less offensive to global public opinion. And Netanyahu is just personally conflicted because of his legal risks. So that’s why I think there’s that preference there.
CA: In the waning days of the campaign, Netanyahu said that, if reelected, he would prepare Israel to become a “bypass economy” to deal with greater international isolation and sanctions. What might Netanyahu have meant by that exactly?
AT: Yes, it’s an extraordinary stage in Netanyahu’s remarkable career, which starts with him in the ’90s as this strategist of hardening Israel for the arrival of an unthinkable future for which it needs to be prepared, which is the moment where his right-wing vision of Israel’s future, his racially exclusionary vision, requires Israel to make choices that mean that it will face this moment of truth. And what that initially meant was a pattern that we saw across the world in the ’90s and the early 2000s, which is so-called self-insurance. In other words, you switch your fiscal politics into austerity mode, you ran a current account surplus, so you run a trade surplus, you accumulate foreign exchange reserves, and you build a kind of hard-nut capacity that means you can withstand the external pressure. So along with Israel, you might think of China, you might think of [President Vladimir] Putin’s Russia as all following a kind of strategy of this type. Israel obviously is a much smaller country, but huge foreign exchange reserves.
And the question, of course, is when does this get triggered? And because de facto Israel actually enjoys the connivance and support of Europe and the U.S., it isn’t until the current moment that it has begun to get triggered, because the extremity of Netanyahu’s policy since October 2023 is really pushing the envelope of what’s working. And in September 2025, he came out with this extraordinary statement that Israel needed to prepare to be a super Sparta. Which would be a kind of self-contained, hard-knocked, militarized economy that was able to assert its interests. Then of course, you know, things pivoted in its direction. It found that it could manipulate the Trump administration. I think that super-Sparta claim came at the moment when they were having their wrists slapped about their attack against Qatar.
And now we’ve had this bypass thing, which seems to be a kind of idea that somehow Israel’s leadership and key parts of its economy can be insulated from external pressure by essentially bypassing into crypto and using various types of fintech, which Israel has huge strengths in, to bypass sanctions. And it’s a total illusion and it’s no surprise that the responsible financial authorities in Israel, officials at the central bank, said, “What the hell are you talking about, this makes no sense.”
Because Israel is hugely dependent on the outside world for foreign investment, for markets. You know, this is not an economy that can easily cut itself off. Its exports are 60 percent high-tech. It’s business R&D is heavily financed from abroad to the tune of about 47 percent. The venture capital investment in Israel which drives its tech sector last year was over 70 percent from abroad. The idea that you can bypass this through some crypto somehow sneak your way past international tension is just silly. The calm factor of the matter are the numbers that we started with. Over the period since October 2023, the Israeli stock market has boomed. You know, money has flown in, the shekel has been strong. The idea that somehow it’s liable to be punished for anything other than the most egregious actions which somebody might actually finally decide to take criminal action over—it might be a problem for Netanyahu and some of his cronies, but not for Israel as such, right? So there’s a way in which he is dragging Israel into his own maelstrom of increasingly acute legal issues.
