US embassy cable - 04TELAVIV6632

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 006632 
 
SIPDIS 
 
E.O. 12958: DECL: 12/28/2014 
TAGS: ECON, PREL, EFIN, KWBG, IS, ECONOMY AND FINANCE, PEACE PROCESS, ISRAELI-PALESTINIAN AFFAIRS, GAZA DISENGAGEMENT 
SUBJECT: NETANYAHU AND CODEL LIEBERMAN DISCUSS ECONOMIC 
REFORM, PROSPECTS FOR PEACE 
 
Classified By: Ambassador Daniel C. Kurtzer for reasons 1.4 (b) and (d) 
 
1.  (C) Summary:  CoDel Lieberman met with Minister of 
Finance Binyamin Netanyahu on Tuesday, December 28 to discuss 
elements of the Ministry's economic reform package, as well 
as prospects for advancing the peace process in the wake of 
Arafat's death and the rise of a new PA leadership.  On the 
economy, Netanyahu said that Israel has achieved the 
equivalent of "ten years of growth" via privatizations, 
pension reform, reducing taxes, cutting government spending, 
and a welfare-to-work agenda that will bring 80 percent of 
poor families above the poverty line within one year.  He 
noted that while he does not like the way some 150,000 
illegal foreign workers have been "rounded up" and deported, 
their departure is crucial to lowering unemployment.  On the 
peace process, Netanyahu said Israel is in a "moment of 
opportunity" for re-engaging with the Palestinians, but that 
what he termed U.S. hopes for teaming up with Europe to apply 
pressure on the PA to reform are misplaced since "Europe 
consistently fails to see Palestinian shortcomings."  The 
change in PA leadership will be meaningless without societal 
change and Fayyad-like reforms across the board, he said, but 
with a real partner for peace Israel will spare no effort to 
reach a final settlement.  Netanyahu expressed his concern 
over threats of violent resistance to disengagement from 
"tens of thousands" of settlers, saying only a national 
referendum could calm the waters.  End summary. 
 
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Encouraging Growth by Trimming Government Fat 
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2.  (C) CoDel Lieberman met with Minister of Finance Binyamin 
Netanyahu December 28 to discuss a range of economic and 
political issues.  Netanyahu began the meeting with a 
discussion of the effects of his broad economic reform 
agenda, noting that simply by "opening up the economy" Israel 
has achieved the equivalent of "ten years of growth" during 
his tenure.  "Israel has made the fastest transfer to a 
complete market economy the world has seen."  Noting that per 
capita income is up and the deficit is down, Netanyahu said 
he expects over four percent annual economic growth within 
the next two to three years.  A key feature of his agenda has 
been "slimming down" the public sector, historically 60 
percent of GDP, via aggressive privatizations including El Al 
airlines and the banking and telecom sectors.  He noted that 
significant corporate and VAT tax breaks as well as 
government payroll cuts are additional elements of MinFin's 
program of economic reform. 
 
3.  (C) Netanyahu said that while most countries have avoided 
tackling pension reform, he did so by nationalizing union 
pensions, raising the age of retirement across the board, and 
modestly cutting benefits while increasing contributions. 
Similarly, his welfare reform program has reduced the "fat 
man of welfare" from 56 percent of GDP to 51 percent.  When 
opponents of welfare reform cite poverty statistics, he 
explained, they ignore the fact that within one year, 
MinFin's welfare-to-work program will raise approximately 80% 
of working poor families well above the poverty line. 
Netanyahu also highlighted the special police unit he had set 
up to uncover welfare fraud, something that "everyone does," 
and in major cases can waste millions of shekels of 
taxpayers' money. 
 
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Foreign Workers Removed to Make Room for Israeli Unemployed 
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4.  (C) Netanyahu said that there is a relationship between 
the 300,000 foreign workers that until recently resided in 
Israel, and the same number of Israeli unemployed.  "You 
can't find a Jewish construction worker or a Jewish house 
cleaner in Israel," he noted.  Explaining that he did not 
like some of the methods the GOI used to round up and deport 
over 100,000 illegal workers, he said that their departure 
was one-half the equation to bring Israelis back to work. 
Palestinians should not replace the Romanian, Nigerian, Thai 
and Philippine laborers who have left, he said -- it must be 
Israelis, both Jewish and Arab, who take over vacant jobs via 
welfare-to-work. 
 
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Potential in New PA, But Nothing Certain Yet 
-------------------------------------------- 
 
5.  (C) In response to a question from Senator Lieberman, 
Netanyahu said that he believes Israel could find itself in a 
moment of opportunity for engagement with the Palestinians in 
the wake of Arafat's death and the rise of new PA leadership. 
 Arafat represented the "worst of Arab Islamic tendencies, a 
complete negation of Israel's existence," he said.  Real 
progress, however, depends on deep-seated changes within 
Palestinian society, as well as reforms throughout the PA 
that are similar in scope to what Salaam Fayyad has done 
within the Ministry of Finance.  In Netanyahu's view, a 
change in leadership without these elements in place will be 
nothing but "replacing a dictator with a more 
benign-appearing dictator." 
 
6.  (C) On change within Palestinian society, Netanyahu 
observed that Israel should not leave the territories without 
dismantling the terrorist infrastructure and eliminating 
elements of incitement.  On PA reform, he said its success 
depends heavily on American pressure.  He was pessimistic 
that Bush administration hopes of joint U.S.-EU pressure on 
the PA would come to fruition, due to what he called Europe's 
historic inability to see the extent of corruption within PA 
ministries.  Overall, he said, if Abu Mazen and the new 
leadership can shape the PA into a "compliant and willing" 
partner for peace, Israel will go to any length to reach 
final status solutions.  In the near-to-medium term, he said 
that the GOI hopes that disengagement after Gaza withdrawal 
can be negotiated, particularly the thorny and urgent issue 
of air and sea access for goods entering PA territories. 
 
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Settler Resisters Threatening Rule of Law 
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7.  (C) Netanyahu said he fears that the tens of thousands of 
settlers that he said are threatening violent resistance to 
evacuation from the Gaza Strip and parts of the northern West 
Bank pose a "real danger" to the rule of law in Israel.  He 
explained that the situation is a tragic one no matter the 
outcome -- if Israel does not respond to settler violence it 
shows it cannot govern; and if it does respond, the ensuing 
clashes could tear the fabric of Israeli society.  He said 
that the only way out of this dilemma is a referendum. 
Sharon could win it hands down, he said, and it would force 
more settlers to accept disengagement as the will of the 
Israeli people, not just the Prime Minister. 
 
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