A Daily Analysis
By Marc Schulman

July 29 , 2007 Tel Aviv Stock Market Drops/ Defense Budget Discussed

TonightÕs evening news in Israel was dominated by a more then 5% drop in the Tel Aviv stock exchange. That drop is just a reaction to the drop in world markets last week. For the first time in a many years, all one hundred of the largest Israeli companies' stocks dropped.

The weekly Israeli Government meeting today was devoted to the defense budget. The meeting lasted seven hours and dealt with two major issues. The first issue was the recommendations of the Bordat Commission. That commission is considered by many to be the most in depth study of the defense budget ever. Its main recommendation was the establishment of a ten year budget for the IDF. The army has long argued that it is impossible to do any long-term planning, especially for when it takes years to develop and purchase new weapons systems. The government approved the commission recommendation starting in 2009. The Ministry of Defense does not trust a future government to continue with a ten year plan, and thus wants this change to be enshrined in law.

Meanwhile, Minister of Defense Barak and Prime Minister Olmert could not come to an agreement over the 2008 budget, with the majority of the cabinet supporting Olmert, who was not willing to give the army as large an increase as Barak had requested. Barak's request for the next year includes funding for a considerable increase in the size of the army, including adding two full divisions.

There are those who question if Israel is not replaying the mistakes following the Yom Kippur war when the IDF grew exponentially. Barak rightly demanded that before any final budget decision is to take place, the government must formally agree to what contingencies the army is supposed to be preparing for. The IDF acquisitions over the next years is ambitious and includes the purchase of a new generation of combat aircraft, replacing an ageing transport fleet, new armored carriers, and a new naval craft.

Israeli military decisions have been tied to Washington's announcement that the United States wanted to sell to the Saudis and the other Gulf states a very large arms package. The announcement comes after the Bush-Olmert meeting during which they decided that the US was going to expand the military aid budget to Israel by 25% over the next 10 years. There are some who say that Israel should stop accepting American aid, and while that is a good goal, with the newest aircraft that Israel would like to purchase costing $180 million a piece, that is going to be difficult.

Olmert announced at todayÕs cabinet meeting that the US has formally agreed to insure IsraelÕs qualitative advantage over the Saudis, making it clear that between that agreement and the agreement to increase military aid Israel was not going to oppose the military sale to Saudi Arabia, and might even support it. He implied that it was in IsraelÕs interest for the Saudis to increase their armaments as a counterbalance to Iran. ItÕs a dangerous game in a dangerous neighborhood.