Flug Style to Smooth Israel Succession After Netanyahu Snubs

Photographer: Sason Tiram/Bank of Israel via Bloomberg

Karnit Flug, governor-designate of the Bank of Israel. Close

Karnit Flug, governor-designate of the Bank of Israel.

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Photographer: Sason Tiram/Bank of Israel via Bloomberg

Karnit Flug, governor-designate of the Bank of Israel.

Karnit Flug, the Bank of Israel’s prospective new governor, is a conciliator who won’t allow the manner of her appointment to disrupt working relations with Prime Minister Benjamin Netanyahu’s government, according to analysts and former colleagues.

Flug was twice passed over to succeed Stanley Fischer, staying on as caretaker even as she was publicly excluded from the shortlist as recently as a week ago. Only Netanyahu’s inability to agree on a candidate with Finance Minister Yair Lapid led to this week’s turnaround, in which Flug, 58, became the first woman nominated to head Israel’s central bank.

Flug won’t allow that history to affect her ties with the prime minister, who will “discover that she is very businesslike and professional,” said Ephraim Kleiman, a professor of economics at The Hebrew University. The government’s turnabout might even work in Flug’s favor, as “the fact that they were forced to ask for her gives her a certain amount of power,” he said.

The Bank of Israel’s autonomy combined with Fischer’s reputation lent weight to his occasional criticisms, especially over what he saw as loose fiscal policy. Flug takes over at a time when the government is seeking to trim the budget. Her challenges include balancing the demands of exporters, who want low rates to cap the shekel’s gains, with a housing market that surged as borrowing costs declined.

‘Right People’

Flug’s style in addressing such questions would be to solicit a wide range of views, said Asher Blass, a former chief economist at the central bank who’s known the governor-designate since they were undergraduates in Jerusalem.

“I think she will consult with the right people,” Blass said. “She’s certainly not the type of person who says, ‘I know everything, I don’t have to talk to anyone.’ She is a person who will delegate.”

Israeli stocks and bonds gained after Flug’s Oct. 20 nomination. The TA-25 (TA-25) equity index added 0.7 percent that day, paring the gain by 0.1 percent yesterday. The yield on benchmark debt maturing in March 2023 has dropped 3 basis points to 3.61 percent, the lowest since May.

Some analysts wonder if Flug’s style may limit her impact. “She doesn’t stand out as somebody with authority,” said Yakir Plessner, a former deputy governor of the central bank. “Maybe once she is governor, that will bring out aspects in her that weren’t visible before.”

‘Has the Courage’

Fischer said he expects Flug to be an “excellent” governor. “She has the courage to deal with problems,” he told Channel 2 television in an interview from New York.

Flug’s appointment came two weeks after President Barack Obama nominated Janet Yellen to become first female head of the Federal reserve. Elvira Nabiullina was appointed to lead Russia’s central bank in June.

“This decision calls for a celebration,” said Rivka Carmi, president of Israel’s Ben-Gurion University of the Negev and its first female leader. “I don’t understand why it took so long, but she won this job on her own merits and she’s a wonderful role model for women in Israel.”

Flug, the daughter of economist and Holocaust survivors’ advocate Noah Flug, left Poland for Israel at the age of three, and studied at the Hebrew University of Jerusalem and Columbia University in New York. She worked at the International Monetary Fund before joining the Bank of Israel. She is married to Hebrew University economist Saul Lach and they have two grown children.

‘Embarrassing Spectacle’

Netanyahu disregarded Fischer’s recommendation of Flug when he nominated Jacob Frenkel, a former Bank of Israel governor, and then Leonardo Leiderman, chief economist at Bank Hapoalim (POLI) Ltd., only to have both withdraw during the vetting process. He also unsuccessfully approached former Treasury Secretary Lawrence Summers for the job.

Even after those plans fell through, Lapid said on Oct. 15 that three candidates were in the frame and Flug wasn’t among them. Lapid and Netanyahu reversed course when they announced her nomination, saying they were “impressed by Dr. Flug’s performance as acting governor in recent months.”

“The selection process was an embarrassing spectacle, but Netanyahu deserves credit for being able to come back to Karnit after saying no to her face,” said Vered Dar, who worked with Flug at the Bank of Israel and met with her regularly as chief economist at Psagot Investment House Ltd. in Tel Aviv.

‘Apologize and Beg’

As acting governor since Fischer’s departure at the end of June, Flug presided over an unexpected interest-rate cut last month. She also stepped up the foreign-currency purchases, aimed at paring the shekel’s rise, that Fischer had instituted.

Even as she steered policy, Flug acknowledged her disappointment at being passed over, signaling she’d quit the bank once Fischer’s successor was installed.

“Only over the past two months, when I encountered the force of the opposition to appointing me as the bank’s governor, did the thought enter my mind that perhaps I was also disqualified because I am a woman,” she said in a September interview with Yediot Aharonot newspaper.

Meanwhile, members of parliament including Labor Party leader Shelly Yachimovich were pressing for her stopgap role to be made permanent.

After Leiderman pulled out, Yachimovich told Haaretz newspaper: “Netanyahu and Lapid should go to the home of Dr. Karnit Flug to apologize and beg her to take the job.”

To contact the reporter on this story: Jonathan Ferziger in Tel Aviv at jferziger@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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