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Israel’s war economy is working—for the time being

The longer the conflict lasts, the greater the pressure

LESS THAN three weeks since Hamas plunged Israel into war, conflict is taking a toll on the country’s economy. The shekel has sunk to its lowest level against the dollar in more than a decade, prompting Israel’s central bank to sell $30bn of foreign-exchange reserves to prop up the currency. The price of insuring the country’s debt against default has rocketed. Firms from builders to restaurants have shut. On October 19th the finance ministry outlined plans to ramp up defence spending and provide for those pushed out of work. Four days later the central bank cut its growth forecast for the year from 3% to 2.3%.

Since war is not just fought by military forces, but also by economic ones, an important question hovers over all this activity. Can Israel withstand the economic pain? The country’s clashes with Hamas since withdrawing from Gaza in 2005 do not provide much of a guide. In each case billions of shekels—a mere fraction of GDP—were spent on the military and repairs. The conflicts did not pose a threat to the country’s economy, which has long had one of the highest incomes per person in the Middle East.

The scale of Hamas’s attacks on October 7th, and the likely ensuing conflict, is therefore pushing economists to the history books. In 1973 the cost of weapons and drafting 200,…