Judicial overhaul carries risks beyond immediate operational disruption stemming from protests

A plan proposed by Prime Minister Benjamin Netanyahu’s government to give the executive and legislative branches greater powers over the judiciary has spurred a historic protest movement. Control Risks considers the implications of this reform for the business environment.

Reform

On 4 January, days after Israel’s 37th government took office on 29 December 2022, Minister of Justice Yariv Levin unveiled a proposal to reform the judiciary. Most controversially, it includes bills to:

• Give the government and coalition parliamentarians a greater say in the selection of judges, including at the Supreme Court – Israel’s highest judicial authority and last court of appeal.
• Allow the parliament to override rulings issued by the High Court – the status that the Supreme Court assumes when ruling on administrative matters – with a simple majority vote at the Knesset (Israel’s parliament).

The ruling ultra-orthodox and ultra-nationalist coalition, led by Netanyahu’s Likud party, sees the Supreme Court as an unelected institution that has overstepped its mandate in recent years to push a ‘leftist’ activist agenda. Key figures of the coalition, including ultra-nationalist ministers of national security and finance, Itamar Ben-Gvir and Bezalel Smotrich, have been vehemently opposed to decisions taken by the High Court. One such ruling saw the court overturn a law in 2020 that would have legalised settler outposts built on private Palestinian land in the West Bank.

Conversely, the opposition sees the judicial overhaul as an attack on the country’s democratic foundations and its main checks and balances mechanism. In addition, many opponents to the reform have seen the plan as a bid on Netanyahu’s part to evade a corruption indictment that he has faced since 2019. Accordingly, a broad spectrum of Israeli society has mobilised since the announcement of the reform. According to local media reports, one in every five Israelis has attended a demonstration since the judicial reform project began.

Protests culminated on 26 March, after Netanyahu dismissed Minister of Defence Yoav Gallant after the latter had used a televised address to call on the government to halt reform plans. Protests continued on 27 March, even prompting Israel’s main trade union, the Histadrut, to call a nationwide general strike that resulted in the temporary grounding of flights departing from Tel Aviv’s Ben Gurion International Airport. In the evening of 27 March, with the country on the brink of paralysis, Netanyahu agreed to postpone further parliamentary hearings on the overhaul until early May, after Passover recess. He also put Gallant’s dismissal on hold.

Demonstrations to continue

With Netanyahu’s about turn, the pace of demonstrations has slowed. Still, popular mobilisation will persist over the coming weeks as Netanyahu remains committed to implementing the reform plan when the new parliamentary session begins. In addition, the cabinet’s preliminary approval on 2 April of the creation of a national guard to be overseen by the Ben-Gvir’s Ministry of National Security will sustain the opposition’s fears over what they see as state capture by ultra-nationalist and ultra-orthodox elements of the ruling coalition.

As negotiations over the judicial reform plan progress in the coming weeks, Israel will continue to experience frequent demonstrations. Hundreds of thousands of people have demonstrated over the past week, particularly in Tel Aviv, showing deep distrust of the government’s intentions. Meanwhile, a growing number of pro-reform protesters have also taken to the streets in support of the government. For example, a pro-government protest on 30 March saw thousands of people blocking the Ayalon highway, the main freeway running through Tel Aviv.

Over the coming weeks, civil unrest will continue to primarily take place in Tel Aviv, but the vicinity of state institutions in Jerusalem, including the Knesset, will also be affected. Protesters have typically sought to disrupt transport infrastructure, including roads, railway stations, Tel Aviv’s airport, as well as maritime lanes. Consequently, businesses will likely continue to see regular operational disruption, with an escalation in early May, when the government is expected to resume pushing at least some elements of the judicial overhaul through parliament.

Institutional damage

Protests will continue to cause disruption, but the judicial overhaul’s impacts extend beyond immediate operational considerations. The stability of the coalition will likely face significant strain over the coming weeks as Netanyahu seeks to balance diverging priorities – with coalition members spanning ultra-nationalist and ultra-orthodox parties to the more traditionally right-wing Likud party. With the increased risk of fault lines appearing withing the bloc, the chances of a coalition collapse leading to early elections being called will grow over the coming months.

The business environment could also deteriorate as Israel’s social rifts start transpiring within state institutions. Army reservists’ refusal to take part in training in March, in protest of the judicial overhaul, highlighted ongoing threats to the operations of critical state bodies. Dysfunction in key institutions would likely result in administrative delays for companies. This threat will be further compounded by possible efforts of civil society institutions to pressure the government into abandoning the reform. In particular, another general strike called for by the Histadrut – a credible prospect – would have a crippling effect on institutional capacity.

Finally, the probable ratification of at least some elements of the judicial overhaul in the coming months will likely have a negative impact on Israel’s economy. The plan will have limited direct impact on the business environment; the ruling coalition’s ideology focuses on nationalist and identarian themes rather than economic and business matters. However, economic actors’ expectations that the plan will reduce judicial independence, combined with continuing protest activity and the spectre of general strikes will harm investor confidence.

Blindsiding reform

The past few months of unprecedented civil action have overshadowed other critical threats to the security and business environments. Most significantly among them: continuing tensions with Palestinian communities, including West Bank-based militants. In fact, negotiations over the judicial overhaul carry a significant risk of escalating tensions with Palestinian communities both in Israel (though they have not significantly participated in anti-judicial overhaul protests) and in the Palestinian Territories, as Netanyahu seeks to secure the cooperation of ultra-nationalist partners. For instance, Knesset passed a 28 March temporary legislation that allows warrant-free searches of properties suspected of harbouring weapons, a law that is likely to disproportionately affect Palestinian citizens of Israel and that will heighten communal resentment towards the state.

In parallel, threat actors based in neighbouring Syria and Lebanon will pose elevated security threats over the coming months. Following a spate of Israeli airstrikes on positions associated with Iran’s Islamic Revolutionary Guards Corps (IRGC) in Syria, including one on 30 March that killed two IRGC officers, the Israeli military on 2 April announced that it had intercepted an Iranian drone that violated its airspace. In an evident sign of further regional escalation, on 6 April, Israel was targeted by a barrage of rockets fired from Lebanon. The Israeli air defences will remain able to intercept most projectiles, but falling debris and occasional hits will sustain incidental threats for businesses.

Source: Control Risks