To understand the significance of the current confrontation between the Bank of Israel and the Ministry of Finance over control of salaries at the central bank, one has to be able to separate the real issue that they are quarreling about from the supposed issue.
By that I mean distinguishing between Minister of Finance Yuval Steinitz's political needs, which dictate distancing himself from the image of Sara Netanyahu's pin-up at the Ministry of Finance, and what any finance minister would do in his place. We also have to separate the needs of the Ministry of Finance's officials, who are looking for a corrective experience after what they went through recently getting the budget approved by the government, and the attempt to reach a satisfactory arrangement with the Bank of Israel.
So what is the quarrel about? Contrary to what Steinitz has been saying, it is not about the Bank of Israel's right to set its own salary scale. The Bank of Israel does not claim such a right, and Governor of the Bank of Israel Stanley Fischer repeated that stance at his press conference today. The quarrel is also not about the need for external supervision of how the bank operates the salary scale. The governor has declared for over a year that an administrative board, controlled by people who external to the bank, will supervise salaries, according to government guidelines, and with a right of appeal to the Ministry of Finance.
In the end, the substantive point at issue boils down to one question: will handing over supervision of Bank of Israel salaries to the Ministry of Finance be liable to impair the bank's independence in the future? In other words, could the fact that Ministry of Finance officials will be the ones to determine whether there have been irregularities in salaries be abused by some future minister of finance? If the answer to that question is yes, then all Stanley Fischer's fears are justified. It's not a matter of spitting in Yuval Steinitz's face, or of bashing already battered Finance Ministry officials.
In fact, the ones who need to give answers about the way matters have been presented are actually the Finance Ministry people. The Bank of Israel agrees that it is the government that sets pay policy, and that deviations from that policy must be prevented through effective supervision. Therefore, the question that remains is whether there can be a special mechanism that will supervise maintenance of pay guidelines but which will not be manned by Finance Ministry officials. Fischer argues, to a large extent rightly, that around the world it is not normal practice for finance ministries to have such great influence on the way central banks manage their internal affairs. He is also proposing to accommodate the needs of pay policy in the economy.
It's true that, if Fischer's stance prevails, the Supervisor of Wages' annual report will less glamorous, and will have to deal again with health funds, the universities, and other bodies. Steinitz for his part will have to find a new direction for his "I'm the Minister of Finance" campaign, while Finance Ministry officialdom will have to find another way of restoring its deterrent power. All that is true, but all that has nothing to do, and always did have nothing to do, with the needs of pay policy at the Bank of Israel.
Published by Globes [online], Israel business news - www.globes.co.il - on June 14, 2009
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