Israeli Prime Minister Benjamin Netanyahu reached agreement on a governing coalition that’s united on key domestic issues and deeply divided on making peace with the Palestinians.
“We expect that the coalition agreements will be signed by the party leaders later today,” said Noga Rappaport, spokeswoman for Netanyahu’s Likud party, after concluding overnight negotiations.
The coalition’s make-up will enable the incoming government to make the budget cuts necessary to keep spending in check, after last year’s deficit came in above target. Ultra-Orthodox parties that had supported the previous government in exchange for hundreds of millions of shekels in subsidies for their community have been elbowed out.
Netanyahu’s coalition partners will also support his previously failed efforts to limit the number of military draft exemptions given to ultra-Orthodox men so they can pursue religious study. That measure, which had been opposed by ultra- Orthodox lawmakers, is designed as a first step toward encouraging devout men to join the work force. More than half of them shun work to devote their lives to religious study, government figures show.
“In terms of advancing on domestic issues, this is probably as good a coalition as Netanyahu could have asked for,” said Avraham Diskin, professor of political science at Hebrew University of Jerusalem. “On the peace process, the government has parties and politicians ranging from hard-line hawks to real doves, and is going to come into conflict when it comes to removing even the smallest West Bank settler outpost.”
The new government may hold 68 of parliament’s 120 seats. Netanyahu’s third term in office, and second consecutive term, gets under way just before U.S. leader Barack Obama begins his first presidential visit to Israel on March 20.

Budget Cuts

One of the priorities for the government will be to pass a 2013 budget. Netanyahu called for early elections last year after his coalition partners refused to approve 14 billion shekels ($3.8 billion) in budget cuts to meet a deficit target of 3 percent of economic output.
Israel’s benchmark TA-25 index has reacted positively to the government’s formation, rising 1.1 percent this week as the composition of the new coalition became clear.
“The signal this government is giving is one of continuity and stability, that Israel’s economic strategy of bringing the budget deficit back under control will go on,” said Leo Leiderman, chief economist at Tel Aviv-based Bank Hapoalim Ltd.
While the coalition will find it easier to reach a consensus on major issues affecting the economy, it will not find that same like-mindedness when it comes to peacemaking with the Palestinians. The new government yokes together lawmakers who want to reach a peace accord and others who oppose an independent Palestinian state.
The coalition will be led by Netanyahu’s Likud party, which ran in Jan. 22 elections on a joint ticket with the Yisrael Beitenu faction, winning 31 seats in the Knesset.
The second-biggest coalition partner will be Yesh Atid, Hebrew for “There is a Future,” which campaigned as a champion of middle-class concerns and won 19 seats. Yesh Atid leader Yair Lapid, a former television interviewer with no political experience, will serve as Finance Minister.
The third-biggest party in government will be the 12-seat Jewish Home party, whose leader Naftali Bennett, a former technology entrepreneur, will take over the Ministry of Industry, Trade and Labor. Jewish Home supports building more West Bank settlements and opposes a Palestinian state, putting it at odds with the other coalition parties, which support a two-state solution to the Israeli-Palestinian conflict.
Foremost among the coalition members that want to advance the peace process is the six-seat Hatenuah party, a new faction headed by former Foreign Minister Tzipi Livni, who will head the Justice Ministry.
Netanyahu is holding the foreign minister’s job for Avigdor Liberman, the leader of the Yisrael Beitenu party, who resigned in December after being indicted on charges of fraud and breach of trust. Liberman will continue to serve in the Knesset through his trial, which is set to resume in April.
The parliamentary opposition will be headed by the 15-seat Labor party, whose leader, Shelly Yachimovich, refused Netanyahu’s offer to join the government, saying the prime minister is not sufficiently committed to the peace process and supports economic policies that hurt Israel’s weakest.
Joining the opposition for the first time in a decade are two parties representing Israel’s ultra-Orthodox Jewish sector, Shas and United Torah Judaism, which oppose Yesh Atid and Jewish Home’s demand to end most draft exemptions.
The new government will also need to contend with Iran’s nuclear program, which Netanyahu has described as an existential threat. The Israeli leader told the United Nations last year that by spring or summer of 2013 the Iranians will have reached the final stage of attaining nuclear weapons capability. He has said “all options are on the table” to prevent that from happening, including a military strike.
Iran, along with the Israeli-Palestinian peace process and the civil war in neighboring Syria, will be the main topics of discussion during Obama’s Israel visit next week, according to Netanyahu.
“It’s unlikely the Israeli governmental changes will have any real influence on Iran policy,” said Mark Heller, research fellow at the Institute for National Security Studies at Tel Aviv University. “The important decisions are still going to rest with Netanyahu and Obama.”