Daniel sent us this one — he's asking about the euro to shekel exchange rate. The historic trajectory, what's pushing it around from both the European and Israeli sides, and the trade balance question — when the rate moves, who's actually winning and who's getting squeezed between Israel and the EU. There's a lot of moving parts here, and honestly the euro-shekel pair doesn't get nearly the attention the dollar-shekel does, but for Israel's trade picture it's arguably just as important.
It's massive, and most people don't realize that the European Union is Israel's largest trading partner. Bigger than the United States, bigger than China. We're talking about roughly thirty percent of Israel's total trade flowing through that euro-shekel pipeline. So when that rate shifts, it ripples through everything from tech exports to what you pay for cheese at the supermarket.
By the way — DeepSeek V four Pro is writing our script today, so if I sound unusually articulate, that's why.
That explains the structure I'm sensing. Alright, let's dig into this. The euro-shekel has had a fascinating arc over the last couple of decades. If you go back to the early two-thousands, the shekel was weak — really weak — and the euro was riding high. I remember when one euro bought you something like six shekels.
That was around two thousand three, two thousand four. The shekel was still shaking off the shadow of the second intifada and the tech bubble bursting. Nobody wanted to touch Israeli assets with a ten-foot pole. But then something shifted, and the shekel just kept strengthening year after year against basically everything.
Right, and against the euro specifically, you can see these distinct phases. From about two thousand five through two thousand eight, the shekel appreciated pretty steadily. The euro went from roughly five point eight shekels down to about five point two. That was the early boom years — Israel's tech sector was really starting to fire on all cylinders, foreign investment was pouring in, and the Bank of Israel was slowly building credibility as an inflation fighter.
Stanley Fischer era. He took over the Bank of Israel in two thousand five and basically imported the playbook he'd helped write at the IMF and Citigroup. Aggressive rate management, clear communication, no political meddling. Markets love predictability, and Fischer delivered it.
That's one of those knock-on effect people miss. It's not just that Israel's exports were doing well — it's that the central bank built a reputation that made holding shekels attractive. When investors trust your monetary policy, your currency strengthens. The eurozone, meanwhile, was dealing with the early rumbles of what became the sovereign debt crisis. So you had this divergence — confidence flowing toward the shekel, uncertainty hanging over the euro.
Then two thousand eight hits, global financial crisis, and everything gets scrambled. The shekel actually weakened briefly — flight to safety, people running to the dollar and, surprisingly, the euro held up okay initially. But the real story is what happened after. From about two thousand nine through twenty fourteen, you get this grinding eurozone crisis, and the euro-shekel just keeps sliding. By twenty fourteen, we're looking at something like three point five shekels to the euro. That's a massive move from the six-shekel days.
This is where the trade balance question Daniel's asking about gets really interesting. Because a strengthening shekel sounds great if you're an Israeli consumer buying European goods — your imported cars from Germany, your French wine, your Italian machinery, it all gets cheaper. But if you're an Israeli exporter selling to Europe, your products are getting more expensive for European buyers. That squeezes margins.
There's a structural tension here that I find genuinely fascinating. Israel runs a persistent current account surplus — it exports more than it imports — and that surplus, in normal economic theory, should push your currency up. But a stronger currency eventually makes your exports less competitive, which should reduce the surplus. It's a self-correcting mechanism that, in Israel's case, has been weirdly slow to kick in.
Because the tech sector doesn't play by the same rules. When you're selling software or cybersecurity services or chip design, the exchange rate matters less than when you're selling oranges or textiles. A German bank buying fraud detection software from an Israeli startup isn't going to switch to a local provider because the shekel moved three percent. The product is differentiated enough that price sensitivity is lower.
The export mix matters enormously. Israel's traditional industrial exports — chemicals, plastics, agricultural products — those do feel exchange rate pressure. But the growth engine, the tech sector, is somewhat insulated. That creates a two-speed export economy where different industries experience the same exchange rate completely differently.
Let me pull up some specific numbers, because this is where it gets concrete. The euro-shekel rate as of late two thousand twenty-three was hovering around four shekels to the euro. That's up from the lows of around three point five we saw in twenty fourteen, but still historically quite strong for the shekel. And then twenty twenty-four got complicated.
The judicial reform protests, the war. The shekel took a beating.
The shekel weakened significantly in twenty twenty-three and into twenty twenty-four — we saw the euro push above four point two shekels at points, which is a level we hadn't seen in years. Geopolitical uncertainty is the fastest way to spook currency markets, and Israel had plenty of it. But here's the thing — the shekel has shown remarkable resilience. By early twenty twenty-five, it was already clawing back, and as of early twenty twenty-six, we're seeing the euro-shekel trading in the three point eight to four point zero range again.
Which tells you something about how markets price Israeli risk. There's a pattern — sharp depreciation during crises, followed by a relatively quick recovery. The market has learned that Israeli institutions hold, that the tech sector keeps exporting regardless, and that the central bank knows what it's doing. The risk premium spikes and then fades.
Now let's talk about what's pushing the rate from the European side, because that's equally important and often under-covered. The European Central Bank has been on its own journey. Negative interest rates for years — literally charging banks to park money — and then a sharp pivot to rate hikes starting in mid-two thousand twenty-two to fight inflation. The ECB raised rates by four hundred and fifty basis points in about fourteen months. That's aggressive by any standard, and it strengthened the euro against most currencies.
Including the shekel, at least temporarily. When the interest rate differential between euro-denominated assets and shekel-denominated assets narrows, some capital flows shift. If you can get four percent on a German bund instead of near zero, suddenly euro assets look more attractive relative to shekel assets, all else equal.
And the rate differential between the Bank of Israel and the ECB has been a major driver. The Bank of Israel was actually ahead of the curve on rate hikes — they started raising in April twenty twenty-two, before the ECB moved. At points, Israeli rates were higher than eurozone rates, which supported the shekel. But as the ECB caught up and the Bank of Israel started cutting again in late twenty twenty-four, that dynamic shifted.
Let's talk about the trade balance specifically, because Daniel asked who benefits and who suffers. The EU-Israel trade relationship is about forty billion euros annually in total goods and services. Israel exports roughly twenty to twenty-two billion euros to the EU, and imports about eighteen to twenty billion. Israel runs a modest trade surplus with Europe, but it varies by sector.
Breaking that down — Israel's top exports to the EU are machinery and transport equipment, chemicals and pharmaceuticals, and then the tech services that don't always show up cleanly in goods trade data. On the import side, Israel brings in machinery, vehicles, chemicals, and refined petroleum products from Europe. Germany alone accounts for about a quarter of EU-Israel trade.
When the euro strengthens against the shekel — meaning one euro buys more shekels — European exports to Israel become more expensive. That German car just got pricier for Israeli buyers. But Israeli exports to Europe become cheaper for Europeans, which should boost demand for Israeli goods.
In practice, the composition of trade matters more than the headline rate. Israeli pharmaceutical exports, for example, are not particularly price-sensitive. If you need a specific generic drug or a Teva product, you're buying it regardless of whether the shekel moved two percent. But for things like agricultural products or lower-value manufactured goods, exchange rate moves bite harder.
There's also the services dimension that doesn't get enough attention. Israel imports a lot of business services, consulting, and professional services from Europe. When the shekel weakens against the euro, those European consultants get more expensive. Conversely, Israeli tech companies selling software-as-a-service into Europe love a weaker shekel — their euro-denominated revenue converts into more shekels.
This is where the political dimension Daniel mentioned gets interesting. Because the EU-Israel relationship is not just a straightforward trade relationship. You've got the Association Agreement, which has been in place since two thousand, governing trade terms. You've got Horizon Europe, where Israel is an associated country and participates in EU research funding. And you've got periodic political tensions that spill over into economic discussions.
The labeling issue on settlement products comes to mind. The EU has been consistent about requiring goods produced in settlements to be labeled as such, which Israel pushes back against. It's a relatively small share of trade — settlement exports to the EU are maybe a few hundred million euros annually — but it's politically charged and creates friction.
Then there's the broader geopolitical overlay. When EU-Israel relations are tense — over Palestinian issues, over Iran policy, over whatever the flashpoint of the moment is — you sometimes see European investment flows to Israel slow down. Not dramatically, not in a way that crashes the currency, but enough to notice at the margin. Conversely, when relations are warmer, you see more European venture capital flowing into Israeli startups.
The European Investment Bank has put money into Israeli tech and infrastructure projects over the years. That's direct euro-denominated investment flowing into the Israeli economy, which supports the shekel. When those flows are robust, it's a tailwind. When they stall, it's a headwind.
Let me give you a concrete example of how these levers interact. In twenty twenty-three, during the judicial reform controversy, several European institutional investors publicly indicated they were reassessing their Israeli exposure. That's not a government action — it's private capital responding to perceived political risk. And that kind of sentiment shift shows up in the exchange rate, because those investors are converting shekels back to euros.
The flip side, though, is that European energy dependence created a fascinating dynamic after twenty twenty-two. When Europe lost access to Russian gas, they went scrambling for alternatives, and Israel suddenly became a much more important energy partner. The natural gas fields in the eastern Mediterranean — Leviathan, Tamar, Karish — those became strategically significant for Europe. And energy deals tend to be long-term and dollar or euro-denominated, which creates steady foreign currency inflows.
Israel's gas exports to Egypt, which then gets liquefied and shipped to Europe, that whole chain generates euro and dollar revenue that flows back into the Israeli economy. It's not the dominant factor in the exchange rate — tech exports are still the heavyweight — but it's a meaningful stabilizer that didn't exist a decade ago.
If we're answering Daniel's question directly — who benefits and who suffers when the euro-shekel moves — we need to be specific about direction. When the shekel strengthens against the euro, Israeli consumers win. European imports get cheaper. Travel to Europe gets cheaper. Israeli companies that rely on European inputs see their costs fall. But Israeli exporters to Europe, particularly in price-sensitive sectors, get squeezed.
European exporters to Israel struggle when the shekel weakens. A German machinery manufacturer trying to sell to an Israeli factory suddenly faces a price disadvantage. European tourists visiting Israel find everything more expensive. But European importers of Israeli goods — they're happy, because their input costs just dropped.
The asymmetry, though, is that Europe's economy is so much larger that the euro-shekel rate barely registers in Brussels or Frankfurt. It's a rounding error for the eurozone as a whole. For Israel, it's a significant variable. That means the policy response is asymmetric too — the Bank of Israel cares a lot more about this rate than the ECB does.
The Bank of Israel has been known to intervene. They've got substantial foreign currency reserves — over two hundred billion dollars — and they've used them to smooth out what they see as excessive shekel appreciation at various points. The stated policy is that they intervene to prevent disorderly market conditions, not to target a specific rate, but everyone knows that a too-strong shekel hurts exports, and the central bank is mindful of that.
There was a period around twenty seventeen to twenty eighteen where the Bank of Israel was buying dollars pretty aggressively to cap the shekel's rise. They were adding billions to reserves, trying to prevent the currency from strengthening too much. It's a tricky game — you're essentially fighting the market, and the market usually wins in the long run.
The reserves give them firepower. Two hundred billion is a lot of ammunition. And the thing about currency intervention is that it doesn't have to work permanently to be useful — sometimes you're just trying to slow the move, to give exporters time to adjust, to prevent a sudden shock from cascading.
Let's talk about the historic trajectory in a bit more detail, because Daniel specifically asked for that, and the long arc tells a story about structural change in the Israeli economy. Twenty years ago, the euro bought about five and a half to six shekels. Today it buys roughly four. That means the shekel has appreciated by something like thirty to thirty-five percent against the euro over two decades. That's a massive shift.
It's not because the euro has been weak — the euro has actually held up reasonably well against the dollar over that period. This is a shekel strength story, not a euro weakness story. The drivers are well-documented. Israel's tech sector generates enormous foreign currency inflows. Natural gas production reduced energy imports, improving the trade balance. The Bank of Israel maintained disciplined monetary policy. And Israel joined the OECD in twenty ten, which was a signal to institutional investors that the country was in the club of advanced economies.
The OECD accession is one of those underrated milestones. It meant Israel's bonds could be included in global bond indices, which triggered passive inflows from pension funds and sovereign wealth funds that track those indices. Billions of dollars and euros flowing in automatically, just because of an index rebalancing. That's structural demand for shekels that didn't exist before.
Then there's the gas story, which we touched on but deserves more detail. Before Tamar and Leviathan came online, Israel was importing coal and fuel oil for electricity generation, which meant foreign currency outflows. Once domestic gas displaced those imports, that was a permanent improvement in the trade balance of maybe five to seven billion dollars annually. That's a structural shift that supports the currency year after year.
If you're looking at the euro-shekel trajectory and trying to project forward, you have to ask which of these forces persist. Probably going to keep growing, though AI disruption could change the composition. Steady for the foreseeable future. Monetary policy credibility? The Bank of Israel has earned it, but political pressure on the central bank is a risk everywhere, including in Israel.
On the European side, you've got structural challenges that could weigh on the euro. Aging demographics, sluggish productivity growth, energy transition costs, political fragmentation. The eurozone has not solved its fundamental governance problems — it's still a monetary union without a fiscal union, and that creates periodic existential doubts that cap euro strength.
Though to be fair, people have been predicting the euro's demise for twenty years and it's still here. I'm skeptical of grand narratives about currency collapse. The euro has institutional staying power. But the growth differential between the Israeli economy and the eurozone economy has been persistent — Israel has grown faster, attracted more investment per capita, and generated more high-value exports. That differential matters for long-run exchange rates.
Let me bring in some specific trade balance data. According to Eurostat, EU exports to Israel in twenty twenty-three were about twenty-five billion euros, while EU imports from Israel were about twenty-two billion. So the EU actually runs a modest trade surplus with Israel, which surprises a lot of people who assume Israel dominates the trade relationship.
That's goods trade, though. When you add services — which is harder to measure precisely — the picture shifts. Israeli tech services exports to Europe are substantial and probably undercounted in the standard trade statistics. If you're an Israeli startup selling cloud software to European customers, that revenue doesn't always show up cleanly in customs data.
Right, and this is a known measurement problem. The OECD has done work on trade in value-added terms, and it suggests that services trade is systematically underestimated for knowledge-intensive economies like Israel's. So the true trade balance between Israel and the EU is probably closer to balanced, or possibly in Israel's favor when services are fully accounted for.
Which brings us back to the exchange rate implications. If Israel's true export position is stronger than the official numbers suggest, that implies even more structural demand for shekels, which reinforces the long-term appreciation trend. The market figures this out over time, even if the statisticians take years to catch up.
Now, Daniel also asked about geopolitical levers from both sides, and I think this is where the conversation gets particularly interesting. Because the EU has used trade policy as a lever in its relationship with Israel. Not aggressively — this isn't sanctions territory — but consistently. The settlement labeling guidelines we mentioned. Periodic statements from the European Commission about the peace process. The EU's position that it won't recognize changes to the nineteen sixty-seven lines without agreement from both parties.
On the Israeli side, there's a counter-lever that doesn't get discussed much — Israel's role as a technology supplier. European banks, European militaries, European intelligence agencies — they all rely on Israeli cybersecurity technology to some degree. You can't easily disentangle that. When push comes to shove, the EU isn't going to jeopardize access to critical security technology over a labeling dispute.
The cybersecurity angle is underappreciated. Israeli companies like Check Point, CyberArk, and a whole ecosystem of smaller firms provide critical infrastructure security to European financial institutions. If you're Deutsche Bank or BNP Paribas, you're running Israeli security software. That creates a mutual dependency that limits how far either side can push economic pressure.
There's the Horizon Europe program we mentioned. Israel is one of the few non-EU countries that's fully associated, meaning Israeli researchers and companies can lead projects and receive funding. That's worth hundreds of millions of euros annually to Israeli academia and startups. It's a concrete benefit of the relationship that both sides value, and it creates constituencies on both sides that push back against letting political tensions disrupt economic cooperation.
The European side has its own internal dynamics that affect the exchange rate indirectly. When the EU adopts new regulations — like the Digital Services Act, the AI Act, the carbon border adjustment mechanism — those create compliance costs for Israeli exporters. If you're selling into the European market, you have to meet EU standards, and that's not free. It doesn't directly move the exchange rate, but it affects trade flows at the margin, and over time that feeds through.
The carbon border adjustment mechanism is going to be particularly interesting to watch. It's essentially a tariff on carbon-intensive imports. Israeli industrial exports — chemicals, refined products — could face additional costs. If that reduces Israeli exports to Europe, it reduces demand for shekels, which would be a modest headwind for the currency.
Let's zoom out and talk about where the euro-shekel rate might go from here. I'm always hesitant to make currency predictions because exchange rates make fools of everyone eventually, but we can talk about the forces in play. On the shekel-strengthening side, you've got continued tech export growth, gas revenues, and a central bank with credibility. On the shekel-weakening side, you've got geopolitical risk, the possibility of broader regional instability, and the fact that the shekel is already quite strong by historical standards.
There's also the interest rate trajectory. The Bank of Israel has been cutting rates, while the ECB has been more cautious about easing. If that divergence continues, it reduces the shekel's yield advantage, which could weaken the currency at the margin. Capital flows follow yield differentials, and the gap has narrowed.
Then there's the wild card — the US dollar. The euro-shekel rate doesn't exist in isolation. A lot of global trade, including Israeli trade, is dollar-denominated even when it's with Europe. So dollar-shekel dynamics spill over into euro-shekel. If the dollar strengthens broadly, that often drags the euro down, which affects the euro-shekel cross rate in ways that have nothing to do with Israel or Europe specifically.
Global macro forces washing through a small open economy's exchange rate. Israel can't control any of this, which is both a vulnerability and, weirdly, a strength. The market knows the Bank of Israel isn't going to try something foolish like capital controls or aggressive manipulation, because it understands the limits of what a small central bank can do.
That institutional humility is actually a competitive advantage. Compare it to countries that try to micromanage their exchange rates and end up creating bigger distortions. Israel mostly lets the shekel float, intervenes sparingly, and focuses on keeping inflation under control and the banking system stable. It's boring, and boring is good for currency markets.
To directly answer Daniel's question about who benefits and who suffers — it's sector-dependent, but we can be more specific. When the euro strengthens against the shekel, European exporters to Israel benefit because their goods are more competitively priced. Israeli importers and consumers suffer because everything from Europe costs more. Israeli exporters to Europe benefit because their goods become cheaper for European buyers. And European consumers buying Israeli goods benefit from lower prices.
When the shekel strengthens against the euro, it's the mirror image. Israeli consumers and importers win. Israeli exporters to Europe, especially in price-sensitive sectors like agriculture, textiles, and basic manufacturing, lose. European exporters to Israel lose. And the Israeli tech sector mostly shrugs because their products aren't price-sensitive in the same way.
The tech sector indifference is worth emphasizing because it explains so much about why the shekel has been able to strengthen for two decades without destroying Israeli export competitiveness. If your economy is increasingly dominated by high-value, differentiated products, the exchange rate becomes less of a constraint. Switzerland has the same dynamic with the franc — it's been absurdly strong for decades, but Swiss exports hold up because they're selling things people can't easily get elsewhere.
That's actually a great comparison. The Swiss franc has appreciated massively over the long run, and Switzerland still runs enormous trade surpluses. Because when you're selling precision instruments, pharmaceuticals, and financial services, the exchange rate is secondary to quality and reliability. Israel is not Switzerland — not yet — but it's on a similar trajectory in terms of export sophistication.
Now: Hilbert's daily fun fact.
The shortest war in recorded history was the Anglo-Zanzibar War of eighteen ninety-six, which lasted between thirty-eight and forty-five minutes depending on which clock you trust.
What should listeners actually take away from all this? First, if you're doing business across the euro-shekel divide, hedge. The rate can move five to ten percent in a year, and that can wipe out your margin if you're unhedged. Forward contracts, options, natural hedging by matching revenue and costs in the same currency — these aren't exotic financial engineering, they're basic risk management.
Second, pay attention to the composition of trade, not just the headline exchange rate. If you're in a price-insensitive sector, currency moves matter less than you think. If you're in a commodity or low-margin business, they matter more. Structure your operations accordingly.
Third, the political dimension matters but it's usually temporary. EU-Israel political tensions create exchange rate volatility, but the long-run trend is driven by structural factors — tech exports, gas, monetary policy. Don't confuse the noise with the signal.
Fourth, for anyone watching from outside, the euro-shekel pair is actually a useful lens for understanding the Israeli economy's transformation. The thirty-five percent appreciation over twenty years isn't a fluke — it's the market's verdict that Israel produces things the world wants and manages its economic institutions competently.
One forward-looking thought — the biggest question mark for the euro-shekel over the next decade might be AI. If artificial intelligence disrupts the tech services export model that has powered so much of Israel's growth, the currency dynamics could shift. Or it could supercharge them. We don't know yet, and anyone who claims certainty is selling something.
That's the right note to end on. Thanks to Hilbert Flumingtop for producing, as always.
This has been My Weird Prompts. You can find every episode at myweirdprompts dot com or wherever you get your podcasts. If you've got a question about exchange rates or anything else, send it our way.
We'll be back soon with more weird prompts.
