War Could Fuel Israel’s Economy

An earlier Hebrew version of this article was originally published on ice.co.il. The present version has been expanded and revised by the author.

In the early hours of June 13, 2025, Israel found itself embroiled in an unprecedented conflict with Iran, exacting an immediate economic toll. Within two days of intense missile exchanges, damages reached nearly one billion shekels, over 12,000 compensation claims were filed, and military expenditures totaled approximately 5.5 billion shekels. Yet beneath the alarming headlines lies a rarely discussed opportunity: if managed correctly, this conflict could become a turning point for Israel’s economic resurgence.

Conventional wisdom frames war solely as destruction. Economists emphasize lost GDP—nearly 0.3% after just one week of fighting—and markets briefly panicked, as Tel Aviv’s stock exchange plunged 3%, with the shekel weakening noticeably. But historically, great conflicts have consistently demonstrated something remarkable: war can lead to profound economic renewal, transitioning national economies from “guns to butter”—shifting massive defense budgets to civilian investments in infrastructure, education, healthcare, and technological innovation. For Israel, this transition offers a unique economic opportunity.

Israel’s fiscal preparedness proved critical. The Bank of Israel swiftly convened its first-ever “Financial Stability Committee” to coordinate regulatory actions and ensure continuity in banking and financial markets. 

Nonetheless, risks remain. An extreme scenario, such as Iran closing the Strait of Hormuz, could sharply raise global energy prices, potentially triggering recession. Despite its resilience and Mediterranean gas fields, Israel would still face impacts, underscoring the need for vigilance.

But a critical question remains: Will Israel’s leaders genuinely shift resources from decades of defense-centric policies toward civilian-led economic growth?

Israel’s decades-long struggle against the Iranian threat has cost over 200 billion shekels. A decisive Israeli victory, permanently neutralizing Iran’s existential nuclear and ballistic threats, would dramatically reduce Israel’s long-term security spending. The economic effect? A permanent reduction in geopolitical risk premiums and a robust rebound in investor confidence.

Despite initial turmoil, the Israeli market quickly recovered, reflecting underlying strength. Markets initially exhibited a familiar ‘Flight-to-Safety’ behavior, temporarily retreating to safer assets, but this reaction quickly dissipated, reflecting confidence in Israel’s economic resilience. Historically, after every major Israeli conflict—Six-Day War, Yom Kippur War, Lebanon War—markets rebounded strongly. This war, by potentially reducing Israel’s defense burden, could lower its country risk premium permanently, enhancing investment appeal.

This conflict presents medium-term economic opportunities. Israel’s decisive military performance demonstrated advanced missile defense, precision strikes, and cybersecurity capabilities, increasing global interest in Israeli defense and technological exports. Concurrently, Europe’s vulnerability to energy disruptions positions Israel’s natural gas fields—Leviathan and Karish—as key sources for significantly increased exports, making Israel essential in European energy diversification.

Economic outcomes also depend heavily on perception. Successfully positioning itself globally as a nation that overcame an existential threat could significantly enhance Israel’s international image and economic attractiveness. Israel adeptly managed international diplomacy during the crisis, presenting itself as responsible by targeting military threats while minimizing civilian harm. This approach maintained investor confidence and international appeal.

Indeed, short-term disruptions are undeniable: tourism virtually halted, international flights were suspended, major investment projects paused, and there were initial signs of capital flight and brain drain fears. Such impacts, if prolonged, risk permanent economic damage, including a possible decline in productivity and a weakened investment climate. Historically, even decisive military victories, such as Operation Iron Swords in Gaza (2023), have resulted in sustained high defense expenditures, raising concerns that the Iran conflict might similarly necessitate ongoing defense investments rather than immediate budgetary relief.

Yet a critical risk remains: a prolonged, inconclusive conflict could severely strain Israel’s economy, perpetuating high defense costs and eroding investor confidence. Persistent uncertainty could reverse post-war optimism, potentially triggering sustained capital flight and a brain drain, undermining any economic recovery.

Fears of permanent capital and brain drain exist, but could be offset by a renewed wave of patriotism and opportunity. Historically, decisive victories boost domestic confidence, prompting capital repatriation and return migration of skilled professionals. Equally, concerns about inflation or global recession risks must be acknowledged but appear containable, given global energy market adjustments and Israel’s energy self-reliance from Mediterranean gas fields.

Critics may dismiss post-war optimism as naive. The “guns-to-butter” transition, supported by strong governance and international alliances, historically yields rapid growth, driven by pent-up consumer demand, technological innovation born from wartime necessity, and international cooperation fostered through shared crisis.

To fully realize this promise, Israeli policymakers must demonstrate courageous economic leadership, swiftly implementing decisive policy shifts: transitioning from defense-centric budgets toward targeted incentives for international investment, extensive workforce training programs for reservists, aggressive regional economic cooperation, significant reforms in civilian infrastructure, education, and innovation, and continued strategic vigilance. Only then can the economic renewal sparked by victory become a lasting reality.

This war could reshape Israel’s security landscape—and permanently redefine its economic future.