Stanley Fischer, Governor of the Central Bank of Israel. Photo: wiki commons.

In a bleak overview of the global economy, Stanley Fischer of the Bank of Israel, told his country’s parliament on Wednesday that Europe’s economy could collapse, a second Lehman Brothers style event could take place, and Israel must be prepare itself to deal with these possibilities.

“Either Europe will deal with it, or it will collapse and countries will begin to quit,” Fischer, who serves as the Governor of Israel’s Central Bank told the Knesset Finance Committee on Wednesday.  “That could happen. We cannot know what will happen in the second case; it may be accompanied by a financial crisis. Some people are talking about Lehman Brothers II. I don’t know. The only thing I do know is that I don’t know. We must therefore prepare. The economy must be ready in advance, not afterwards. We must maintain financial stability, as well as fiscal stability and the budget.”

Fischer cited lackluster U.S. growth forecasts and European financial problems as two reasons why Israeli exports will suffer in the near term.

“We see growth forecasts for the US of just 2%. Europe is in a recession, and there will be very weak recovery next year,” he said.  “Emerging markets are in slightly better shape. Global trade is growing, but slowly. Our exports will be weak next year, and for several years after that.”

Fischer also spent time during his speech to the Knesset Finance Committee urging lawmakers to keep a watchful eye on Israel’s deficit, noting that continued government spending at the current rate, without tax increases, would lead to problems in the future.

“The 2013 deficit will reach 4.5% of GDP if we keep all the spending, but do not raise taxes. We’ll have a deficit of 6.5% of GDP if we don’t raise taxes and we don’t deal with the spending side. A deficit of 6% of GDP with 3% growth is a situation of structural deficit,” Fischer stated.

“The response must come now, when there is no recession here and there is growth.”