What's next for Israel? 70% of Israelis see a fifth election happening

Yair Lapid, leader of the Yesh Atid party, speaks during a news conference in Tel Aviv, Israel, on Thursday, May 6, 2021.

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Six weeks after Israel's fourth election in less than two years, things are starting to feel a bit like Groundhog Day. 

At midnight on Tuesday, Prime Minister Benjamin Netanyahu's 28-day deadline to form a government expired. His failure to build a governing coalition with enough support from multiple parties means another politician will get a shot at trying it again — with another 28-day deadline. 

The process goes like this: After Netanyahu's unsuccessful efforts, Israeli President Reuven Rivlin had the choice of either kicking the task of government formation to the full 120-member parliament, the Knesset, or selecting another lawmaker from the Knesset to try to fulfil that duty. He chose the latter, appointing opposition leader Yair Lapid, chairman of the center-left Future Party (Yesh Atid).

If Lapid fails, Israel goes to another legislative election — its fifth since 2019. 

As unprecedented as that would be, 70% of Israelis believe the country is headed for a fifth vote, according to a survey by the Israeli Voice Index for April published by the Israel Democracy Institute think tank. 

People aren't optimistic: A majority of the country believes that negotiations to build a new coalition government led by Netanyahu's opponents will fail. 

But Israel's president doesn't seem to think so.

"[It] is clear that … Yair Lapid could form a government that has the confidence of the Knesset, despite there being many difficulties," Rivlin said in a speech Wednesday. Lapid received recommendations from 56 Knesset members, five short of a majority, while the other key contender for the appointment, far-right settler leader and former defense minister Naftali Bennett, got only seven.

Rivlin described Israel as being "caught in a maze – if not a political crisis – for some time now." 

The political gridlock reveals a country more divided than ever. Meanwhile, political players representing Israel's Arab minority have made historic electoral gains, and getting their buy-in will now be essential for Lapid and his allies to succeed. 

Who is Yair Lapid? 

Lapid, a 57-year-old former news anchor and finance minister, must now form a unity coalition out of a broad and eclectic array of parties ranging from far-right and left-wing parties to Arab and Islamist parties. 

The support of some of those parties will be absolutely essential in getting Lapid a parliamentary majority. The lawmaker is considered center-left, supporting negotiations with the Palestinians and a two-state solution, but is said to be hawkish when it comes to security. Popular with secular Israelis and the middle class, he's pushing for a unity government that includes a wide spectrum of ideologies.

"After two years of political paralysis, Israeli society is hurting," Lapid said in a statement Wednesday. "A unity government isn't a compromise or a last resort — it's a goal, it's what we need." 

"Lapid needs to stitch together a very un-homogenous and unnatural coalition of forces from the center, from the left and right, and including the support of at least one of the two parties that represent the Arab minority," said Yohanan Plesner, president of the Israel Democracy Institute. 

"So it's a very unusual coalition. And even if Lapid and Bennett manage to identify common denominators between all of these varied players, they will still have a government with a relatively narrow majority," Plesner told CNBC on Thursday.

The end of the Netanyahu era?

If Lapid is successful, this would mean the end of an era for Netanyahu, the longest-serving prime minister in Israeli history. It would also bring an end to his right-wing Likud party's 12-year hold on power. 

None of the players attempting to form a government has an interest in going to a fifth election. But Netanyahu does; without it, his only remaining option will be to chair the opposition.

"If the other side is not able to form a coalition, then automatically Netanyahu stays as head of a transition government and the country will go into another election," Plesner said. "This is what he is counting on."

The hawkish and right-wing Netanyahu, in his 15th year as prime minister and facing multiple corruption charges, has revealed a willingness to push boundaries to extend his hold on power. In the last month, he has advocated for direct elections for prime minister, currently against Israeli law, and his recent attempt to appoint a justice minister in breach of legal/state protocol was declared illegal by Israel's attorney general.

"Netanyahu has a proven track record lately that he will go quite far in order to remain in power," Plesner said, describing him as attempting to "drive a wedge between the potential partners in the group coalition."

"So until the future government is formed," he added, "I wouldn't take anything for granted."

Impact on the economy?

Without a functioning government, Israel can't pass a budget. The last budget was passed in March 2018, and last year's was left unapproved and patched up with some increased spending.

"That will create an unstable macroeconomic environment," Plesner warned. The nature of the coalition's makeup might not make a major difference, he added, "but the mere fact is we need a government, and if we don't get one, the continued period of instability will for sure cause damage."   

Israel's world-leading vaccination campaign is set to "drive strong economic recovery," according to London-based consulting firm Capital Economics. And venture capital in the country has been thriving: Israeli tech start-ups raised a record $5.4 billion in the first quarter of 2021, after a record year in 2020.

At the current pace, Israel start-ups are on track to attract $20 billion in investment this year, according to data from Israeli venture capital fund OurCrowd.

Asked about whether there was impact from continuing political gridlock on the economy, OurCrowd CEO Jon Medved replied: "Absolutely none whatsoever."

"It's rather remarkable that the Israeli tech investment scene and the economy in general seems to be impervious to the political deadlock," Medved told CNBC's "Capital Connection" on Thursday. "Remember, this has been going on for 2.5 years. And we seem to be running just fine without the government."

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