War in Gaza is testing Israel's economy. A 2nd front against Hezbollah could break it

KATZRIN, the Golan Heights — The tours at the Golan Heights Winery used to take place daily, stopping by the fermentation tanks and the cellar where thousands of oak barrels are stacked 20 feet into the air.

But the tourists and honeymooners stopped coming to this pastoral hills region after Oct. 7, 2023, when fighters from the militant group Hamas attacked southern Israel and touched off a war that has continued into the new year.

The Oct. 7 attack happened far from here, more than 100 miles away from the winery. But much closer is Israel's border with Lebanon, home to Hezbollah, the powerful Iran-backed armed force with whom Israel warred in 2006 — and with whom tensions have risen this month.

"The sound of planes, helicopters, booms, that's kind of routine," said Victor Schoenfeld, the head winemaker.

No Hezbollah rockets have struck nearby — for now, the winery's top executive said. "Not yet," said CEO Assaf Ben Dov. "We don't know."

The conflict, even at its current simmer rather than the full-blown war taking place in Gaza, has already taken an economic toll in these northern regions: Towns are emptied of people. Businesses are shuttered. Farm fields, including vineyards, lay untended, putting production timelines in jeopardy.

"We will need to find new strategies. I don't see any new or quick solution that will appear," said Ben Dov.

Six Israeli civilians have died in cross-border attacks from Lebanon, Israeli officials say, including an elderly mother and son killed Sunday by a pair of anti-tank missile strikes on their home in Kfar Yuval. Lebanese officials say at least 20 civilians have died on the other side of the border.

Residents have fled the region by the tens of thousands. If they decide it will never be safe enough to return home, "it will affect the economy in these places in the long run in a way that could definitely be lethal," said Tomer Fadlon, an economist at Tel Aviv University.

Even if Israel achieves its military objectives in the south, an economic recovery in the north is far from guaranteed, Fadlon said. "So this war was not only about winning the war. It is also about gaining back the feeling that they can go home safe, run a business and run their life," he said.

Agriculture along the border with Lebanon is inaccessible

The winery is located in the Golan Heights, a territory claimed by Syria that Israel seized in 1967 and has occupied ever since. Hezbollah's rockets haven't yet reached as far as the winery, about 13 miles from the Lebanon border, but much of its staff lives in northern Israel, where the sounds of war are now routine.

Of the 130 employees at the Golan Heights facility, 12 are reservists who were called up to active duty after the war began. (In total Israel has mobilized some 360,000 reservists, causing significant labor shortages, including in the country's high-powered tech sector.) The loss of staff means the winery is running behind their normal production schedule.

Much more affected is the ownership group's second winery, the Galil Mountain Winery, which is located in Kibbutz Yir'On, only a few hundred yards from the Lebanon border. Visitors can see into Lebanon from the winery building, Ben Dov said. "You used to see Hezbollah flags right next to us," he said. "I hope they're not there anymore."

The Israeli military ordered the evacuation of areas along the border in October, including Yir'On. The Galil Mountain Winery has been entirely shut down ever since. Managers must seek daily permission from the Israeli military to access the facility, Ben Dov said.

Most concerning are the winery's vineyards, 90% of which are located along the border and are currently inaccessible, Schoenfeld said.

Grape vines must be pruned in the winter, an important step in wine making. Were there not a war, the staff would be pruning now. But the military will not let staff access the vineyards while the conflict with Hezbollah is still so volatile, he said.

The pruning can be put off for a couple months, perhaps, Schoenfeld said. But eventually there comes a natural deadline: The plants will start pushing leaves by the end of March or early April, meaning pruning must be done before then.

"If things aren't accessible by then, we have some strategies," Schoenfeld said. "But the longer it goes on, the more complicated it's gonna be."

In communities along the border, the economy is still far from normal

Consumer spending in Israel has been depressed since the outbreak of war, said economist Fadlon, who has tracked credit card spending. (Only in one week of the war so far — in late November, when a temporary ceasefire was negotiated to exchange Israeli hostages and Palestinian prisoners — did Israelis spend more than a typical pre-war week, he said.)

Unlike cities further from the conflict, like Tel Aviv, which have mostly rebounded from the initial shock of war, the economies of border communities are still profoundly impacted. In Kiryat Shmona, the largest city on Israel's side of the northern border, credit card spending levels are still 70% or more below normal, Fadlon said.

One of the few open businesses in Kiryat Shmona is Shlomi Baguette, a counter-service shawarma restaurant. "Most of Kiryat Shmona is evacuated. But we're working as usual," said Toby Abutbul, 22, whose father runs the restaurant.

Soldiers stationed in the north now make up 80% or more of the restaurant's sales, Abutbul said. "We will not let the soldiers stay hungry, you understand? We help them how we can," he said.

An estimated 60,000 people have fled the border region, staying for months with family or in hotels away from the conflict.

In November, the Bank of Israel estimated that the absence at work of 144,000 evacuated residents, about 40% of whom have fled the north, had cost Israel's economy about 590 million shekels, or $158 million, each week.

That impact would be felt even more widely should evacuees decide not to return, Fadlon said. "If you have so many people that want to stay in these places and want to move elsewhere, it will affect everything, the cost of living, even the real estate and everything else," he said.

The central bank has assessed that the total budgetary cost of the war, to Israel, will be 210 billion shekels, or about $56 billion — nearly half an entire year's budget for Israel, a country with fewer than 10 million residents.

That forecast "assumes that the lion's share of the war will occur on one front, Gaza," said Amir Yaron, the bank's top official, on New Year's Day. "It is clear that the length of time, and the developments of the war to additional areas, can change the estimates markedly."

The risk of a broader war with Hezbollah

A potential second front could be the north. Leaders from Hezbollah and Israel have both said they are prepared to go to war if necessary. "We will restore security to both the south and the north. Nobody will stop us – not The Hague, not the axis of evil and not anybody else," said Israeli Prime Minister Benjamin Netanyahu on Saturday.

"If we have a war with Hezbollah, given the arsenal that they have, they can paralyze the country for a month or longer," said Esteban Klor, a researcher at Hebrew University of Jerusalem who studies the intersection of terrorism and economics.

Hezbollah, the world's most heavily armed non-state actor, is far better equipped than Hamas, analysts say. It is estimated to have 130,000 or more rockets and missiles in its arsenal, some with a range that could allow the group to strike targets all across Israel.

The effects of a full-blown war with Hezbollah would extend far beyond the north, Klor said. "People are going to have to stay home in shelters, and so the entire country will probably stop working for the duration of that war," he said.

The question has taken on greater urgency this month after a strike in Lebanon's capital Beirut killed a top Hamas official. Israel has not taken responsibility for the strike, but still Hezbollah has retaliated. In addition to the two civilians killed in Kfar Yuval, attacks from Lebanon in recent days have damaged Israeli military infrastructure and injured at least six soldiers, officials say.

An outbreak of war with Hezbollah could drive the cost to Israel two or three times higher, Klor said. Such an increase might send the country into a period of economic stagnation like the one that followed Israel's last major war, the Yom Kippur War of 1973. It took Israel more than a decade to recover economically, he said.

In Lebanon, where the economy was already in a state of catastrophe before Oct. 7, the United Nations estimates that more than 76,000 people have fled the border region. The crisis, which dates back to 2019, is one of the worst the world has seen since the mid-1800s, the World Bank has said. Over the past four years, Lebanon's currency has collapsed and poverty has skyrocketed as political and financial leaders have resisted reform.

An outbreak of war along its southern border "could be truly, truly devastating, especially if we see what has happened in the Gaza Strip," Klor said.

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