Tel Aviv. “We are not Sparta, we are Athens,” says Erel Margalit, founder of venture capital firm Jerusalem Venture Partners (JVP). He alludes to Israeli Prime Minister Benjamin Netanyahu's demand last year that Israel must become self-sufficient, a “Super Sparta”. Israel's high-tech industry, which is suffering from isolation, sanctions and exodus, is hoping for the opposite after the election: a government that will reopen the country.
However, the parliamentary election on October 27 did not produce a clear winner. Last Sunday, President Isaac Herzog commissioned opposition politician Gadi Eisenkot to form a government after 67 of the 120 MPs recommended him as head of government. However, a sharp change of direction is unlikely after the election results.
The country's economy is still resilient. Since 2023, it has grown by almost ten percent despite the wars in Gaza and against Iran. In 2025, Israel's debt ratio was 68.5 percent of economic output, just five percentage points higher than Germany's. The shekel has appreciated around 16 percent against the US dollar since November 2023.
“The Israeli high-tech industry is doing very well,” says Margalit. The industry generates a fifth of the gross domestic product and a quarter of the tax revenue, but only employs ten percent of the workforce. But isolation, migration and the threat of sanctions are hitting companies hard.
Bosch, Merck and BMW are withdrawing research capacity from Israel
Because three years of war have isolated the industry. Israeli companies disinvited trade fairs, were no longer invited to conferences, and delegation trips were canceled. At the same time, politicians pushed for isolation. This is a problem for Israel. The country is small and has hardly any natural resources.
Exchanges with Germany have also decreased. According to the Chamber of Commerce in Tel Aviv, the number of German delegations has fallen to a fifth.
At the same time, corporations are withdrawing. Bosch closed its two research offices in Tel Aviv and Haifa at the end of June, and ten employees lost their jobs. The group will remain in the country with around 400 employees. Bosch justifies the move with a strategic realignment of its AI research, not with the situation in Israel. According to information from Handelsblatt, Bosch is the first major German company to withdraw from Israeli research since the pandemic.
In addition to Bosch, the pharmaceutical company Merck is reducing its research presence in the country. According to the company, around 50 of the currently around 400 jobs are affected, primarily in the electronics center in Jerusalem and in the life sciences division in Rehovot. According to information from Handelsblatt, the car manufacturer BMW also closed its research office in Tel Aviv in November. The office has had three employees since 2019, two of whom are moving back to Munich. All three companies reject political motives for the decline.
“The main reason for the decline is the sometimes worsening security situation,” says Charme Rykower, deputy head of the Chamber of Commerce. The entry restrictions would limit exchanges. “But of course we sense a clear reluctance, also in view of the political developments in the country.”
If the current opposition forms a government, Rykower expects a rapid recovery. “I strongly assume that we will soon return to previous travel levels,” she says, “provided, of course, that the security situation eases.”
Despite the more difficult entry, existing business relationships continued and were even deepened in defense and cyber defense. “A new government would significantly boost the potential in other areas,” says Rykower, “especially in artificial intelligence, quantum computing and digital health, but also in the area of smart manufacturing.”
Sanctions: How big is the risk for Israel's banks?
Israel's current policies lead to diplomatic exclusion. Eisenkot spoke last weekend of a “devastating diplomatic crisis”: “Even our closest friends and strategic allies are calling for a reassessment of their relations with Israel.”
These have noticeably worsened. In July 2025, the EU Commission proposed to the Council to exclude Israeli companies from the European Innovation Council (EIC) accelerator in the future. The program supports start-ups as part of Horizon Europe. Israel was the third largest recipient in 2024 behind Germany and France. Participation for the research framework program 2028 to 2034 must be renegotiated.
While criticism of Israel is becoming louder in the EU, Germany in particular wants to prevent Israel from being excluded from the EIC Accelerator. According to insiders, whether Germany will continue to defend Israel in the EU could depend on whether Eisenkot manages to form a government without the radical settler parties.
Added to this is the growing call for sanctions against Israel. In September, Britain announced it would ban imports from illegal settlements in the West Bank and sanction companies operating there. Israeli banks would also be expressly affected by this. A total of eleven other countries want to join the sanctions, including many EU member states and Canada.
Even the United States, Israel's main ally, could sanction settler products after Democrats won Congress in midterm elections last week. Germany expressly rejects the sanctions.
Brain drain: emigration is a burden
Even if the export volume from the settlements is low at less than five percent, sanctions against Israeli banks could endanger the entire economy. Economist Zvi Eckstein, who heads the Aaron Institute for Economic Policy at Reichman University, warns of this. “If the sanctions are actually implemented in the planned form, it would be a significant blow to our economy,” says Eckstein. “Unlike goods from the settlements, financial and insurance companies and supply chains are closely intertwined with the entire Israeli economy.”
Together with 60 other Israeli economists, he also warned in an open letter of a “deterrent effect” for foreign investors. Since Israel is so closely linked to the settlements, investors could withdraw from the country to avoid legal consequences. “This damage must be prevented, now, while this is still possible,” the economists write.
Emigration is already putting a strain on Israel's economy. According to a count by Tel Aviv University, around 50,000 Israelis have left the country every year during this term. In addition, many high-tech companies are moving their headquarters abroad because the strong shekel is putting a strain on export business. Eckstein considers the brain drain to be one of the greatest threats to the Israeli economy.
Armaments and the cyber industry are still growing
Israel's economy is not yet isolated. Arms exports reached a record in 2025 with a contract volume of $19.2 billion. Cooperation also grew in the cyber sector, for example through the pact that Federal Interior Minister Alexander Dobrindt signed with Netanyahu in January. Israeli technology companies raised $7.6 billion in the first half of 2026, according to IVC and Leumitech, 52 percent more than the previous year.
Gilli Cegla, founder of the Europe Days conference, where German-speaking companies look for Israeli start-ups, sees Europe as a growing partner. The conference was supposed to take place in March and was postponed first to May and finally to October 20th because of the Iran War. Germany had the largest delegation with 28 of 52 speakers.
According to IVC, 105 European investors contributed almost four billion euros in the first half of 2026. “The overall picture shows that Europe is establishing itself as a strategic financial partner for the Israeli high-tech industry,” says Cegla. At the same time, it is difficult to bring partners into the country: “From the outside, Israel looks like a country in which there is constant war.”
Unlike France, Spain or Belgium, Germany has never given up trade relations with Israel and enjoys a high level of trust among companies. According to Cegla, Germany is best positioned in the EU to access the start-up ecosystem.
Coalition without a majority: What Eisenkot needs now
If Eisenkot succeeds in forming a government, a more open economy could bring significant benefits to the industry. Herzog cited “immense challenges” when commissioning him: the threat from Iran, the peace plan for the Gaza Strip, conscription, sanctions and a “new political situation” in the USA.
Netanyahu's government camp has 53 of the 120 mandates, Eisenkot's camp has 48. The Arab parties have 19 mandates, do not belong to any camp and recommended Eisenkot. 67 MPs recommended him, 48 plus 19. 46 spoke in favor of Netanyahu. The seven representatives of United Torah Judaism refused to recommend him and abstained.
Nevertheless, difficult coalition negotiations lie ahead for Eisenkot. For a majority of 61 seats, he needs either the 19 seats of the Arab parties or the 13 of the ultra-Orthodox. One variant would require compromises in security policy, the other in compulsory military service. In both cases he would break key election promises. He already prepared his voters for this on Sunday: “[Forming a government] will require creative and unconventional political steps.”
Eisenkot has four weeks to form a government, which the president can extend by two weeks. Shekel he, Herzog can appoint another party leader. Netanyahu, whose Likud party was by far the strongest force in the election, is considered the most likely successor.
The incumbent prime minister is calling on Eisenkot to form a “unity government” with him, in which both would take turns in the post of head of government. In view of the threats from Iran, Parliament must now put aside “all other considerations” and form a “government of national unity,” Netanyahu told his parliamentary colleagues after the constituent session on Tuesday.
