Israel Was Supposed to Be the Disadvantaged Economy. Then It Caught Up With Europe.
Israel, Portugal, Greece and Belgium provide an illuminating comparison. Portugal and Greece possess substantially more territory than Israel, while Belgium sits at the heart of the European Union, surrounded by wealthy trading partners and connected to one of the world’s largest integrated markets.
Israel, by contrast, operates under conditions that would impose a serious economic burden on almost any developed country. It has hostile neighbours, limited regional trade, recurring wars and exceptionally high security expenditure. In practical economic terms, Israel operates almost like an island: its commercial relationships with Egypt and Jordan remain limited relative to its potential regional market, while most of its surrounding countries are hostile or lack normal economic relations with it.
And yet Israel has achieved something remarkable. Within one generation, it has closed much of the economic gap with Belgium and moved decisively ahead of Portugal and Greece in aggregate economic output.
The question is not simply how Israel caught up. It is what this transformation tells us about the next twenty years.
The transformation of a generation
In approximately 2005, Belgium was comfortably ahead of Israel across the principal measures of economic scale.
Israel had a population of around 6.9 million, compared with Belgium’s 10.5 million. Belgium’s economy was approximately two and a half times the size of Israel’s, while nominal GDP per capita was substantially higher.
Twenty years later, the picture has changed fundamentally.
Israel’s population has grown to approximately 10.2 million, compared with Belgium’s roughly 11.9 million. Israel has added more than three million people, growing by nearly half, while Belgium’s population has expanded much more slowly.
The economic gap has narrowed just as dramatically. Israel’s nominal GDP has increased severalfold, reaching a scale broadly comparable with Belgium’s. Nominal GDP per capita has also converged, with the precise comparison depending on the statistical vintage and exchange rate used.
The contrast with Portugal and Greece is even clearer. Despite populations broadly comparable to Israel’s, their economies are substantially smaller. Israel’s nominal GDP is roughly twice Greece’s and considerably larger than Portugal’s.
These are not marginal differences accumulated over centuries. They represent a profound change in relative economic standing within a single generation.
Belgium: Europe at its most advantageous
Belgium is the most revealing comparison because its structural advantages are so considerable.
It occupies a central position in Europe, with access to major industrial economies, dense transport infrastructure, established institutions and the European Union’s single market. Brussels hosts the European Commission, the Council of the European Union and NATO’s headquarters. The country’s ports, railways, roads and waterways connect it to an enormous commercial hinterland.
Belgium benefits from political stability, deep trading relationships and a regional environment in which neighbouring countries are predominantly commercial partners rather than military adversaries.
Israel has almost the opposite strategic circumstances.
Its regional market is largely inaccessible. Trade with Egypt and Jordan exists, but remains limited relative to the opportunities that normal economic relations across the region could offer. Relations with much of the surrounding region are hostile, restricted or politically constrained. Israel must therefore rely heavily on more distant markets, particularly in North America, Europe and Asia, for international commerce.
This is the economic significance of Israel’s de facto island status. It is not literally an island, nor is it disconnected from global trade. Rather, it lacks the ordinary regional economic integration that benefits many European countries.
The difference extends to defence spending. Israel has devoted a much larger share of its economic resources to security than Portugal, Greece or Belgium. In recent years, Israel’s military expenditure has risen sharply during wartime, reaching several percentage points of GDP more than the levels typical of these European comparisons. Depending on the year and accounting definition, the relative burden can be several times higher. A claim that it is ten times higher requires a specified measure and year, and should not be treated as a universal ratio.
Security spending also understates the full economic cost of Israel’s circumstances. Military mobilisation, disrupted business activity, reserve-duty absences, elevated insurance costs and uncertainty all impose additional burdens that are difficult to capture in a single budget figure.
Belgium is not an unsuccessful economy. It remains wealthy, productive and deeply integrated into European commerce. The point is that Israel has approached its economic scale while facing substantially more difficult regional conditions.
Geography matters. What countries do with it matters more.
The comparison with Portugal and Greece reinforces the argument.
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Portugal has an Atlantic coastline and established connections to international trade. Greece occupies a strategically important position in the eastern Mediterranean and possesses a substantial maritime industry. Both countries have significantly more territory than Israel.
Belgium, meanwhile, has a land area roughly 1.4 times Israel’s, while Portugal is about four times larger and Greece approximately six times larger.
Yet territorial size has not determined economic performance. Israel’s population is broadly comparable to those of Portugal and Greece, but its economy is substantially larger.
The important distinction is not simply geography. It is the capacity to convert human capital, institutions, technology and investment into economic output.
Israel’s high-technology industries, including cybersecurity, software, semiconductors and other knowledge-intensive exports, have helped it overcome the limitations of a small domestic market and a difficult regional environment. Its companies sell internationally because their economic opportunities cannot be confined to their immediate neighbourhood.
Geography creates advantages and disadvantages. Productivity, innovation and institutional performance determine how effectively countries respond to them.
Demographics: the next source of divergence
Israel’s demographic trajectory may prove as consequential as its economic transformation.
Its fertility rate remains around 2.9 births per woman in recent estimates, substantially above the approximately 1.3–1.5 range in Portugal, Greece and Belgium. Israel consequently has a younger population and stronger natural population growth.
This matters because population growth can expand the labour force, domestic demand and the supply of future entrepreneurs and skilled workers. In countries with persistently low fertility, ageing places increasing pressure on pension systems, healthcare expenditure and the working-age population.
Israel’s demographic momentum is expected to continue. Depending on the projection variant, its population could reach approximately 13.5–14 million by the mid-2040s. Portugal and Greece face greater risks of long-term population contraction, while Belgium is expected to grow more slowly.
Population growth is not automatically prosperity. Israel must ensure that housing, transport, education and infrastructure keep pace, while improving productivity across the wider economy. Nevertheless, its demographic position offers a potential long-term advantage that much of Europe does not share.
The next twenty years: convergence or divergence?
The arithmetic of sustained growth illustrates what could happen next.
Consider an illustrative scenario in which Israel achieves average annual real GDP growth of 3.3%, while Belgium grows at 1.3%. These are assumptions, not forecasts.
Over twenty years, Israel’s real economic output would increase by approximately 92%, while Belgium’s would rise by around 30%. That difference alone would materially change their relative economic positions. If Israel’s population also grows faster, its aggregate economy could pull further ahead, provided productivity and employment remain strong.
The same forces could widen the gap with Portugal and Greece.
However, the outcome is not predetermined. Israel’s security burden could intensify, prolonged conflict could weaken investment and human capital, and demographic growth could strain public services. Belgium and the wider European economy could also outperform current trend assumptions through productivity gains or technological advances.
The argument is therefore not that Israel is guaranteed to overtake every European comparator. It is that the conditions for further divergence exist, and their cumulative effect over two decades could be substantial.
The larger lesson: Belgium Got Brussels. Israel Got Hezbollah. Somehow, the GDP Caught Up.
In 2005, Belgium had a much larger population, an economy more than twice Israel’s size and substantially higher nominal income per person. Today, the two countries operate in a broadly comparable economic league.
Israel has achieved this while contending with a difficult regional environment, limited trade with neighbouring states, recurring warfare and a security burden far heavier than that of its European peers. At the same time, it has developed internationally competitive technology industries and maintained demographic growth uncommon among advanced economies.
Portugal and Greece demonstrate how a country can possess significant geographic advantages and a population comparable to Israel’s without achieving the same aggregate economic output. Belgium demonstrates that even an established European economic centre can see its relative advantage diminish as another country grows faster.
The next twenty years will reveal whether Israel’s convergence with Belgium becomes sustained divergence. Its demographic momentum and technology-driven economy provide grounds for that possibility, but security risks, productivity, public finances and the quality of future investment will determine the outcome.
The remarkable fact is already established: within a single generation, Israel has fundamentally changed its economic position relative to three European countries with comparable populations, while operating under far more demanding regional conditions.
Israel’s story is not simply one of economic growth. It is a demonstration of how rapidly a country’s relative position can change when human capital, innovation and demographic momentum overcome constraints that would otherwise appear structural.
