Benjamin Netan­yahu's first major act of diplomacy as Israel's new prime minister had nothing to do with Barack Obama or the Palestinians, and everything to do with Ireland.

When Netanyahu unveiled his first budget in Jerusalem last month, he was supported by two unlikely allies: the chairmen of the labour federation, Histadrut, and the Federation of Israeli Economic Organisations (FIEO). Somehow the contentious veteran politician managed to get Israel's infamously militant unions to hammer out a social partnership agreement with the country's most powerful business organisation.

Sound familiar? It should. The Israelis learned this trick from Bertie Ahern. Netanyahu's two budget wingmen that day in May – Ofer Eini of Histadrut and Shraga Brosh of FIEO – led a fact-finding delegation to Dublin in October 2007 to examine whether the Irish social partnership model could work in Israel. The delegates met the then taoiseach, as well as their counterparts from Ibec and Ictu, to see how it was done. The trip was so successful it was followed a month later by an official government visit – at the time, the first in three years between the two countries – to pursue the idea further.

Social partnership isn't the only Irish economic policy Netanyahu plans to copy. In the run-up to the hotly-contested February elections, the Likud party leader ran on a platform of "economic peace" – a policy of improving economic relationships with the Palestinians as a precursor to (some would say a substitute for) political engagement. The idea owes a lot to his view of the Irish peace process, which Netanyahu believes was made possible as much by the Celtic Tiger and improvements in cross-border trade as by diplomatic persistence.

But why is Israel trying to copy the Irish economic miracle at precisely the moment when we are waking up to the painful reality that much of the past decade's prosperity was a mirage?

Israel Makov, economic adviser to opposition leader Tzipi Livni and former chief executive of Israel's largest firm, Teva, a generic drug maker which employs 800 in Waterford, says the Irish economic story resonates strongly in Israel because both small countries travelled a similar path from agricultural roots to knowledge-based industrialisation.

"We have to learn from the Irish model," he says. "You went from a country that produced potatoes to a country that produced software in a very short period."

But learning is one thing, copying is another. Critics have attacked Netanyahu's plans as a set of unworkable concessions to special interests on the one hand and a dereliction of political responsibility on the other. Makov is – not surprisingly for a political opponent – sceptical of the prime minister's ambitions to turn the desert green, as it were.

"That Ireland could be an economic model for Israel is really unbelievable. I was always suspicious of the Celtic Tiger: you didn't really develop your own industry. You provided fantastic incentives for others to come, but the foundation was not strong enough."

In other words, Ireland is a great place to manufacture asthma inhalers, as Teva does, but we're not in danger of developing a new asthma medicine of our own.

The key difference for Israel is its capacity and commitment to innovation. As Makov says, "It's very difficult to find an Israeli who thinks inside the box". The list of Israeli inventions, including Intel's Pentium chip, voicemail, internet firewalls and pill cameras for medical imagery, would do most countries proud, let alone one with just 7.5 million people.

Another example is the world-famous Better Place electric car project, an Israeli start-up venture headed by serial entrepreneur Shai Agassi, one of Time magazine's top 100 most influential people of 2009. Better Place initially raised $200m in private funding and recently attracted another $135m, an unimaginable haul for an Irish firm. Agassi is trying to develop a standard infrastructure, supported by government concession, for electric cars involving car park charging points and battery swap stations. The company has utility partnerships in Israel, Denmark, Japan, Australia and Hawaii, where governments have all made commitments to the project. ESB flirted with the idea, but backed off earlier in the year after deciding it would remain agnostic on the question of proprietary infrastructure.

"We had the money but we needed to find a country," explains Tal Agassi, Shai's brother and global manager for infrastructure. "We went looking for transportation islands. The business model depends on government concessions. The Israeli government supports any company doing green business. It's a challenge to persuade [other] people."

The government in Jerusalem is pouring hundreds of millions of euro into high-tech industry in an effort to stave off a slowdown. It is also helping small businesses with a €40m credit support fund. The government is also reducing taxes on employees and corporations, while offering a tax credit to low-wage earners as part of an overall stimulus package.

For the moment, with this scale of business and government activity, the global recession is not affecting Israel as badly Ireland. The economy turned slightly negative in the fourth quarter of 2008 as exports – the main growth engine – collapsed by 44.8%. But Israel has avoided the bank failures that have plagued much of the rest of the developed world. That's partly because it had a banking crisis in the 1980s and subsequently put all kinds of onerous restrictions on property lending. Banks typically ask for 30% security on mortgages, which creates a natural buffer against negative equity, and lending for speculative development is rare as more than 90% of Israel's land is in state ownership or under the control of semi-state agencies. Credit is hard to come by, but the Bank of Israel is predicting a return to growth by mid-2010 after a shallow and comparatively short downturn.

By then unemployment in Ireland should be reaching 15% and Nama will only just be starting to assert control of the property market.

Makov's assessment is blunt, if politically charged: "Unemployment that high is worse than Hamas. That's a real threat to existence."

Ireland and Israel combine on green tech

Although trade between Ireland and Israel exceeds €500m annually, direct cooperation between firms is rare. Fifty Ireland/ Israel joint research projects are under way as part of the European Commission's 6th Framework Programme, mostly in health and IT, but commercial joint ventures are almost unheard of. In 2006 the Israel-Ireland chamber of commerce tried to match 30 small Israeli software firms with Irish partners, but the project fell through due to lack of interest.

But Israel's new export focus is green technology, especially water technology, an industry the small desert country is in a position to dominate, having pioneered desalination, drip irrigation and cheap water recycling. Israel already exports $850m in water tech solutions and expects to reach $3bn by 2010 on the back of global climate change regulatory initiatives.

The industry will be on display at the WATEC conference in Tel Aviv in November, where buyers from over 80 countries are expected to come shopping for energy and water management products. Two Israeli alternative energy firms – Leviathan Energy and Ocean Bricks – are close to completing deals in Ireland for major wind and wave energy projects.

How the US underwrites Israel's debt

Like most countries, Israel is running a budget deficit, which means it has to raise money on the bond markets. Judging by its recent debt issues, this should pose no problem, particularly as the country benefits from guarantees from the US Treasury.

In March the Israeli Ministry of Finance got away a benchmark 10-year dollar-denominated global bond issue worth $1.5bn to help fund the 6% budget deficit for 2009-2010. The relatively modest issue was very well-supported, with over $12bn from more than 300 investors in the market for the bond.

Why so popular? Israel is rated A by Standard & Poor's - below most eurozone countries, including Ireland. Consequently, it offered a very attractive yield of 5.19% for this debt round, or 262 basis points above the US Treasury yield.

Ireland has offered more attractive spreads recently, despite its higher rating, but Israel benefits from issuing in dollars with US government guarantees. This gives the small country the explicit backing of the world's largest economy, which of course enjoys a AAA rating.