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akuperma: First, allow me to say that Moshiach must be coming soon- today, we may agree on two different threads! Wow!
Anyway- it might surprise you that , on a personal level, I would have favored your second alternative- no army,no subsidies. Some high ranking Israeli political figures held the same. The problem with this is that the chareidi leadership would never agree to this. They want their cake (no army) and eat it too (plenty of subsidies). At least, the NK/Brisk/Satmar way – not taking any money and not participating is ,at least logical. Although I don’t believe they do not take any money and I certainly do not accept any sedition against the medinah.
The chareidi leadership, and here I indict the politicians, not the Gedolim, who, I think are being hoodwinked by the politicians, don’t want to give up th money. There is too much at stake-jobs, power,influence. Hence, the quid pro quo was offered. Limited army and civil service (do no forget that this is also on the table,ZAKA, firefighting, etc) and the continution of a certain amount of subsidies. By freeing a large part of the chareidim from army, they would be able to go to work.
You saw what happened- not only did the chareidim totally reject any compromise, they came up ith very spurious excuses (attack on torah,etc) Hence, the present law. However, you are mistaken in thinking that something in the hands of the Defense Minister is not lawful. It is and was the system for many decades. Now, however, they put certain standards in the system. This is what the law says and it has nothing to do with an attack on Torah and everything to do with trying to give thousands of avreichim the chance to work. That, of course, is a mortal danger to the FRoshei yeshiva…..