While the euro wobbles and European governments announce draconian cuts, one small country at the heart of the continent is an island of stability.
Switzerland has remained relatively untroubled by the crises and the franc has surged in recognition of Bern’s traditionally sound finances. Although not a member of the European Union – let alone the eurozone – the country is one of a tiny handful comfortably meeting the budgetary criteria of the EU’s stability and growth pact.
Last year, the public sector notched up a surplus, retiring some debt in the process. Although gross domestic product declined by 1.5 per cent in 2009, that was less than many neighbours, while public sector borrowing of 40 per cent of GDP was also comparatively good. Taxation remains low and unemployment is lower than in most European neighbours. How have the Swiss done it?
Switzerland’s resilience is attributable partly to business-friendly policies and low taxes. Monetary independence has helped, as has a central bank that reacted promptly to the slowdown.
Economists highlight three other factors. “We had our property crisis in the early 1990s and learnt our lessons then,” says Martin Neef, chief economist at Credit Suisse. “There was no property bubble to explode, and no credit crunch following it.”
The early 1990s property boom and bust prompted legislation limiting public sector borrowing. “And as the economy picked up, the government made sure it repaid debt,” says Felix Brill, of Wellershof & Partners, an economic consulting company.
“We have a very flexible system, albeit stopping well short of hire and fire,” says Christian Gattiker, head of research at Julius Baer, the private bank. “There are fewer restrictions on creating new jobs. And there are very pragmatic rules on short-term working during downturns.”
Such flexibility helped maintain relatively strong domestic consumption.
New rules have opened the labour market to EU citizens. Unlike the controlled immigration of the 1950s and 1960s, comprising predominantly unskilled Mediterranean jobseekers, the latest arrivals are professionals and entrepreneurs, many of them creating additional jobs and demand.
“There were more than 100,000 new arrivals in 2008 and 70,000 last year. About 60 per cent of the growth in domestic consumption can be ascribed to such new arrivals,” says Mr Neef.
Finally, economists stress the flexibility of Swiss business. While best known for multinationals such as Nestlé and Novartis, the country has thousands of smaller companies, accounting for 99 per cent of all businesses and 60 per cent of the workforce.
“There was a long, and often very painful, adjustment process during the 1990s, as companies moved away from traditional businesses, like textile machinery, into more specialised growth sectors. That has paid off,” says Mr Brill.
But Switzerland still runs risks. The franc’s surge against the euro has been cushioned by regular central bank intervention, but all agree the Swiss National Bank can only attenuate, not reverse, the trend. Foreign currency reserves now amount to more than two-thirds of its balance sheet.
Pressure from Switzerland’s neighbours is another danger. Some foreigners have said Bern should do more – an accusation hard to justify, given Switzerland’s existing IMF contributions and the fact that the country is not an EU member.
Some fear a resurgence of pressure from Brussels over Switzerland’s allegedly anticompetitive corporate tax practices. For the time being, the EU’s attention is focused closer to home. But it may not be long before Europe’s politicians start looking for scapegoats.