Field trip: EDELWEISS ECONOMY SHINES IN EUROPE

Lugano, 31 July 2013

WHAT EXPLAINS THE STUNNING PERFORMANCE OF SWITZERLAND?

It is not just the heat wave that is melting European hearts this summer.  Dreadful economic figures are drowning optimism like a tidal wave.  Banks are still wobbling, growth remains elusive at best and unemployment is scarring a generation.  A particularly worthy indicator speaks in the same tone:  new car registrations in the Euro zone have fallen by 12%in the last year, and by 26% compared to 2006.  Even Picasso would be challenged to brighten the picture.

Yet a few bright spots exist in Europe, and in none other than the Swiss confederation.  Numbers speak loud and clear for themselves:  Growth has ranged from 2% to 4% since 2006 and was negative only in 2009 (-1.9%).   Inflation hovers around 1% and last month unemployment went down to 2.9%.  Contrary to the rest of Europe, Government debt as a % of GDP went down from 54% in 2006 to only 34% in 2012. A stunning performance despite a strong Swiss franc.

For the last decade the Swiss franc has consistently remained way above parity with the US dollar and the Euro.  Playing proxy to the defunct Deutsche Mark should have pulled down the trade balance, but hell no!  Exports are still climbing and the trade balance is positive and healthy. Furthermore, and in spite of a high cost of living, Switzerland collects much Foreign Direct Investment, lured by substantial tax incentives.

This is no story of luck.  And theirs is no quick’n easy recipe to emulate either. Yet behind the hard work and discipline of the Swiss lie a few smart lessons for the rest of us.  Here are five reasons why the Helvetic economy runs so smoothly.

1. A diversified economy:  An economy split 1% in agriculture, a healthy 28% into manufacturing and 71% in services.  Swiss manufacturing aims at the resilient end of the spectrum: High quality, precision and high tech.   In a nutshell, goods of high value added.  The Swiss hung on to their manufacturing in the last decade and they are one of the few countries to register a trade surplus with China\Hong Kong.  Somehow most regions of the country are doing reasonably well:  Chemicals in Basel, watches in the Jura, international organizations in Geneva and tourism in the Alps.  Equipment and machinery are doing fine in Zurich.  This time it is the Swiss banks that are blotting the clean sheet as they are struggling past the financial crisis and are mired in international tax issues.  This is opening the door for Singapore to jostle for the top wealth management center.

2.  Fiscal prudence:  Swiss like to build reserves for the rainy days and federal laws prevent the build-up of budget deficits.  Public subsidies are limited and several public services are closer to market prices than in the rest of Europe.

3.  Culture of work:  The Swiss work a full 42 hours a week and have once turned down a referendum to increase annual holidays.  It is not unusual to see executives switch on their office light at 7 am.  The famous apprenticeship system still works wonders to ingrain ethics and discipline at work.  Doing a good job remains a personal pride.

4.  Innovation in the blood:  Switzerland regularly tops surveys as the most innovative country in the world.  We all know that the country developed a culture of inventiveness to make up for limited natural resources.  What is little known is the fact that the Swiss don’t throw at all any R&D tax credits at companies.  Innovation is first and foremost led by industry.  The last OECD report highlights the fact that about 65% of Swiss companies are considered innovative and 50% do R&D activities.  This is naturally to be expected from the Swiss multinationals.  But when we consider that 90% of Swiss companies have 10 employees or less, just like in most other countries, these statistics bear weight and meaning.  The main point is that Swiss companies do learn to be innovative regardless of their size.   The government programs to support technology transfers between universities and industry, incubators and start-up accelerators, are not meant to be the main policy about innovation, but rather to be complementary to the industry’s efforts to innovate.

5.  High propensity to deliberate:   There is a silent majority who thinks there is somehow an excess of referendums and party initiatives in Switzerland.   For outsiders they may look cumbersome and some issues might appear menial to the unadvised eye.  Nevertheless the propensity of the Swiss society to deliberate comes in handy in times of global changes.  They might not always move fast, but they usually move in the right direction and stay ahead of the curve.  They created the World Economic Forum in 1971. Then in 1999 they set up the Swiss Economic Forum entirely dedicated to their SME, just when the rise of Asia was mixing in the cards.  And now they have just signed the first free trade agreement in continental Europe with China. Switzerland was in effect the first country to recognize the RPC in 1950 and not surprisingly was the first to be granted a ‘Certified Travel Destination’ by China in 2004.  In 2012, 800k Chinese visitors roamed the country.

Transparent deliberations are a cornerstone of Swiss politics as well: meant to they keep their politicians on their toes!  Transparency pushes politicians to actually earn the trust of people, a process which discourages murky abuses.  Direct democracy makes their governments quite responsible to deliver on essential services, on security and order, and on fiscal responsibility.  The Swiss like to keep their politics open and transparent, but they will in turn often vote bearing in mind the greater good of the nation because they have trust in their institutions.

For the time being, it is all working like a Swiss clock.

Andre Du Sault. MBA (LBS), MPA (Harvard)