An island of calm in the euro storm
Not joining the union has paid off for the Swiss, although tough times are ahead for them too, writes Lisa Steyn.
At the eye of the eurozone storm rests the small but prosperous country of Switzerland. Geographically, it is slap bang in the middle of the turmoil, but economically it could not be further removed.
There is an odd sense of harmony in Switzerland. The summer heat has melted away heavy snow along the Alps, feeding the rivers and lakes with frosty blue water that tempts passers-by to take a quick dip or to braai along the water’s edge.
But it is not just the warm weather that has the Swiss people in good spirits. Their decision not to join the eurozone is starting to pay off.
Swiss citizens opted not to join the European Union in 2001. It might have seemed a questionable move as neighbouring countries such as Germany and Austria quickly grew fat on the devalued currency.
But if there was ever a time for Switzerland to give itself a pat on the back, it is now.
With gross domestic product at $636-billion, inflation at 0.23%, within the target band of 0% to 2%, and state debt at almost 49% of GDP – the lowest of the Organisation for Economic Co-operation and Development countries – this diminutive nation is boxing well above its weight.
Switzerland has topped the ranks in the World Economic Forum’s global competitiveness index since 2009 and has come first on the EU’s innovation union scoreboard for the past three years. According to Eric Martin, head of bilateral economic relations in the Swiss federal department of economic affairs, it is not hard to see why.
“Chocolate is not the main driver of our economy,” he said. “It has mainly to do with innovation, technology and research.”
Trade is vital for growth and Swiss exports contribute almost 37% to GDP. Primary export products such as pharmaceuticals and machinery have not been greatly affected by the economic crisis. Switzerland also remains a leader in luxury products such as watches, although similar Chinese goods may soon give them a run for their money.
As a safe haven, recent turmoil has triggered a flood of money into Switzerland and the ever-strengthening Swiss franc has caused concern about the country’s ability to keep its exports competitive.
Pace of the appreciation
A strong franc is nothing new, but the pace of the appreciation, particularly in 2011, became alarming. As a result, interventionist methods were used and in September last year a floor of 1.20 francs to the euro was set, which provided some security to the private sector.
To maintain this the Swiss central bank has had to stockpile euros and in May this year it bought no less than €66-billion.
But even with its domestic stability, the tremors from neighbouring countries cannot be ignored. “It is a major concern for the Swiss government to see that the EU countries are not doing well,” Martin said.
Switzerland’s exposure is fairly large: 58.6% of its exports and 77.5% of its imports are traded with the EU. Germany is the biggest trading partner, and Italy the third-largest export market. But the government and business sector are keeping a keener eye on one of the biggest threats to Switzerland’s economy – a housing bubble. Following a burst in the 1980s, concerns are growing that the country may find itself in a similar situation because of record low interest rates luring buyers and pushing up property prices.
Global financial services company UBS launched the Swiss real estate bubble index in May last year. It registered just below the risk zone in the first quarter of 2012. “Given current trends, we expect the real estate bubble index to enter the risk zone in the present quarter,” UBS said.
“It is on the verge of overheating,” said the Swiss National Bank, which has already discussed the topic of macroeconomic instruments and countercyclical buffers with the government.
Urban sprawl is also to blame and Switzerland remains a high-immigration country – foreigners account for 22% of permanent residents. For workers the lure remains strong. The average wage is high – about R42500 a month – and in general represents the largest part of production costs. Low taxes, a flexible labour market, a wide pool of qualified workers and access to the EU common trade \market all make Switzerland an attractive business destination.
Immigration is a hot political topic, but even since the market was opened, unemployment has remained low. It is now 3.8% overall and 7.2% for youth unemployment. The rest of the Organisation for Economic Co-operation and Development countries reflect 8.2% overall and 16.7% for youth. Switzerland credits its figures to its vocational education and training programme through which two-thirds of Swiss youth pass. This publicly funded dual-track system offers apprenticeships and schooling, which is recognised as equal to a university degree in Switzerland.
But can Switzerland remain an island for much longer? The signals are mixed. The Swiss KOF Leading Indicators, a composite of surveys from leading sectors of the economy, rose for the third consecutive month in May and suggests a growth in Swiss GDP in coming months.
“We are not out of it yet,” the Swiss National Bank said, “but we have done quite well.”
However, the Swiss purchasing managers’ index has shown negative growth for the past three quarters after almost reaching a 30-month low in January. Economists say growth may even become negative in coming quarters.
But Switzerland would take it in its stride, Martin said, smiling widely. “This is a leading indicator and it shows we are in for a difficult time. But we will survive.”
Lisa Steyn visited Switzerland as a guest of the Swiss government