Jean-Pierre Roth: Switzerland - small, but global
Speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the
Swiss-Argentine Chamber of Commerce, Buenos Aires, 16 November 2004.
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Argentina is a country that fascinates us Swiss. At one time it offered my fellow countrymen a new
home when they could no longer see a future in Switzerland. Today, Argentina largely attracts
business people and tourists. As you know, Switzerland is a tiny country in comparison with Argentina.
Situated in the heart of Europe, it has more or less come to resemble one huge agglomeration. It is
therefore not surprising that many Swiss view Argentina as a land of space and opportunity. But as to
what Switzerland could mean to the Argentineans is only something I can guess at. Perhaps you still
associate my country with chocolate and watches. On the other hand, maybe you recently visited
Switzerland and discovered that a great deal has changed. The country has become more
liberal-minded and has begun to question its traditional views - partly of its own accord and partly as a
result of external pressures.
I am delighted to be here this evening and to have this opportunity to give you a brief overview of the
challenges facing Switzerland in an era of growing globalisation, under the heading "Switzerland:
small, but global".
1. Switzerland according to common view
Switzerland has the reputation of being a special case - one which in some ways is slowly becoming a
normal case. A good example of this is the development of the public spending ratio. Still quite low by
international standards at the beginning of the eighties, it has now almost reached the EU average. As
in most industrialised countries, the financing of the social security system has become a political hot
potato also in my country. At the same time, the wealth gap between Switzerland and other OECD
nations is shrinking; and there is no consensus as to how Switzerland might boost its economic
growth. Political debates have intensified and politicians' telegenic skills have become an issue there,
too.
However, certain aspects of Switzerland's time-honoured image still prevail. Despite all the prophecies
of doom, our democracy is under no threat; the Alps still shine in all their majestic glory; and the Swiss
people - a fifth of whom are non-Swiss in origin - are just as hard-working, punctual and reliable as
ever. The level of employment is in fact remarkably high: almost 80 percent of the population of
working age are in employment. While it is true that the unemployment rate rose sharply at the
beginning of the nineties, it is still less than half as high as the EU average. Important areas of the
working world, such as unemployment insurance and the protection against unfair dismissal, are
regulated in such a way that companies are willing to create new jobs, and the unemployed are
anxious to find work again quickly.
In addition, Switzerland still has a very competitive export sector, which is well able to hold its own in
today's global environment. It comprises both large international companies as well as a great deal of
small and medium-sized enterprises. These are able to maintain their leading position in the world,
thanks to high productivity and innovative products.
A greater cause for concern, however, is our domestic economy. It includes a number of different
sectors, such as agriculture, tourism, and trade and industry, as well as public and semi-private areas,
such as telecommunications, post and electricity. In many sectors, the domestic industry is not
productive enough and too costly. Many prices are kept high by state regulations, cartels and other
anti-competitive agreements. The enforcement of the Domestic Market Act, which was introduced in
the nineties with the purpose of standardising the Swiss market, failed at a cantonal level. As a result,
price levels in Switzerland are significantly higher than they are abroad. The affected sectors put
forward the argument that like hadn't been compared with like and that the differences in quality hadn't
been taken into consideration. There is undoubtedly some truth in what they say. Furthermore, the
desire to mitigate competitive pressure may reflect a Switzerland that wants to avoid conflict. Indeed,
this attitude has, in many respects, proved highly advantageous for the country. Nonetheless, it
doesn't change the fact that international competition has increased and that the Swiss are making the
most of the growing number of possibilities to avail themselves of goods and services from abroad.
Of course, we can't talk about Switzerland without also talking about the Swiss franc. The Swiss franc
forms the basis for the Swiss National Bank's monetary policy autonomy and for price stability. It also
underpins the efficient Swiss capital market, which is characterised by a low interest rate level, when
compared internationally, and which represents an important locational advantage for the country.
The European political and economic environment - of which Switzerland is an integral part - has,
however, gone through a great deal of change. It is therefore not surprising that our relationship with
Europe is a topic of much discussion in my country.
2. Switzerland and the European scene
For almost six years now, Switzerland has been surrounded by the single European currency. And for
six years we have been trying to make it clear to our friends abroad that Switzerland is nevertheless
not an island, but is in fact deeply integrated into Europe. Approximately 20 percent of our workforce
comes from EU member states. A total 60 percent of our exports go to the EU and 80 percent of our
imports come from there. A large proportion of the transit travel from the north to the south of Europe
goes right through Switzerland. In order to make this more efficient, we are currently digging a
57-kilometer-long railway tunnel through the Gotthard Mountain - an undertaking that is going to cost
Switzerland a lot of money. So I hope that it will manage to be the longest railway tunnel in the world -
for a few years at least.
The country's economic relations with the European Union are governed by the Bilateral Agreements -
this comes after the electorate voted against Switzerland's accession to the European Economic Area
in 1992. Agreements in seven sectors have been in force since mid-2002; a further eight agreements
were signed by the EU and Switzerland just three weeks ago. These now need to be approved by
parliament or, if necessary, by the people.
Opening up the Swiss labour market vis-à-vis the EU is of particular importance. For our country, the
enlargement of the workforce through the immigration of foreign nationals has long been crucial, given
its own limited labour potential. Earlier arrangements were customised to suit the needs of certain
sectors, notably the construction, tourism and agricultural industries. However, since the bilateral
agreement on the free movement of persons entered into force two years ago, the Swiss labour
market has been open to EU citizens. And vice-versa - Swiss nationals seeking employment are free
to work anywhere in the European Union. There are, however, still quotas in place. These will be
removed in 2007. In June of this year, the preference clause favouring Swiss employees was
abolished. A company in Switzerland may now employ EU nationals without first having to prove that
an equally qualified person could not be found for the position in the country.
Thanks to the agreement on the free movement of persons between Switzerland and the EU,
Switzerland now has access to an extensive highly-trained workforce. It has not yet been possible to
estimate just how much of this potential will be used. Up until now, there has been no major influx of
people into Switzerland, although this may be attributable in part to the weak labour demand, which in
turn is due to the current economic situation. In the medium term, we expect the proportion of labour
coming from the EU to Switzerland to increase.
However, opening up the Swiss labour market also gives rise to fears. People are concerned that
Swiss salary levels will come under pressure and that employment conditions will deteriorate. In an
effort to counteract any serious repercussions on the Swiss labour market, the authorities have
implemented a number of accompanying measures. These, however, will not be able to completely
prevent competitive pressures in Switzerland from intensifying. The attempt to avert any wage
adjustments by introducing minimum wages across the board, for instance, would be
counterproductive. Switzerland would be unable to benefit from the opportunities that this opening up
presents. The Swiss labour market would become less flexible, and the country would lose one of its
most crucial locational advantages. It is more important to ensure that the goods markets also adjust
and the inflated price level drops - this can be achieved by systematically promoting competition and
by reducing state regulations.
The eastward enlargement of the EU inevitably begs the question as to whether the rocky bilateral
road on which Switzerland has set out will also be a fit for the challenges of the future. Accession to
the EU is currently not an issue, however. Reasons for the scepticism of the Swiss people in this
regard are manifold. For instance, Switzerland would have to give up the Swiss franc if it joined. This
in turn would mean a higher interest rate level and an end to our autonomous monetary policy.
It was precisely in the past three difficult years, that the possibility of conducting an independent
monetary policy proved advantageous. At the beginning of 2001, the Swiss National Bank relaxed its
monetary policy before the European Central Bank and, in the following months, also cut its short-term
interest rates more drastically than the ECB. In March 2003, we lowered our key rate, the three-month
Libor rate, to almost zero. This was in reaction to the deflationary risk in the wake of the strong
appreciation of the Swiss franc. We have, in the meantime, pushed our interest rates back up slightly.
Our economy has now returned to its growth path and the risk of deflation has been overcome; so
there is no longer any reason to keep the short-term interest rate level so close to zero.
The sharp decrease in interest rates certainly helped to bolster domestic demand and thus avoid an
even worse downturn. It was nevertheless not possible to completely escape an economic slump. It
goes to show, yet again, just how close Switzerland's ties are with the EU and the global economy
- both in good times and in bad.
3. Switzerland as a global player
Switzerland does not only feel the winds of change in Europe. As a small and open country, it is also
strongly exposed to globalisation. Foreign trade - measured as the sum of exports and imports in
relation to the gross domestic product - has risen further in the past ten years. At the same time, the
export and import structure has become more diverse. While the old EU countries have lost some
ground, the emerging countries in Eastern Europe and Asia have gained substantial shares.
Globalisation brings with it an increase in competition for the most attractive business locations. In
recent years, Swiss companies have founded or taken over companies outside Europe on a significant
scale - partly to cut costs, but in many instances also to be closer to the markets. To what extent
Switzerland has already become a global player is reflected by the impressive development of direct
investments. These are investments through which an investor participates with at least 10 percent in
a company abroad or establishes a subsidiary or branch abroad. In 2002, the stock of Swiss direct
investment abroad amounted to almost 100 percent of Switzerland's GDP, as against only 29 percent
in 1990. Compared with other industrialised nations, Switzerland is in the top league.
In the financial sector, globalisation has manifested itself particularly clearly. In the past few years,
Swiss banks have seriously boosted their investment abroad, mainly by taking over foreign financial
institutions. At the same time, however, the Swiss banking sector has undergone an intensive process
of concentration, which partly resulted from domestic problems, but also came as a reaction to fierce
international competition. The total number of banks halved from roughly 600 institutions at the
300
beginning of the nineties to less than institutions today. Of the four big banks, only two remain.
Apart from this restructuring process, a number of other challenges have arisen over the past few
years. Notably the clean-up of the legacy from World War II, the participation in the combat of money
laundering, and also the protection of our interests vis-à-vis the EU, particularly with regard to banking
secrecy and the taxation of savings income. Lastly, the stock market slump in 2001/2002 put the
earning power of the financial industry to the test.
The Swiss financial sector proved it could tackle these challenges. It was able to consolidate its
position as a significant international financial centre, and thus remains an important pillar of
Switzerland's economy. Stiff global competition, meanwhile, is still forcing the financial sector to
increase its efficiency and lower costs. The days when banks and insurance companies were reliable
job machines are gone and will probably not return in the foreseeable future.
The challenges I mentioned - from securing the social security institutions to standing our ground in a
global environment - will be major issues for the Swiss economy, politics and the public in the coming
years, and they will put Switzerland's adaptability to the test. Allow me now to comment briefly on a
few of these challenges.
4. Current challenges
As in most industrialised countries, demographics create a need for action in Switzerland, too. The
population is steadily aging and grows only slowly. It is thanks to immigration that it is rising at all. We
will therefore face a massive increase in social security expenditure in the decades ahead. At the
same time, economic growth in Switzerland is weak. This constellation threatens to destabilise public
finances. There are solutions, yet none of them come for free.
The first two solutions, i.e. cutting back social benefits and/or increasing social contributions, are not
very popular. In the first instance, the people are opposed to such measures. As to the second
solution, it does not make economic sense to further increase the already heavy tax burden. This
leaves a third alternative - that is to boost income through stronger economic growth. A majority of
people favour this solution, yet there is no consensus as to how it might be realised. Some support
stimulating demand, especially with a view toward monetary policy. Others put the emphasis on
supporting the market forces by deregulation and liberalisation. However, these same people will often
shy away from drastic measures as soon as their own interests are concerned.
The National Bank can support economic growth with its monetary policy as long as the goal of price
stability is not jeopardised. This is the case when economic growth reaches capacity limits. However,
monetary policy cannot increase the growth potential. To achieve this, measures are needed that
provide more room for manoeuvre and foster initiative and readiness for innovation on the part of
individuals and corporations.
In recent years, Switzerland has seen a number of reforms that head in the right direction and - in
some cases - that have proven to be successful. For instance, the telecommunications sector and the
hotel and restaurant industry have been liberalised, the cartel laws revised and - last but not least -
labour market policies have seen changes as a result of the free movement of persons between the
EU and Switzerland. Admittedly, some of these reforms have been implemented only half-heartedly
and - what's more - under pressure from outside. This is not surprising given the fact that the level of
prosperity in Switzerland is still high and that we are not in an acute crisis situation. I am confident that
the reform process will accelerate in the next few years, with the European domestic market and
globalisation being important driving forces. In order to remain competitive and attractive as a
production centre, Switzerland will have to break new ground in many areas.
The National Bank is also confronted with some challenges. One change, which initially caused us
considerable concern, has turned out to be a big advantage: the creation of the European currency
area.
Prior to the launch of the euro, there was a great deal of concern at the SNB. We could not exclude
the possibility that the euro would destabilise the franc, that it would replace it as a means of payment,
and that the expectation of the Swiss franc being pegged to the euro would mean a convergence of
the lower domestic interest rate level with the higher interest level in the euro area.
None of these scenarios have become a reality. On the contrary - the euro stabilised the exchange
rates to a degree that we would not have thought possible ten years ago. The franc continues to be
the means of payment in Switzerland, and the usual interest rate differential vis-à-vis the euro area
remained. As I have already mentioned, this enabled us to conduct a monetary policy in the heart of
the euro area that is suited to the needs of Switzerland.
And that brings me to my concluding remarks.
5. Conclusion
Switzerland is a small, open country, with few natural resources, which in many ways has become
global. The export industry and the financial sector have adjusted well to the new structures and have
become global players. The domestic economy and the political structures, however, are straining to
make the equivalent adjustments because changes in those areas would often affect vested interests
and future claims on the social security system. Nor has there been sufficient pressure to act.
However, in order for Switzerland to stand the test in a dynamic global environment, it must ensure
that the reform process currently under way will be continued and accelerated.
By now, some observers have come to question Switzerland's ability to make comprehensive reforms
altogether and assert that the country has become a problem case because of its inability to make
changes. I do not share this pessimistic view. On the contrary, I am convinced that the understanding
for the necessity of reforms, and with it the willingness to temporarily accept disadvantages, will grow.
What ultimately gives me cause for optimism are Switzerland's sense of realism and its wealth of
experience. We are aware that neither the European environment nor globalisation will take our
national feelings into account. However, we have also discovered that a small country can indeed exist
in a globalised world provided that it considers its comparative strengths.