Switzerland: Uncertainty confronts the surest of economies
Home to mountainous landscapes, luxury watches and Roger Federer, Switzerland sits in a strategic position, slightly left of Europe’s centre. Although small in size compared to its enormous neighbours, the Western European nation has carved out an important economic and political place for itself, both regionally and internationally.
A global crossroad
Situated at the intersection of three major linguistic regions, Switzerland has four national languages. German is the primary tongue of more than 60% of Swiss citizens and is followed by French, Italian and the lesser-known Romansh, spoken by just under 1% of inhabitants. Its capital city is Bern, where the official language is German.
Although its population comes in at only 7.8 million, making it less than that of London, Switzerland boasts two important global business centres - Zurich, its largest city, and Geneva. They house headquarters for numerous banks, financial institutions, and international organisations. Besides UBS, Credit Suisse and Caterpillar, the head offices for the Red Cross, the World Trade Organization and multiple agencies of the United Nations are found in the two cities as well. The country also hosts the World Economic Forum in Davos, where global leaders, intellectuals and personalities gather annually to address the most urgent matters of the day.
Additionally, the famous CERN facility, otherwise known as the European Organization for Nuclear Research, is located on the French-Swiss border outside of Geneva. It holds the most powerful and advanced particle accelerator in the world, the Large Hadron Collider. The particle smasher is reported to be on the cusp of finding the Higgs Boson or ‘God’ particle, a theoretical component that lies at the heart of modern physics.
While Switzerland is known for its successful banking sector, the country has established itself as much more than that. With its skilled workforce and competitive industries, it is a global financial hub and a centre of innovation. Furthermore, it has become the meeting point for international discussion and collaboration.
An international national economy
Besides being one of the most high-income economies in the world, Switzerland also benefits from a reputation as a modern and investment-friendly nation. The service sector contributes to over 70% of GDP and employs just under three quarters of the active workforce. Banking, insurance and freight and transport make up the OECD member’s most competitive sectors and have supported the development of foreign trade across the country. Switzerland now contains some of the largest trade transit companies with modern warehouse and facilities networks.
It is therefore unsurprising that international trade plays such a big part in Switzerland’s economy. The country’s exports, with pharmaceuticals, watches and orthopaedic appliances as its most popular goods, account for more than half of GDP. Trade with the EU composes more than two thirds of the country’s total international trade, followed by that with the US; of the EU nations, neighbours Germany, France and Italy are the country’s biggest import and export partners. Switzerland has consistently maintained a substantial trade surplus for both goods and services, with its exports eclipsing its importation of mostly drug components and motor vehicles.
Switzerland routinely tops worldwide rankings when it comes to its economic environment. In the 2011-2012 Global Competitiveness Report, the World Economic Forum again crowned Switzerland as having the most competitive and robust business environment in the world, followed by Singapore in second place and Sweden in third. The list, which looks at 12 economic pillars including technological readiness and business sophistication, cites the country’s supportive business atmosphere and readiness to adapt as reasons for its placement.
Switzerland also nears the top of the 2011 list for the Heritage Foundation’s Index of Economic Freedom. Number five globally and first among its fellow European countries, Switzerland is applauded for its openness to foreign trade and investment. The country is seen as an appealing destination for foreign direct investment due to its economic and political stability, transparent legal system and advanced infrastructure.
Furthermore, Switzerland offers numerous tax incentives. Its canton system of government, which divides the country into 26 semi-sovereign states that together form the Swiss Confederation, allows the individual cantons to establish their own foreign investment policies. Instead of abiding by regulations instituted by the federal government, each canton creates their own. Certain cantons offer foreign investment tax exemptions, with some even waiving taxes for new firms for a period of up to ten years.
It is no wonder, then, that Switzerland attracts a notable foreign business presence. Although FDI inflows suffered during the financial crisis, the country’s economic attractiveness continues to draw investment, primarily in the manufacturing, insurance, and chemicals and plastics sectors.
While its general approach to business seems to be one of openness, Switzerland is very protective of its agricultural sector. The country heavily subsidises the industry to promote domestic production, but prices remain high. Import tariffs levied against foreign food products make local alternatives cheaper only by comparison. It further implements a quota system directed at Switzerland-based importers for certain items, which changes annually depending on market requirements, the year’s harvest and other criteria.
Although encircled by member nations of the EU, the country remains linked to the supranational organisation only via bilateral treaties. A referendum to join the European Economic Area, or EEA, was rejected by the Swiss people in a referendum in 1992, and two ensuing referenda on EU accession were met with the same response.
Switzerland has a long history of abstaining from treaties and agreements that could bind them to intervene in a future conflict. The country famously remained neutral during World War II and only began to slowly venture away from its mantra of absolute neutrality at the end of the Cold War. In 1996, it joined NATO’s Partnership for Peace and sent unarmed peacekeepers to Kosovo following the 1999 war, a step in breaking with past policies. Switzerland did not even become a full member of the UN until 2002, when it joined by referendum, the first country to do so. The country further approved in 2005, again via referendum, to join the Schengen Zone.
Switzerland is a founding member of the European Free Trade Association, or EFTA, which also includes Liechtenstein, Iceland and Norway. A trade bloc for non-EU European nations, EFTA has also signed free trade pacts with non-EU countries in addition to its agreements with the EU. However, unlike the other EFTA countries, Switzerland is not part of the 30-member EEA, which was drawn up to allow EFTA nations to participate in the EU Internal Market without joining the EU.
Nonetheless, Switzerland enjoys much of the economic benefits and diminished trade barriers that the other EEA member nations have. The country’s relations with the EU are outlined in a series of treaties that represents the ‘bilateral approach’ establishing agreements with the union as two equal entities, all the while refraining from full membership. However, having agreed on most of the regulations regarding the free movement of people, services and goods, Switzerland is practically an EEA member, all but in name.
Considering the geographical and economic proximity to the EU, it comes as no surprise that Switzerland has not been immune to the worries plaguing the euro and the EU. The Swiss metals, electrical, and machinery (MEM) industries have seen exports to the bloc slide. Coupled with the strong Swiss Franc, MEM industry leaders have reported declining margins. In a recent survey of 280 MEM companies, 71% saw a dip in orders. Although exports to Asia rose by 11.9% from a year earlier, it remains only a slight buffer to the trade troubles affecting its biggest destination market.
The likelihood of an enduring crisis is therefore a major point of concern for the export-driven economy. Switzerland’s export volume is likely to increase by only 1% in the next year due to EU economic instability. This follows a tough 2011, which saw an appreciation of the Franc against the Euro, the currency of its main trading partners, effectively making Swiss exports more expensive and harming the national tourism industry as well. This led the country to peg its currency to the Euro, a controversial decision that sparked talk of a currency war. The Swiss National Bank also recently established a cap of 1.20 Francs to the Euro in an attempt to stabilise the monetary situation.
While unemployment is estimated to sit at 3.4% in 2011, low when compared to the EU average, the figure is likely to escalate slightly next year due to the global economic slowdown. Switzerland’s GDP, which contracted by 1.9% in 2009 due to the financial crisis, grew by only 0.2% in the second quarter this year. This marks the slowest gain since its relatively swift recovery in the aftermath of the crisis.
A web of uncertainty
While Switzerland is faring better than some of its European brethren, its economic dependency on the continent means that it will not emerge from the crisis unscathed. Projections for the country remain mixed, ranging from dull growth at best to a slight recession at worst. Switzerland’s foundation is solid enough to weather the storm, but the measure of the damages inflicted remains to be seen.
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