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Talk – What is the economic situation in Switzerland?

27.12.2023
Felix Niederer
Guest: Prof. Dr. Tobias Straumann, economic historian, University of Zurich

Professor Dr. Tobias Straumann, one of Switzerland's best-known economists and an expert in economic history, talks about the economic situation in Switzerland and the challenges of the present in our podcast.

The economic situation in Switzerland

Felix Niederer: As a financial historian, you have dealt intensively with the economic and geopolitical crises of the past. How is Switzerland doing today?

Prof. Dr. Tobias Straumann: In economic terms, we are doing better than ever before, at least on average. Per capita income has increased nine or even tenfold in the last 150 years. But of course there are challenges and crises that cause concern.

Felix Niederer: If we look at the economy, the question arises as to why Switzerland is so successful. What are the success factors?

Prof. Dr. Tobias Straumann: We are an integral part of Europe, the continent where the industrial revolution began. Over the last 150 years, modern economic growth has been characterized by continuous progress in productivity. Year after year, we get richer because we are more efficient and do things better than before. Take agriculture 200 years ago, for example: Back then, it took dozens of laborers to work a field for an entire week. Today, a tractor can do it in an hour. Such innovations have made us prosperous.

Before that time, there were also technological breakthroughs, but they were isolated. What is special today is the constant innovation in all sectors of the economy. Switzerland, as part of this, is benefiting in particular. One possible reason for this is its geographical location. It is conveniently located on the major European trade and migration routes, which means that many people have come to Switzerland over the centuries, bringing a lot with them economically.

In addition, I think our institutions are well structured. The population can correct undesirable developments. We can say: «No, we don't want that.» I think it's important that politics is kept in check. If they are allowed to do too much, politicians tend to pursue their own interests, which does not always meet the needs of the population. This phenomenon can be seen in many countries, where the elite develop their own agenda, which is often opposed to what would be good for the general population.

Felix Niederer: Despite the success, there is always room for improvement. Are there areas where Switzerland can still improve?

Prof. Dr. Tobias Straumann: One area that I am critical of is education. Elementary school has lost quality. As a result, people no longer master basic skills (reading and writing). I am also concerned about energy policy, especially the phasing out of nuclear energy without an adequate replacement. We shut down a nuclear power plant before we had a replacement. The next one will probably have to be shut down in 2030. Here, too, we have no replacement. You can see that the solar and wind offensive isn't going anywhere. This is also far too irregular electricity and something has to happen now, otherwise we'll have a big gap.

Comparison with the USA and geopolitical challenges

Felix Niederer: Many people compare Switzerland with the USA. How do you explain the growth in Switzerland compared to the USA in recent years?

Prof. Dr. Tobias Straumann: A direct comparison is difficult, as the USA has a much larger and differently structured economy. The USA is a global leader, especially in the technology sector. Switzerland, on the other hand, offers a high standard of living and good social security.

The USA is characterized by a highly competitive approach, both internationally and internally. Here, the principle is: succeed and rise, or fail to keep up and remain at a low level, with the possibility of a rapid decline if things don't go well. Although it is not surprising that per capita growth is higher in the US, it is important to emphasize that on average this does not necessarily translate into a better standard of living for the population. Europe offers a good education, which increases the chances of rising into the middle class.

Switzerland, on the other hand, stands out for its pharmaceutical industry and its global orientation, which allows it to adopt innovations from abroad. Despite the declining financial center, the Swiss SME scene is economically very successful. Even if Switzerland cannot keep up with the USA in terms of competitiveness, the economic performance of small and medium-sized enterprises in particular is phenomenal. There is therefore no need to worry about Switzerland's economic development.

The lack of presence of large technology companies

Felix Niederer: You also mentioned innovation, but compared to the USA, there is a lack of major tech companies not only in Switzerland, but also in Europe. Did we miss the opportunity in the 80s? We had highly qualified computer scientists like Niklaus Wirth, who were international leaders. We could possibly have established our own Silicon Valley at that time.

Prof. Dr. Tobias Straumann: That's an interesting question. There are different opinions on this. For Europe, I would agree. But it's difficult for Switzerland because we have a small market. In this industry, exporting may no longer be so difficult because it is more or less standardized, but it still requires certain conditions, such as those that exist in Silicon Valley. There is an enormous concentration of universities and companies there. The capital stock and the market are large, and there is immigration, where the best of the best come there. This is something that a small country cannot cope with. I don't think that's tragic for Switzerland. It would be bad if we missed the boat, but there are always companies developing interesting applications. We don't have a car industry for the same reason. We can act as a supplier, but there is no car industry in Switzerland. The pharmaceutical industry is an exception because it has historically been able to concentrate quickly on individual areas.

Geopolitical challenges and the new reality

Felix Niederer: Let's talk again about the geopolitical conflicts we are currently experiencing. After the fall of the Berlin Wall in 1989, the end of history was proclaimed. In the years that followed, we had a period without any major conflicts. The USA remained the undisputed sole superpower. But with the invasion of Ukraine by Russian troops at the latest, this image was shattered. In addition to the Ukraine conflict, we now also have the conflict in the East, which is preoccupying the whole world. There are also uncertainties regarding Taiwan. It seems as if the time without conflict is over.

Prof. Dr. Tobias Straumann: Yes, definitely. As you said, this period was really special, and I would say it ended earlier. The turning point was perhaps 2008 with the financial crisis, which showed that globalization is not a sure-fire success. 2008 also saw Russia's intervention in Georgia. Georgia wanted to join NATO, but the West did not react sufficiently and Georgia was drawn back strongly into the Russian sphere of influence. It has already become clear that things are not going in just one direction.

Felix Niederer: That became even more obvious with the occupation of Crimea.

Prof. Dr. Tobias Straumann: Exactly. And then we became sluggish. Many things have gone well in the last 20 years, but not everything. Afghanistan and Iraq were problem areas, as was the war in Yugoslavia in the early 1990s. There were signs that we were perhaps too optimistic, but it seemed as if we had survived. Then in 2014, the invasion of Ukraine by Russian troops. In 2015, Chancellor Merkel said that we would definitely build the second pipe for natural gas from Russia. That was naive.

The West is often underestimated, and that is dangerous. The others should know that the West will react strongly. We have to signal this again and again. Act preventively, arm ourselves and send clear signals. It is an illusion to think that disarmament will lead to peace. The world will probably never be completely free of conflict, but we can take better preventive action.

Economic concerns and rising national debt

Felix Niederer: In addition to the geopolitical challenges we face, national debt is also a challenge. Switzerland is a model student here, but the USA has an enormous national debt that is constantly growing. Is that sustainable?

Prof. Dr. Tobias Straumann: No, certainly not. At the moment, there is no bipartisan consensus that this needs to be tackled. It doesn't look good. High interest rates are a huge burden on Americans, and that is pushing other spending into the background. A tax increase and clear spending cuts would be necessary, but that's impossible right now. If no consensus can be found, financial repression will probably be resorted to. This means that savers will be expropriated.

Felix Niederer: Not all central banks only aim to keep inflation low. They often also have the goal of full employment.

Prof. Dr. Tobias Straumann: In Europe, the focus is also on stabilizing the euro, which has not yet reached full stability. Despite the efforts of the European Central Bank (ECB) over the last 15 years to calm the political situation, it is clear that this has not worked sufficiently. The central problem is that the monetary union unites politically different countries with different mental attitudes. In particular, different views prevail between the south and north of Europe when it comes to government spending.

Germany pursues a certain fiscal policy orientation, while the south tends to focus on austerity. Nevertheless, there is a common growth problem within the eurozone. In order to develop further, the eurozone should pursue a differentiated monetary policy. Bringing together strong and weak regions in a monetary union, as we are also seeing in Switzerland, is proving difficult.

The EU should be aware that there is not only migration from abroad, but also internal migration, which is challenging due to mental and linguistic differences. The EU economic area is by no means homogeneous, and this also affects the technology sector. The difficulties in exploiting economies of scale arise because innovation areas are fragmented and growth occurs at different rates. This is an unresolved challenge.

The future of the Swiss financial sector

Felix Niederer: One of the last crises we experienced in Switzerland concerned the financial center. The fall of Credit Suisse (CS) and the political decision that UBS should take over CS - this has meant that we now only have one big bank in Switzerland, and it has become even bigger. What is the solution, what options does the Swiss government have if the merged bank finds itself in such a situation again in a few years' time and there is a banking crash?

Prof. Dr. Tobias Straumann: That cannot be ruled out. We should therefore prepare ourselves for it. There are basically two schools of thought: some say that we should improve the existing regulation, give FINMA more powers, further increase equity capital and better regulate liquidity. Certain categories of securities could be weighted more heavily. This would be an adjustment based on the experience of the CS crisis. Then there are those who say that radical changes need to be made. One option would be to increase the capital requirements enormously in order to have more time to rescue the bank. Politically, however, I think this is hopeless. One change I propose is to act much more decisively in crisis intervention. You should intervene much earlier, use clear indicators such as the share price and insurance moves and force regulators to intervene early, but also support them instead of blaming them later for intervening too early. The incentive should be to act in good time. Until now, the incentive has always been to wait as long as possible so as not to be accused of having acted too early. That has to change.

Felix Niederer: Prof. Straumann, we haven't solved all the problems in Switzerland and the world yet, but not everything is hopeless either. There are many possibilities. We have to tackle the problems and not put them off. Thank you very much for the interview and see you next time.

Disclaimer: We have taken great care with the content of this article. Nevertheless, we cannot exclude the possibility of errors. The validity of the content is limited to the time of publication.

About the author

author
Felix Niederer

Founder and CEO of True Wealth. After graduating from the Swiss Federal Institute of Technology (ETH) as a physicist, Felix first spent several years in Swiss industry and then four years with a major reinsurance company in portfolio management and risk modeling.

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