Special issue: Federations and the Economic Crisis
Swiss stimulus for banks, roads and trains eases crisis
A carriage of Switzerland’s new M2 underground rail line drives under the Bessieres Bridge during tests in Lausanne.
Until a few months ago, the global economic meltdown seemed to many people in Switzerland a distant problem for other nations to worry about.
Certainly, in the latter part of that period, the country’s major banks, UBS and Credit Suisse, were taking a beating, posting record losses along with many other major financial institutions around the world. But other sectors of the Swiss economy, from private banking to watch-making and tourism, appeared to be humming along in spite of the financial crisis on Wall Street. Many businesses in this country of 7.7 million people recorded strong financial results in 2008.
It was not until the first couple of months of this year, when industrial sectors issued sales figures for the final quarter of 2008, that reality began to sink in.
The reversal caught many economic forecasters by surprise, including those from the federal government. Last November most predicted that, while the Swiss economy would slow down, it would escape recession. That is no longer the case: the latest forecasts call for negative growth of more than three per cent, the worst performance since the energy crisis of 1973, with no recovery until 2011.
Although exports dropped by six per cent in the final quarter of 2008, Switzerland’s current account for the period rose because imports fell even more sharply. The trade surplus for the full year increased to 63 billion francs (US$ 59 billion), 10 billion higher than in 2007, according to the Swiss National Bank. However, this was offset by a lower surplus in investment income, which reduced the current account slightly to US$ 46 billion for 2008, two billion less than the previous year.
The global financial market crisis led to a rise in net capital outflow in 2008 to US$ 52 billion from US$ 35 billion the previous year, despite a major inflow from investors buying Swiss bank shares and bonds.
While rising unemployment has raised concerns about foreign workers among nationalists in Switzerland, the government has resisted increasing restrictions on those from outside the country. In February, Swiss voters agreed to extend a freedom-of-movement labour agreement that it has with most European Union countries to Bulgaria and Romania. Switzerland depends on hundreds of thousands of foreigners to keep its economy churning, and while it has the right to activate a system of quotas with the EU if unemployment rates rise, it has yet to do so. Government reports have concluded that the free movement of workers from surrounding European states has benefited the economy. Foreigners make up more than a fifth of the Swiss population.
In November last year, Bern adopted a US$ 320 billion stimulus plan, designed to accelerate previously approved capital projects, even though at the time Doris Leuthard, federal economy minister, expected the Swiss economy to grow by one per cent in 2009.
Swiss President Hans-Rudolf Merz speaks during a news conference on the UBS in Bern. Shares in Swiss banking giant UBS rose after it agreed to pay $780 million and identify certain American clients to settle criminal fraud charges in the United States. It had advised clients on tax evasion schemes.
As the outlook worsened in February, Swiss President Hans-Rudolf Merz and Leuthard unveiled a US$ 658 million plan intended to stabilize the economy, largely through investments in road and rail projects. Other money went to regional development and applied research, while US$ 75 billion were earmarked for environmental and energy projects. Now, a proposed third stimulus plan calls for a further billion-dollar investment, with proposals aimed at energy-efficiency projects such as renovation of buildings and incentives to replace oil and electric heating.
The country’s cantonal governments, meanwhile, have introduced a range of additional measures including public works projects and, in some cases, tax cuts to help deal with the recession. In Geneva, for example, the cantonal government outlined plans to reduce taxes for families by more than US$ 282 billion annually, although the relief won’t come until next year.
Switzerland is a strongly decentralized country, with its 26 cantons collecting almost half of income tax revenues, while municipalities take around 30 per cent. The federal government, run from Bern, gathers less than a fifth of all such tax receipts in addition to revenue from the national value-added tax of 7.5 per cent applied to most goods and services. Bern controls such national services as rail transport systems and motorways, communications and the Swiss army. It also sets policies for uniform environmental regulations, unemployment benefits and health care.
The country’s cantons have extensive powers, including control over local education and transportation and such issues as residency permits. They each set tax rates independently of Bern that vary extensively from one end of the country to the other.
Shoring up UBS
The bank posted a record loss of US$ 21 billion in 2008 and was forced to write off more than US$ 47 billion in bad investments linked largely to the U.S. subprime mortgage market. The federal government pumped US$ 5.6 billion of capital into the bank, although this has failed to stem job cuts at the financial institution. After eliminating 1,500 positions last year the bank announced plans to cut a further 10,000 jobs globally in April 2009, including up to 2,500 positions in Switzerland.
Switzerland’s central bank, the Swiss National Bank (SNB) agreed to establish a fund to take over the responsibility for managing US$ 54 billion of “toxic assets” held by UBS. The intent of the fund is to resell the assets as markets improve. With offices in Bern and Zurich, the SNB sets monetary policy for the country.
In a bid to help Swiss exporters, the central bank recently dropped interest rates to the lowest levels in five years and intervened in currency markets to force down the value of the franc by buying euros and other currencies. The franc, traditionally seen as a safe haven in financially troubled times, had strengthened significantly against the euro and the dollar, making Swiss exports less attractive.
The SNB’s action has coincidentally helped home buyers in Switzerland, who are benefiting from the lowest mortgage rates since 2005. The federal government, meanwhile, tripled protection for bank account holders to 100,000 francs (US$ 94,000).
Complicating economic challenges for Switzerland, the country is facing renewed pressure from the United States and major European countries, such as Germany, to revamp its banking secrecy laws. High-profile cases of tax fraud, involving UBS employees who counselled American account holders on ways to evade taxes by sheltering income offshore, have hurt the country’s image.
In 2009, after a lawsuit brought against UBS by the US government, Switzerland agreed to change its policy on the exchange of tax information with other countries to conform with that of the Organization for Economic
Reducing the impact
Across Switzerland, the impact of worsening unemployment has been cushioned by a generous national unemployment scheme. This provides jobless people with benefits equivalent to 80 per cent of the pay they received before being laid off. The federal government also allows companies to reduce work hours for employees under a “partial unemployment” scheme where workers use benefits to top up their wages. The government recently extended the length of such “partial unemployment” from 12 months to 18 months.
The public sector’s strong involvement in the Swiss economy is also helping reduce the impact of the economic crisis. Most cantons operate their own banks, which are mandated to invest locally. In the canton of Vaud, where the government is based in Lausanne, an official from the cantonal bank estimated that the public sector accounted for as much as one fifth of the canton’s economic activity.
Transportation projects are major sources of investment in many parts of the country, particularly in larger cities such as Zurich, Geneva and Lausanne. Large projects are typically cost-shared by federal, cantonal and municipal governments.
Lausanne’s recently-built M2 metro, a six-kilometre driverless subway system costing US$ 696 million, received such joint funding. Bern kicked in US$ 190 million, while Vaud contributed US$ 284 million and the city of Lausanne picked up the remainder. The train line dovetails with plans by the city to develop a new environmental neighbourhood with housing for more than 2,000 families as part of an urban development project.
In Geneva, the canton is accelerating plans to expand its light rail transit
Another component of the transit system includes a planned new regional railway line to link Geneva’s main train station with the nearby French border, at a cost of around one million dollars. A major ongoing stimulus nationally resulted from a decision by the Swiss people in a referendum more than a decade ago to put all freight crossing the Alps on railways. That has sparked major multi-billion-dollar projects to build new rail links through the mountains via several tunnels, including the 57-kilometre Gothard Base Tunnel that will be the longest in the world when it is completed in about eight years’ time.
Swiss voters have also backed other long-term investments in railway infrastructure, which has led to a rolling series of investments in new tracks, upgrading of stations and new trains. In Zurich, for example, work is under way on a US$ 2 billion project to improve rail access through the city with a new 10-kilometre line, including a five-kilometre tunnel running beneath the main train station. Other funding has been committed to highways, such as a US$ 3.7 billion motorway bypass around Zurich.
Such costly projects appeared affordable while the Swiss economy was booming, but now concern is rising in the country about mounting government debt in the next few years if recovery fails to take shape.
Malcolm Curtis is a journalist for Swisster, an English-language news service of a consortium of Swiss newspapers.