The economy suffered in 2015 after the Swiss franc-euro exchange rate cap was suddenly lifted last January. Will business pick up in 2016? Looking into his crystal ball, economics professor Sergio Rossi says the country faces a difficult year ahead with its future closely linked to eurozone policies and bilateral relations with the European Union.
In 2016, leading economic research institutes forecast the Swiss economy to grow 1-1.5%.
swissinfo.ch: Many experts predicted Switzerland to fall into recession after the Swiss National Bank (SNB) removed the 1.20 franc per euro cap. One year on, how would you assess the impact?
Sergio Rossi: The situation evolved throughout 2015. In the first six months, the SNB’s decision was scarcely evident. This was because industry and tourism were mainly surviving on contracts and orders that had been finalised when the exchange rate was still at CHF1.20 per euro.
The consequences were much more noticeable in the second half of the year. Many companies took decisions that reflected their fears. There was increased pressure on wages, in some cases salaries were partly paid in euros rather than francs, jobs were lost, and certain business activities were moved abroad. The Swiss economy stuttered and consumption declined. Saving money became more important for people, and they went shopping over the border. The European economy also weakened in 2015 and this did not help our economy.
swissinfo.ch: After falling to parity, in recent months the exchange rate has risen close to CHF1.10 against the euro. Is this exchange rate sufficient to help the economy get back on track?
S.R.: The exchange rate was not the main problem. What is much more serious is the problem of currency fluctuations, which can have a negative impact on business confidence. If the exchange rate is stable, it doesn’t matter if the exchange rate is CHF1.10 or CHF1.05 per euro. What is crucial is stability so that companies can plan their future and investments in a reliable way. This gives reduced margins of error and fewer risks.
The exchange rate is one of many factors that businesses have to take into account, but it is not necessarily the most important. What is more important is that firms are able to renew themselves by focusing on research and innovation. If profit margins are clearly reduced, as was the case following the SNB’s decision last January, this gives an incentive for firms to make large investments in order to increase their profitability once again. Creative and innovative companies are capable of pushing into markets outside the eurozone in order to offset the negative consequences of the strong franc.
swissinfo.ch: The strong franc barely had any impact on unemployment in 2015. The rate remained constant at 3%. Will this change in 2016?
S.R.: Most certainly. The longer the franc remains overvalued, the more difficult it will be for Swiss companies to find alternatives to job cuts as they seek to keep costs under control. However, economic policy within the eurozone will be even more crucial for Switzerland than the strong franc. I am referring to their pointless, expansive monetary policy coupled with a very restrictive budgetary policy. Let’s not talk about austerity, which has a negative impact on consumption in Europe, in turn slowing down Swiss exports. It is realistic to think that this situation is here to stay for some time. The European Central Bank (ECB) itself conceded in a recent report that it would take at least ten years to see the positive results of these policies.
swissinfo.ch: The US Federal Reserve decided in December to raise interest rates, which had remained between zero and 0.25% since 2008. What will happen in Switzerland? Will there continue to be low interest rates or even negative interest rates?
S.R.: This is likely because the SNB will probably be forced to keep interest rates lower than those of the ECB. This is necessary in order to prevent an inflow of capital and a further increase in the value of the Swiss franc. The ECB will not raise rates soon, at least as long as there is no clear indication that there is a sustainable economic recovery in the eurozone.
The overall situation has negative consequences for Switzerland. For example, think about those who have saved money and deposited it in a bank account or entrusted it to a pension fund. These people must do without interest on their savings or must take risks to earn something with their savings. However, the biggest danger for the Swiss economy is a further overheating of the real estate market. This trend has been apparent for years and could end in a crisis for this sector.
swissinfo.ch: The implementation of an initiative against mass immigration launched by the conservative right Swiss People’s Party could also compromise bilateral relations with the EU. How important are these agreements for the Swiss economy?
S.R.: It is possible that if these agreements had not existed, the Swiss economy would not have fared that badly, as is sometimes claimed. Now we are at a point where Switzerland is tied to the EU with more than 120 bilateral agreements. They have become part of daily business. If these agreements were to be abandoned - even one important agreement like that of the free movement of people - this would have negative consequences for the Swiss economy for years.
Let us hope that awareness of the advantages of these agreements will prevail both on the Swiss and on the EU side. The implementation of these agreements, however, must be improved through effective accompanying measures, in particular to the labour market, as well as other measures aimed at protecting the border regions, in particular canton Ticino.
swissinfo.ch: When the Swiss parliament approved the introduction of the automatic exchange of tax information in December, it signalled the end to a long-standing conflict between the EU and Switzerland. What will be the future of Switzerland’s banking industry without banking secrecy?
S.R.: For 30 to 40 years, Swiss banks relied on banking secrecy. Capital practically flowed on its own into Switzerland. There was little or no need for banks to take the initiative. Banking secrecy contributed to Switzerland’s success as a financial centre, but it also partly prevented the industry’s renewal. Meanwhile, other financial centres, especially those in Asia, have made significant progress in recent years.
Swiss banks will have to work harder in the future to attract new customers. They will also have to embrace innovation. If you look at it in this way, the end of banking secrecy can be viewed in a positive light, even though it comes rather late.
Swiss banks face considerable challenges in the coming years. These are related to the implementation of the automatic exchange of tax information. This requires a high degree of specialization and an in-depth knowledge of foreign tax systems. They are complex and differ from country to country.
Clients will also have higher expectations. If someone now has to reveal their assets to their tax authorities, they will demand a much greater return on their capital invested with the bank. These clients know all about the possibility of transferring capital between competing financial centres. The bottom line is that the Swiss financial centre is entering a restructuring phase, which will put small- and medium-sized banks to the test and will probably result in job cuts.
Translated by Catherine McLean, swissinfo.ch