What can Switzerland learn from Austria?

Austria is trying hard to differentiate itself in terms of locational advantage (Austria Tourism) swissinfo.ch

Businessmen and politicians looking to “jump-start” the economy might do worse than take some lessons from Switzerland's eastern neighbour.

Starting a series to mark the tenth anniversary of Austria joining the European Union, swissinfo talks to Rudolf Walser – chief economist at Swiss business federation economiesuisse – about the “land next door”.

Criticism of the Swiss economy tends to focus on the country’s comparatively low rate of economic growth and the need for major structural economic reforms.

Professor Fritz Breuss of the Austrian institute for economic research (WIFO) points out that Austria enjoyed average economic (GDP) growth of 2.25 per cent over the period 1980 to 2003, compared with just 1.5 per cent in Switzerland.

Breuss says the Swiss economy has experienced particular “stagnation” since its 1992 decision not to join the European Economic Area (EEA) – especially in comparison with Austria.

He argues that the Austrian economy has seen additional economic growth of 0.4 per cent per year as a direct result of European Union membership, while Switzerland has negotiated bilateral agreements with the EU that are “less good than those offered by the EEA”.

For Walser, though, many of these arguments are best taken with a strong pinch of salt.

swissinfo: How would you compare the Swiss and Austrian economies?

Rudolf Walser: The two countries have pursued different paths in economic, political and historical terms, and both have been successful in their own way. This shows that there is no one single recipe for positioning a country in the international division of labour.

Both countries are dominated structurally by small to medium-sized enterprises, but Austria has almost no large international companies.

One result is that Austria does not have the same international standing when it comes to international direct investment. Switzerland also has the additional advantages of a strong financial services sector and an autonomous currency.

swissinfo: Switzerland is near the bottom of the international league tables when it comes to the rate of economic growth, and Austria is catching up fast in absolute terms. Will it overtake soon?

R.W.: Austria has enjoyed remarkable economic development in the post-war period, and has caught up a lot in comparative terms.

However, when you look at absolute figures, Switzerland still comes out on top, with some exceptions, such as tourism and agriculture. Also, even when you look at relative growth rates, you must bear in mind that these methods of comparison are not without flaws.

swissinfo: What do you mean?

R.W.: When you calculate economic growth for a country, for instance, you need some method to measure added value. This is not difficult for industry, but it is a problem in the services sector.

Because Switzerland has a larger financial services sector, this leads to added value in the country as a whole being consistently under-estimated.

Nonetheless, it is clear that Switzerland no longer tops the list of fast-growth countries – and will not do again. What we must do is use our remaining growth potential better than in the past.

swissinfo: How would you compare the economic development of both countries since the early 1990s?

R.W.: I don’t really see any major differences, because for Switzerland you have, in a sense, to ignore the years 1992-1996. In those years, we made serious macroeconomic mistakes. Monetary policy was far too restrictive, fiscal policy too.

In addition, we had a housing crash and the psychological effects on the economy of the 1992 decision not to join the EEA. Taken together, this led to a five-year period of virtually zero growth.

What is clear is that we are well behind the EU when it comes to opening the domestic market and liberalising the infrastructure industries, particularly electricity.

Together with cutting budget deficits, these are the main areas where urgent action is needed.

Another important area is corporate taxation reform.

swissinfo: Austria has done a lot since the end of the Cold War to build relations with eastern Europe. Has Switzerland missed a chance to do likewise?

R.W.: I wouldn’t say Switzerland has been inactive – exports to these countries are growing sharply in annual terms, albeit from a relatively low starting point.

However, it is fair to say that Austria has pursued a very clear and effective strategy in this sense, in particular in the banking sector.

swissinfo: What could or should Switzerland do to compete better in future?

R.W.: We can certainly learn from Austria how to reform agricultural policy and how to open up other markets to competition, both domestically and abroad. We can also learn how to conduct a very effective “cluster” policy in certain economic sectors.

Overall, Austria is a serious competitor whose example should encourage us to continue to improve our own performance, but in our own way.

swissinfo: Do you think Switzerland should follow Austria and join the EU?

R.W.: Under current circumstances, I think the overall result of Switzerland joining the EU now would probably have little influence on growth.

There would be clear advantages, particularly in increased competition and access to markets. However, we would lose our low interest-rate advantage and monetary policy autonomy, not to mention our VAT [sales tax] advantage.

Overall, I think EU entry for Switzerland is an issue that will be decided on the basis of national politics, not economics.

swissinfo-interview: Chris Lewis

In brief

For many years now, Austria has been catching up with Switzerland economically.

Some economists say the process has accelerated over the past decade, with Switzerland “stagnating” while Austria reaps the benefits of EU membership.

Walser thinks the Swiss can learn valuable lessons from Austria – but his overall conclusions are more nuanced.