Wednesday, September 12, 2012

Moving to Switzerland? A little economic primer


Seems a little crazy to start a blog about moving to Switzerland just when dark clouds are finally appearing in the Swiss horizon, but there you go.

Indeed, economic prospects don’t look great from lots of angles, despite the country’s enduring safe haven status. Feel free to tell me how I’m wrong.

To start with, the Swiss banking sector, traditional Alpha dog of whole economy, is on its knees thanks to the triple-punch of weak global economic prospects, increased regulation and loss of bank secrecy – the sector’s unique selling point. Public relations may puff about the country’s fine banking tradition, but the truth is with every passing year the financial sector is shrinking – both in size and importance, and the smaller private banks are continuously shutting shop.  

Lost banking clients from Europe and the US also mean less shopping on the Bahnhoffstrasse and fewer overnight stays in hotels – no need to visit one’s money if it’s no longer there. Highly paid Swiss bankers also support the rest of the service economy: the plumbers who drive Mercedes, the builders who charge 100,000 francs to mend a roof. And let’s not start on the dentists!

Given US and European government success at forcing Switzerland to capitulate on bank secrecy, corporate taxation policy looks a lot like low hanging fruit. Switzerland has worked very hard for the past decade to attract highly mobile multinationals (smaller companies too) through a combinational of low corporate taxes and laissez-faire, business-friendly legislation. As a result, the EU has long complained that cantonal tax deals (in a competitive race to the bottom) amount to state aid.  At some point, it’s possible the EU will do something more than just rattle its sabres. Switzerland has always been good at negotiating, but the threat is always there.

As for the Swiss tradition of ensuring business-friendly and rich people-friendly legislation – this too seems a bit less clear. The banking crisis followed by the global economic meltdown has left a bitter taste, and redistributive justice is on the political agenda, despite the reassurances that Switzerland is always pragmatic in the end. Stiffer inheritance taxes, higher lump sum taxes, “fat cat” salary legislation with real teeth – these are just some of the issues being voted on. Expect the usual hysterical poster campaigns.

There’s already a flow of commodities traders departing from Switzerland and going to Singapore.

But Switzerland is still a lot better off than its neighbours, and this had sent the franc soaring against the euro until the Swiss National Bank put a stop to it a year ago. Even at the 1.20 rate (it got down to near parity before the intervention), the strong franc has hobbled the tourism industry and seriously damaged the very-well regarded Swiss export sector. Companies that earn abroad but whose costs are in francs – not an insignificant number – are particularly vulnerable. “Brand Switzerland” relies on its high-quality image, so cutting costs isn’t a huge possibility.

The SNB didn’t have a lot of choices, and the cap is expected to hold (some companies are so sure they aren’t even hedging.) Even with the intervention, a euro doesn’t buy anywhere near the traditional average of 1.50 francs. And Swiss companies aren’t exactly getting rich off this rate – they’re just pausing to take a breath.

But the perils of dabbling in the dark arts of currency manipulation are serious. Giant exposure to a sinking, possibly disappearing, asset and the possibility of stoking future inflation probably stops central bankers from high-fiving each other in the corridors, even if they did manage to make money on the trades this year. There’s also the whole “beggar thy neighbour” issue. Defending the cap at all costs also means other currencies must go up – not a very popular move.

The star of the Swiss export sector – the watch industry – also looks a lot less shiny. Independent watchmakers reported at the beginning of the year that the market in China (the industry’s bestest client by far) is awash with watches. There was also concern – pre Bo affair – that popular outrage at the spoiled rich would ultimately affect the watch industry. One can only imagine how much worse the image problem is now. Numbers are still holding up but…

Of course, all is not lost. Unemployment is below 3%, compared to 8% in the US and 10% in the EU. And Swiss giants like Nestle are still reporting solid profits.

With weaker prospects perhaps the franc will also lose its sparkle -- and that may help the export sector, which already accounts for about half of Swiss GDP.  The even better news is that Switzerland still tops the innovation indexes. The country is awash with world leaders in high-tech niche products that cannot be easily duplicated. While it’s not exactly a hot bed of grass roots entrepreneurial activity, Switzerland’s universities, labs and other technology centres are not lacking in good ideas.
Lower prices for goods and services? Well, I'll let someone else answer that one.

While Switzerland may experience some serious economic turbulence in the coming years, it might be a really exciting time to live here as the country reshapes socially and educationally to fit in to the new world order. Who knows what this place will look like in 10 years.

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