The Cheesy Economy of Switzerland

Swiss citizens transformed their country forever in a series of referendums between 2003 and 2005, economically aligning it with the European Union and liberalising labour migration. It was an unusual reaction to increasingly perilous times.

Switzerland’s annual inflation rate fell to 1.3 percent in March 2003. Once regarded as a cause for celebration, it is now viewed as a concerning sign of impending deflation. For years, growth has been below trend. Demand is dwindling and capacity remains idle. Taxes are excessive, and the national debt is spiralling out of control.

Interest rates are at an all-time low, having been slashed by a half-point in March 2003. The Swiss franc, on the other hand, is at a five-year high against the dollar, impervious to these monetary gambits. Switzerland’s economy is reliant on exports and tourism, which together account for more than half of its gross domestic product. The mighty currency does nothing to help the trade balance.

Economic national symbols are collapsing left, right, and centre. In an interview with the daily Blick, Andre Dose, chief executive of Swiss International Air Lines, the floundering successor to the bankrupt Swissair, pleaded for tax exemptions, reduced insurance premiums, a waiver of airport charges, as well as soft loans and subsidies from both the government and banks. In 2002, the airline lost more than $700 million.

Agrarplattform, a group representing farmers, processors, and retailers, recently released a study dispelling the Swiss’ long-held belief that their cherished agricultural sector – particularly milk, potatoes, and meat – is profitable. Indigenous armaments technology firms – such as the state-owned Ruag group – have seen their profits slashed as a result of anti-war protesters’ siege.

Between 2002 and 2005, Switzerland’s leading brands – Roche (pharmaceuticals), Credit Suisse (banking), Adecco (human resources), and Zurich Financial Services – announced record losses and job cuts.

There’s also Severe Acute Respiratory Syndrome (SARS) and avian (bird) flu to contend with. Ten suspected cases of the former have been reported in Switzerland. It increased airport inspections, cancelled flights, and set aside funds for research into the new pandemic. By the end of 2003, the Swiss pharmaceutical company Roche had developed a diagnostic kit.

No sector is immune to the downturn. Swiss banks, which have been widely criticised in recent years for alleged involvement in money laundering, are being pried open by assertive US regulators and a zealous, primarily European, Financial Action Task Force.

In 2002, Swiss banks began repatriating to Nigeria more than $670 million in funds looted and deposited with them by late dictator Sani Abacha. In the run-up to the Iraq war, the government froze $368 million in Iraqi financial assets at the request of Washington, repeating a 1990 action.

Mobsters, terrorists, con artists, shady politicians, and tax evaders are now seeking anonymity and discretion in Lebanon and Cyprus, as well as in Austria, the United States of America, the United Kingdom, and Luxembourg. Switzerland’s reputation as a secure financial haven is dwindling.

This was the latest in a string of setbacks for the struggling banking industry.

In August 1998, in response to intense public pressure from Jewish organisations – and a covert anti-Semitic backlash – Switzerland’s two largest banks, UBS and Credit Suisse, agreed to establish a $1.25 billion fund to settle claims by Holocaust survivors and their relatives. Switzerland’s red-faced government contributed $210 million. The banks did not appear to be in a hurry to locate the heirs of murdered Jewish owners of dormant accounts worth billions of dollars.

A settlement was reached only after legal action against the Swiss National Bank was threatened and both public opinion and lawmakers in the United States of America shifted against Switzerland. It includes owners of dormant accounts, slave labourers, and 24,000 of 110,000 refugees who were returned to certain death at the Swiss border – or their heirs.

A high-level international commission led by Paul Volcker, a former Federal Reserve Board chairman, identified 54,000 accounts opened by Holocaust survivors – but only after inspecting 350,000 accounts at an outlandish cost of $400 million to incensed banks. To add insult to injury, the Bergier Commission, established in 1996 by the Swiss parliament, revealed in March 2002 that Swiss banks provided interest-free loans to the Axis powers.

Wall Street dealt another blow to Swiss financial intermediaries and their US-based brokerages. They recently reached a settlement with US regulators over allegations that they provided biassed stock analyses and recommendations. However, this did not prevent Frank Quattrone, a former star investment banker with Credit Suisse First Boston, from being charged with obstructing justice and evidence destruction. Numerous mid-sized and large Swiss businesses are abandoning the tainted capital markets entirely.

According to Swissinfo, the news Web site of Swiss Radio, Jean-Pierre Roth, chairman of the Swiss National Bank (SNB), warned against excessive optimism during the SNB’s annual meeting in April 2003. Deteriorating trading conditions, stagnant consumption, and reduced government spending all contribute to the “risks of a renewed deterioration of the situation… Conditions for our companies have deteriorated relative to the previous year.”

The country remains constrained by bureaucracy and anti-competitive cartels. He admitted that growth in 2003 was lower than the Bank predicted only five months ago. Consistent with this is the Organization for Economic Cooperation and Development (OECD). It warned in its outlook that subdued global conditions and an inexorably appreciating franc continue to jeopardise the country’s recovery.

In 2003, GDP increased by an imperceptible 0.6 percent, and by 1.9 percent in 2004. More optimistically, the International Monetary Fund (IMF) forecast a 0.3 percent increase in 2003 and 2.4 percent the following year. In 2002, the economy slowed to a standstill. In February 2003, unemployment reached an all-time high of 3.9 percent.

Not everything is hopeless, however. Infineon, a German chipmaker, is considering relocating to Switzerland. Tempest Asset Management, a San Diego-based subsidiary of Netrom, opened a currency trading centre in Zurich in April 2003 “to gain access to Europe’s multi-trillion-dollar financial markets.” Swiss companies, ranging from gourmet bakery Hiestand to computer peripherals maker Logitech, are reporting record sales and profits.

The UBS Index of Investor Optimism, which is jointly maintained by UBS and the Gallup Organization, increased 61 points in March 2003 – albeit to less than a third of its January 2000 level. Half of the population believes the economy will recover and two-fifths believe employment prospects will improve.

Additionally, globalisation has compelled Switzerland to abandon its magnificent – and costly – isolation. It voted in March 2002 to join the United Nations, a move it had resisted for decades. Swisspeaks, a two-month festival promoting Switzerland, was held in New York City in April 2003.

Expo.02, a national exhibition held in Neuchatel, attracted ten million visitors. In June 2003, seven agreements with the European Union entered into force. Surprisingly, Switzerland is on the verge of joining the Schengen agreement, which would result in the abolition of internal EU borders. Banking secrecy will be lifted in part in accordance with EU directives.

With a population of 7 million (one-fifth of whom are immigrants), Switzerland is one of the wealthiest countries on Earth. The per capita income is greater than $38,000. The economy’s openness – its vulnerability – also serves as a source of strength. It endows Switzerland with an enviable degree of adaptability and resilience.

The country remained largely untouched by the first and second world wars, which were fought on its doorstep. It has reinvented itself, evolving from a backward rustic landlocked domain to a global financial conglomerate. It will reappear, as it always does, reenergized and prepared to take on new challenges.

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