Strong SMEs key to Switzerland’s economic success

Switzerland is an island of prosperity in Europe RDB

As many western countries struggle to stay afloat amidst powerful economic storms, Switzerland sails on largely impervious to the pain. Economist Stéphane Garelli reveals the secrets of its success, but warns of dark clouds on the horizon.

The Swiss economy has continued to grow despite the three-year-old European debt crisis that began in Ireland and Greece and spread to Italy and Spain.

For the past six years, the Swiss government has run budget surpluses, even while suffering a recession during the financial crisis in 2008 when it was forced to bail out UBS, the country’s leading bank.

Switzerland’s economy has so far avoided the worst effects of the strong franc, with better-than-expected economic growth of two per cent year-on-year in the first three months of 2012, while the jobless rate held at 2.7 per cent in July.

And although economic growth is forecast to slow to about 1.5 per cent this year from about 2.5 per cent in 2011, the government still expects to book a surplus of SFr1.5 billion ($1.56 billion) for 2012, down from SFr2 billion last year.

Meanwhile, the 17-country eurozone appears headed for its second recession in three years.

swissinfo.ch: Is the situation in Switzerland really that exceptional? Germany and Nordic countries also seem to be weathering the economic storm quite well, don’t they?

Stéphane Garelli: Every possible indicator – unemployment, public finance, growth rates and inflation – is extremely positive for Switzerland. Very few other countries are managing to produce such major economic indicators and such results. So, yes, Switzerland really is in quite an exceptional situation.

swissinfo.ch: What’s your explanation for this?

S.G.: Firstly, Switzerland’s economy is very much focused on the rest of the world. This is an unexpected consequence of its refusal to join the European Economic Area (EEA) in 1992. Many businesses at the time began to diversify their export markets instead of concentrating solely on Europe. Export sectors were very quick to focus on emerging markets with strong growth potential.

Second, Switzerland has many highly efficient small- and medium-sized companies (SME). In most countries, even in places like Mongolia, you find large, very competitive multinationals. But an economy only really starts to stand out thanks to its SMEs – firms of between 100 – 1,000 employees that own their own technologies and have a global outlook.

Thirdly, the Swiss economy is incredibly diversified. We produce everything except perhaps cars. Also, for over a decade Switzerland has managed to introduce a debt brake that everyone is now talking about in Europe. This has enabled us to keep public finances under control.

swissinfo.ch: People often talk about the positive influence of its high-quality education system and close collaboration between the academic and economic worlds. How true is that?

S.G.: Very much so. This is all the more important as it has an impact on SMEs. Unlike big multinationals, SMEs really need collaboration with the academic world, and access to laboratories, research centres and special skills. This is extremely important as it strengthens medium-sized firms that export homemade products.

swissinfo.ch: Despite the diversification of markets, Europe remains Switzerland’s main export partner. What are the risks if the continent’s economic situation continues to worsen?

S.G.: Indeed I think the negative side of the Swiss model is its vulnerability. It’s vulnerable as it is the object of everyone’s desire. We can see that with our German and French “friends”. They look at us in a funny way and try to impose quite difficult conditions, especially financial.

This vulnerability is due to the fact that Switzerland is a relatively important economic power but is small-fry politically.

We depend on Europe for two-thirds of our economic activity and we depend on the United States as we are traditionally close to it through business activities. We have tried to diversify markets but it’s true that most business continues to be done with Europe and the US. And right now we must admit that relations with them are tense.

swissinfo.ch: And we mustn’t forget the handicap of the strong Swiss franc…

S.G.: The big question is how long the Swiss National Bank will be able to maintain the SFr1.2 to the euro cap. I must say that I have some doubts about this. Given the speed with which the SNB is building up exchange reserves, people say it cannot continue for ever at that pace.

At the same time it’s in the Europeans’ interest to keep the value of the euro low. The only way for them to work their way through their austerity policies is to export to high-growth countries. So if they want to do that it’s better for them to keep a weak euro.

swissinfo.ch: Swiss business circles have often pleaded in favour of joining the European Union. In view of the current problems, aren’t we better off outside?

S.G.: Right now not being an EU member is an advantage. Switzerland doesn’t have to suffer the impact and slowness of European decisions. What strikes me most is the time needed to take decisions which are pretty obvious from an economic perspective. It’s been roughly two years that leaders have known what needed to be done to save the Greek economy.

But sooner or later we’ll have to find a modus vivendi with Europe as Switzerland is in an extremely vulnerable position. We can see that with Germany. The Germans can do what they want, like buying CDs of stolen Swiss bank data, without us being able to do a thing. It’s the same with the Americans.

swissinfo.ch: Are there any early signs at all of a downturn in the Swiss economy?

S.G.: Yes, certain machine tool firms have already indicated that the situation is becoming much tougher. And export-oriented firms are beginning to suffer compared with competitors who benefit from a weaker euro or dollar.

Europe will be in recession later this year. When that kind of thing happens to your main trading partner, it’s not good news. As to the US, business has been picking up so slowly that you can hardly talk about a recovery.

Stéphane Garelli

Stéphane Garelli is a professor at the International Institute for Management Development (IMD) and at Lausanne University.

His work focuses mainly on competitiveness between countries and firms on international markets. He is considered one of the world’s leading experts in this field.

He is also director of IMD’s World Competitiveness Centre, which publishes an annual report comparing 46 countries based on 250 indicators.

On top of his academic work, he is also president of the executive board of the French-speaking newspaper Le Temps.

In the past Garelli worked as director general of the World Economic Forum (WEF) and the Davos Symposium.

(Translated from French by Simon Bradley)