Mathias Binswanger, Matthias Michel and Stefan Pfister discuss potential growth stimuli for the Swiss economy and explore the question of whether Switzerland is still an attractive target for foreign investment.
Prof. Mathias Binswanger: In an international comparison, the regulatory environment in Switzerland isn’t all that bad. Yet here, too, we have a tendency toward tackling each and every problem by adding new regulations. That approach leads to a mentality that mainly focuses on not breaking any rules so that if mistakes do happen to occur, you can’t be held liable for them. The same thing also holds true with regard to sustainability. What counts is that all of the companies are certified and you have the right label.
Government Council member Matthias Michel: I, too, think the situation in Switzerland is good compared to other countries. However when I see economic players being hit by demands from so many different sides and know that these demands are to be satisfied through regulatory means, then yes, I am a bit concerned. Granted, there are always new and even inherently justified requirements, such as those regarding environmental or energy-related matters. First, however, these are all too frequently countered by restrictive regulations instead of economic instruments. Second, there is a distinct lack of courage and willingness to dismantle or redesign traditional regulations. One topical example is our labor law which was first enacted in the 1960s. This legislation from the last century simply isn’t capable of accommodating the structures currently found in today’s workplaces.
Stefan Pfister: KPMG experiences the topic of regulation from two perspectives: On the one hand, we’re directly impacted by regulations like the labor law just mentioned. On the other, we see our clients faced with a growing regulatory burden, particularly when it comes to financial services. Essentially, regulations make sense wherever they grant entrepreneurial or individual freedom, strengthen security and safety-related matters or level the playing field for the different stakeholders. We have to be careful that we don’t overregulate, though, that we don’t keep piling one regulation on top of another, because an overabundance of regulations doesn’t just translate to more administrative work and higher costs, it actually stifles vital investments. You also shouldn’t forget regulations’ cost to the economy. The findings of a study conducted by KPMG Germany a few years ago on behalf of the Swiss Federation of Small and Medium Enterprises are alarming: The annual cost of regulations in the areas of labor law, social insurance and food hygiene alone comes to CHF 4 billion.
Stefan Pfister: Initially drawn to Switzerland by the country’s well-known location advantages, many multinational corporations now feel that those benefits are at risk. This was the result of a survey conducted by KPMG last year among more than 850 multinational corporations located in Switzerland. Vital location factors include a liberal labor law, the availability of qualified employees plus an attractive corporate tax rate. Right now, though, we have to put a few question marks behind each of those three aspects. Not only that, but as we prepare to vote on Energy Strategy 2050, we also have to ask ourselves which priorities we want to set in terms of energy policy.
Government Council member Matthias Michel:
Absolutely: The resolutions passed by Parliament and the electorate regarding funding for railway infrastructure and national roadways show that Switzerland is capable of creating good financial instruments for long-term infrastructure development. These also include follow-up costs for maintaining and operation of the transportation infrastructures, which is commendable. These two examples also show that while funding might be limited, the focus cannot be on simply funneling more and more money into infrastructures whenever demand increases. Instead, the importance of other demand-side measures is growing, especially in the area of transportation however not limited to it. What comes to mind here are new financing methods like mobility pricing, which isn’t just a financing instrument but a tool that helps us steer our mobility patterns in a smarter way. Unfortunately, this approach still doesn’t enjoy enough support among conservative parties or in business circles.
Stefan Pfister: Switzerland’s economic success has always depended on its broad international network, something that’s also reflected in our firm: KPMG Switzerland is extremely international and even our clients have global networks, regardless of whether they happen to be medium to large Swiss companies or foreign-owned companies. Within KPMG, our engagements often require us to work across national borders, something we do quite successfully. The collapse of Bilateral Agreements I, and thus the end of the free movement of persons, would seriously harm Switzerland as a business location for all of the reasons I just mentioned.
Prof. Mathias Binswanger: Nevertheless: Switzerland’s international relationships are generally better than we might think. Switzerland is and always will be a country with a very strong international focus. Neither the approval of the Mass Immigration Initiative nor the rejection of Corporate Tax Reform III really change any of that.
Government Council member Matthias Michel: I’d say tax reforms, and not just because of recent events: While I’m convinced that Parliament will put together a new package that benefits Switzerland as a business location, I’m worried about the accelerating pace at which the stability of conditions in Switzerland is eroding, one example being the people’s verdict on CTR III.
In the past, our virtues have included stability and dependability. Even though legal safeguards and planning certainty lay the best foundation for investments, these are being questioned with growing frequency. I feel that one contributing factor could be an abundance of prosperity which is apparently letting us stray from our virtues. Another impediment is growing doubt about the achievements of the free market. Protectionism will be particularly harmful to small economies like Switzerland’s. Given the country’s strong focus on exports, we depend on multilateral agreements such as those that exist within the scope of the WTO. These are the only way of limiting power plays by large members since a joint court of arbitration monitors developments. Finally, the mechanisms currently employed by the National Fiscal Equalization policy prevent the cantons from attracting companies by creating a negative incentive for recipient cantons, in particular.
Stefan Pfister: The strong Swiss franc still presents a huge challenge for the Swiss economy as a whole and for the export industry in particular. Many companies might have learned to live with the new situation, but the added strain of a strong currency or higher costs for production and wages are still extremely problematic in the export business.
Prof. Mathias Binswanger: It depends on how you define sustainability. Since the term is ultimately rather ambiguous, all we can say is what is driving growth. The economy outside Switzerland plays the biggest role. Growth in Switzerland is strong if it’s stimulated by exports. The pharmaceutical and precision instruments industries play a key role here, as do services. One long-term aspect of this lies in the fact that, on the whole, Switzerland has a highly diversified sectoral structure with a large number of SMEs. That makes it relatively robust.
Stefan Pfister: Digitalization offers Switzerland unique opportunities for the future. In its white paper entitled “Shaping Switzerland’s digital future”, KPMG outlined 7 visionary business opportunities. The global digital economy will create an entirely new value chain. The appeal of outsourcing to low-wage countries is likely to dwindle since demand for technical skills in areas such as data analytics will be on the rise. Switzerland is perfectly poised to become a digital workbench for the global economy: Its qualifications include a well-developed infrastructure plus a high degree of stability, legal certainty and data protection. Switzerland needs to step up its investments in research and development, however, if it wants to seize these opportunities.
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