Can Switzerland, a non-EU member surrounded by a sea of European Union states, act as an effective role model for the UK after its vote to exit the economic bloc?
This article was first published in the October 2016 international edition of Accounting and Business magazine.
In the UK’s referendum campaign on EU membership, the majority of top financial thinkers forecast economic woe if Brits opted to jilt Europe’s big economic bloc. The Organisation for Economic Co-operation and Development (OECD), the club of rich nations, predicted that by 2030 the UK economy would be up to 8% smaller than it would have been within the union. And 10 winners of the Nobel prize in economics signed a public letter arguing that the UK was better off within the EU and that leaving would create adverse effects that would ‘persist for many years’.
Whether or not leaving was the right choice, the UK has at least one role model to consult for how to thrive outside the EU.
When the Swiss narrowly voted in 1992 to remain outside the European Economic Area (a free movement zone of labour, goods, services and capital that encompasses the EU along with Norway, Iceland and Liechtenstein), the nation’s pro-European economy minister warned that it would prove a ‘black day for the country’. In fact, Switzerland has since distinguished itself as one of the world’s most successful economies. It has held the top spot in the global competitiveness rankings of the World Economic Forum for seven successive years – the UK ranks 10th. It has become a mecca for creativity, with more patents filed per head than any other nation. And its per capita economic growth has outpaced both the EU and UK over the past decade.
However, Christian Jaag, managing partner of Swiss Economics and a lecturer at the University of Zurich, says: ‘Not all the keys of Swiss success can be copied. Still, the Swiss example does provide one possible route to success outside the EU.’
Lesson number one, according to Jaag, is to remain open to talent. ‘Switzerland would not be anywhere close to where it is today without foreign workers,’ he says. ‘The ability to tap the top talent from around the world, including EU neighbours, is part of the reason Switzerland has become such an appealing place to do business.’ The country hosts more FT Global 500 companies per head than any other nation.
As of 2013, 28% of the Swiss population was foreign-born, the second highest proportion in the EU and far larger than the UK’s 12.3%. A willingness to accept free movement of people was also crucial to Switzerland winning access to the European single market, which now accounts for 55% of Swiss exports.
With around 44% of UK exports going to the EU and many foreign investors using Britain as a bridgehead for their exports to the EU, losing unfettered access could prove economically damaging. Formal negotiations on post-Brexit UK access have yet to start, but accepting continued free movement of people is likely to be a condition of full trade access. ‘The problem for the UK government is that free movement was seen to be one of the main reasons many Brits voted to leave the EU,’ says Marc Chandler, chief currency strategist at Brown Brothers in New York.
The second main lesson from the Alpine nation, Jaag believes, is its pragmatic approach to fostering a skilled workforce. ‘The Swiss education system has been a key ingredient,’ he says. ‘Universities frequently develop skills that are not terribly helpful in the workplace. Instead of making a fetish out of university degrees, the Swiss have created an apprenticeship system that ensures young people develop practical skills in the workplace.’ About two-thirds of 15-year-olds opt to go into such schemes, which often end in well-paid and respected jobs; around 58,000 companies offer apprenticeships. The system is admirably flexible, with apprentices able to go to university subsequently. It helps explain why Switzerland has an extremely low youth unemployment rate, just 8.6%; in the UK it’s 14.6%. A host of top Swiss executives began their careers with an apprenticeship.
Following Switzerland’s lead, while not easy or quick, is possible, says Jaag. ‘The tax system encourages companies to operate such schemes, and the fact that apprentices can enter university later also helps create demand as well as supply. Still, it could take a long time to convince young people that such schemes are credible and not for drop-outs. Many people believe universities are the only route to success.’
Finally, the Swiss have been paragons of self-control. The nation has staunchly resisted populist measures that would have made life harder for businesses, Jaag argues. In a national referendum in 2012 the country voted against a six-week mandatory paid vacation. Earlier this year, 77% of the population declined the offer of a guaranteed minimum income.
This discipline is reflected in the public finances, with a net government debt that is just 25% of GDP, according to the International Monetary Fund. That compares with a debt burden of 81% of GDP for the UK, which is close to the G7 average. This impressive feat of fiscal probity has been achieved with relatively low taxation, both on companies and individuals. ‘The UK vote gives the government political cover to consider some bold reforms to boost productivity and create an even more business-friendly environment,’ says Philip Shaw, chief economist at Investec.
Many aspects of the Swiss system will be hard, even impossible, to replicate in the UK or elsewhere. One commonly cited reason for Swiss success is the high level of political decentralisation; the country’s 26 ‘cantons’, or provinces, have greater tax powers than the relatively slim national government. ‘Since companies and individuals can relocate between cantons, the system puts pressure on governments to be lean and efficient – offering high-quality services and low taxation,’ says Jaag. ‘Having the spending power close to the people seems to result in greater efficiency.’ While the UK could opt for greater fiscal decentralisation, it would be difficult to replicate the Swiss approach.
Many economists believe Switzerland has succeeded despite and not because of its rejection of European membership. The country endured sluggish economic growth in the 1990s. The bursting of a property bubble may have been mostly to blame, but the country’s exclusion from the emerging single market until 2002 may also have been a contributory factor.
A demographic bind
In 2014 the Swiss narrowly voted for caps on immigration. Since unfettered movement of people is a condition of Swiss access to the single market, the authorities now face a tough balancing act. To ensure the continued expansion of the labour force in the context of an ageing population, Switzerland may need to ensure a higher rate of female participation in the labour market, an area in which it lags most other European peers. Only about a fifth of mothers work full time, and fewer women get to the top compared with elsewhere in the continent. A 2014 Egon Zehnder European board diversity analysis showed that only 13.9% of Swiss board seats were held by women, compared with 20.3% in Europe as a whole.
Despite these provisos, Switzerland offers food for thought for UK policymakers as they attempt to forge a future outside the EU. Some tough years probably lie ahead for the UK, with slow growth and a hit to consumer spending power. But if the UK can achieve even a modicum of Swiss success, the Brexit vote may not prove quite as economically toxic as the professional economists feared.
Christopher Fitzgerald and Fernando Florez, journalists
"The UK vote gives the government political cover to consider some bold reforms to boost productivity"