- IMD Business School

A call for action to Switzerland’s economic decision-makers

We explain how if we draw on the strengths of our system, we can still exit relatively unscathed
6 min.
March 2020

The Swiss government has announced its projections of the Swiss economy for 2020. In contrast with an original forecast of a growth in GDP of 1.7% released in December 2019, the new estimates predict a recession in 2020 with negative growth of -1.3%.

The COVID-19 crisis is primarily a human emergency that is costing many lives. Fighting and defeating the pandemic should be our main priority. To do so, we need people to take personal responsibility, adhering to basic rules of behavior, hygiene and social interaction. Many companies, in Switzerland and elsewhere, are already adapting to a new world of online meetings, working from home, and reducing face-to-face interactions.

However, worry is rightly mounting over the terrible toll that this crisis is going to take on our economy. Even if the number of individuals affected by the coronavirus starts declining in the coming weeks, the damage is going to last longer. The disruption in supply chains will be significant and affect production in our manufacturing industries; there could be a paralysis due to a lack of employees.

The decline in disposable income will dent demand for products and services. To add insult to injury, the pessimistic outlook reflected by stock markets and a general lack of confidence in the future will also deter corporate investment and individual consumption.

Let us be clear: unlike the 2008 crisis, this is not a banking crisis. It is a crisis of supply and demand, with a dramatic impact on the future prosperity of our country.

And precisely because it is not a banking crisis, monetary policy cannot be the only solution. In the last few days, and acting in coordination with the world’s major central banks, the Swiss National Bank has made explicit its support to the financial system, in order to guarantee that credit is not restricted. Because interest rates are already in the negative, the effectiveness of monetary policy in Switzerland is severely compromised.

At the same time, other countries are focusing on fiscal policies. Since the Eurogroup has delegated national authorities to tackle the economic consequences of COVID-19, countries have followed suit. The German government has guaranteed unlimited funding to companies with a €550 billion loan package to the private sector. The “bazooka plan” has been followed by Spain, whose government has committed 20% of the country’s GDP (€200 billion) to support companies and individuals and to contribute to the health system. France and Italy have proposed similar fiscal policies. The US is preparing a stimulus plan of USD $1 trillion and might include direct payments to individuals, small businesses and tax cuts.

We believe that Switzerland is in a much better position than Germany, Spain, France, Italy and the US as regards addressing the economic impact of the COVID-19 crisis. Switzerland has run a fiscal surplus in the last three years (CHF2.8billion, CHF3.2billion, CHF3.6billion respectively) amidst a very conservative debt policy. The debt capacity of the country is still significant, since total debt to GDP is only 40%, compared to 120% in France, 70.4% in Germany, 115% in Spain and 136.3% in the US. More so than ever before, Switzerland needs to adapt its financial policy to help people.

Our estimates show that in the coming months, Swiss SMEs are going to be in dire straits. We have analyzed the 100 most representative Swiss SMEs (as reported by Datastream). At the moment, if their 2019 performance were to continue, only about 3% of all companies would be unable to satisfy their salary and benefit payments with the proceeds from their gross profits and cash holdings, taking into account their financial obligations.

However, if these firms were to realize losses in 2020, only 60% of them would be able to maintain their employment and pay salaries in full. Moreover, only 25% of all firms could satisfy their operating and financial obligations for more than two years. A less drastic assumption — a reduction of 50% in revenues — could guarantee the survival of 40% of Swiss companies beyond two years.

It is time to act. With a federal budget surplus and CHF821 billion in reserves in the Swiss National Bank, we strongly believe that the Confederation can implement a much more aggressive plan than those in our neighboring countries. A package committing 30% of Swiss GDP (or about CHF 200 billion) should be able to finance our economy in the coming months, restore demand and prepare us for recovery once the pandemic is over.

Here are five key measures we propose:

  1. The Swiss Confederation pays all salaries of Swiss employees for three months, thus releasing companies from their wage bill and guaranteeing their survival. Such transfer should be capped at a certain level. We suggest that, since the average monthly gross salary is CHF6,502 (as of 2016), the cap should be placed at 2/3 of the average salary, or CHF 4,300 per month and person. The cost of a wage guarantee for three months would be a maximum of CHF20bn, assuming that all Swiss employees would need to be subsidized. Such measure would especially help small and medium enterprises.
  2. With regard to entrepreneurs and self-employed workers, the wage subsidy should be extended so as to provide them with similar support — including a salary cap.
  3. The Swiss Confederation can finance these expenses with a significant increase in government debt (from 40-60% of GDP, or CHF140 billion). In a world where most central banks are confronted with zero or negative rates, and because of the sustainable strength of the Swiss franc, Swiss debt would be attractive to foreign investors.
  4. Government debt should replace private debt in two ways: first, through a partial relief of mortgage payments for families in need for the duration of the crisis. Second, through a massive reduction in income taxes on a temporary basis. We are aware of the constitutional mandate to avoid budget deficits; however, this does not hold in recessions and if it is ever going to be triggered, such constitutional provision has to be triggered now.
  5. A government guarantee should be given for companies in financial distress, and unable to satisfy their financial obligations. This is similar to what France and Spain have done. But unlike these countries, Switzerland is a AAA-rated country — thus the guarantee does not jeopardize the country’s own risk level (France is AA, Spain is BBB+).

The Swiss stock market has fallen more than 20% since the beginning of the year. Bear in mind that only  puts us back to where we were in December 2018. If we act fast, heal the damage that COVID-19 has done to our economy, and fight this pandemic together, we can still look at a sound economic year end.


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