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ECONOMY

Why the Swiss are so spooked by using debt to prop up economy

Germany, which is known for strict budgets, has tapped debt markets to prop up its virus-hit economy, while neighbouring Switzerland has consistently curbed borrowing despite calls to change course.

Why the Swiss are so spooked by using debt to prop up economy
Montreaux, Switzerland. Photo: DPA

With Swiss firms struggling through another lockdown, the federal government last week finally loosened its purse strings a bit, doubling emergency aid to 10 billion Swiss francs ($11.2 billion, 9.3 billion euros) as part of a programme to boost the economy.

But when he presented the package for companies worst hit by the latest Covid restrictions, Finance Minister Ueli Maurer again lamented that Switzerland had to borrow to boost the economy.

Some 10 billion francs in debt will have to be paid off within six years according to a constitutional debt brake rule, Maurer warned.

READ MORE: What will Switzerland's coronavirus debt mean for your tax bill?

He promised to present various options to do so as soon as the economic outlook cleared a bit.

Despite mounting criticism that the wealthy Alpine nation isn't doing enough to support companies, Maurer has repeated time and again that the Swiss government has “no money”.

The government is already borrowing “150 million francs a day, or six million per hour, or 100,000 a minute,” he notes.

In 2020, Switzerland's federal government spent 15 billion francs ($16.7 billion, 13.8 billion euros) to support the economy, and preliminary data shows it ended the year with a deficit of 15.8 billion ($17.6 billion, 14.5 billion euros).

Debt phobia

Some have called for Switzerland to put balanced budget dogma aside during the crisis, to protect against potential long-term economic damage.

“Switzerland could be much more generous,” said Michael Graff, an economics professor at ETH Zurich, a public research university.

He believes the country could borrow what it needed to boost business activity without a problem.

A study published by Graff in January argued the nation's post-crisis finances would remain healthy even if borrowing rose, primarily because the country entered the pandemic with one of the world's lowest debt ratios.

National debt stood at 25.8 percent of gross domestic product (GDP) at the end of 2019.

That was less than half the European Union's widely breached target of 60 percent.

According to Graff, if the Swiss debt ratio rose by 10 percentage points, or even 20, and “if things take a turn much worse than expected” the country would still be at a level that is “extremely low, compared to other nations, once the crisis is overcome”.

If Switzerland is in some ways a very liberal nation, Graff pointed to a “public debt phobia” which he said was a cultural trait.

After debt soared at the end of the 1990s owing to a crushing real-estate crisis, Switzerland became a champion of fiscal rectitude, introducing a debt brake into its constitution in 2003.

‘Irrational’ fear

“This fear of going into debt is something irrational,” argued Cedric Tille, an economics professor at Geneva's Graduate Institute of International and Development Studies.

This is especially so, he said, because Switzerland currently benefits from negative interest rates, which means investors are willing to lose money to own Swiss 10-year bonds.

Former Swiss central bank vice president Jean-Pierre Danthine believes the country's debt brake rule should be suspended when the economy is facing a crisis.

With negative rates, Switzerland can borrow “all it needs for its economy”, he said in a recent interview with Leman Bleu television.

The country did not suffer as badly as some European neighbours during the first wave of the pandemic moreover, and its economy has fared better.

It was able to ease restrictions faster and count on strong pharmaceutical exports.

The Swiss government rapidly implemented economic support measures and allocated 70 billion francs ($78 billion, 64 billion euros) to finance partial unemployment benefits for workers and short-term business loans.

After falling by 8.6 percent in the first half of the year, Swiss GDP rebounded with a 7.2-percent gain in the third quarter.

But after infections surged again, cafes, restaurants, theatres, cinemas, museums and sports clubs were closed in mid-December and all non-essential shops followed a month later.

Shops are slated to reopen on March 1, but some fear the shutdown will lead to a wave of bankruptcies at small- and medium-sized businesses.

“For the second wave, they should have distributed aid much earlier to cover lost revenue,” remarked Rafael Lalive, an economics professor at the University of Lausanne.

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MONEY

Italy expands €200 payment scheme and introduces public transport bonus

Italy's government will extend its proposed one-time €200 benefit to more people and introduce a €60 public transport payment, Italian media reported on Thursday.

Italy expands €200 payment scheme and introduces public transport bonus

Seasonal workers, domestic and cleaning staff, the self-employed, the unemployed and those on Italy’s ‘citizens’ income’ will be added to the categories of people in Italy eligible for a one-off €200 payment, ministers reportedly announced on Thursday evening.

The one-time bonus, announced earlier this week as part of a package of financial measures designed to offset the rising cost of living, was initially set to be for pensioners and workers on an income of less than €35,000 only.

However the government has now agreed to extend the payment to the additional groups following pressure from Italy’s labour, families, and regional affairs ministers and representatives of the Five Star Movement, according to news agency Ansa.

Pensioners and employees will reportedly receive the €200 benefit between June and July via a direct payment into their pension slip or pay packet.

For other groups, a special fund will be created at the Labour Ministry and the procedures for claiming and distributing payments detailed in an incoming decree, according to the Corriere della Sera news daily.

One new measure introduced at the cabinet meeting on Thursday is the introduction of a one-time €60 public transport bonus for students and workers earning below €35,000. The bonus is reportedly designed to encourage greater use of public transport and will take the form of an e-voucher that can be used when purchasing a bus, train or metro season pass.

Other provisions reportedly proposed in the energy and investment decree (decreto energia e investimenti), which is still being adjusted and amended, include extending energy bill discounts, cutting petrol excise duty and rolling on the deadline to claim Italy’s popular ‘superbonus 110’.

The €14 billion aid package, intended to lessen the economic impact of the war in Ukraine, will “fight the higher cost of living” and is “a temporary situation”, Prime Minister Mario Draghi has said.

The Local will report further details of the payment scheme once they become available following final approval of the decree.

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