Outsider Switzerland feels Europe's pain

Economists suggest the Swiss outlook is not as rosy at it might seem at first

As the crisis in the eurozone continues, many Europeans are wondering whether the single currency, and even the European Union (EU) itself, were ever really good ideas.

Some are looking towards Switzerland, which has stayed out of the EU and the euro but maintains close ties with Brussels, as a better example of how to protect the national economy while still enjoying the benefits of Europe's trade markets.

The Swiss continue to enjoy high salaries and a high standard of living and Switzerland's major cities regularly make the top ten list of best places to live.

What's more, Switzerland's welfare and social services remain relatively generous, with little sign of the austerity measures currently being introduced in many EU member states.

But Swiss economists say the picture is not as simple, and certainly not as rosy, as that.

"The Swiss economy is very integrated in the European market," explained Rudolf Minsch, chief economist at the Swiss Business Federation.

"Our enterprises are really dependent on what happens in the European market.

"About half of our exports are going to the eurozone, close to 60% to the EU, so once there is a recession in Europe this is a drawback for the Swiss economy. We are probably falling into a recession in Switzerland, too."

Strong franc

Export orders for cheese, watches and tools were cancelled due to the strong franc

What's more, although Switzerland still has its own currency, the franc has caused Swiss industry huge problems this year.

As doubts over the European and the US economies grew, the franc became the safest bet for investors, rising over 20% in value.

When it began trading at one-to-one with the euro last August, Swiss exporters sounded the alarm. Everything from cheese, to watches to machine tools had become too expensive for the EU, and orders were cancelled.

"The strong Swiss franc has caused tremendous problems for the export sector," said Mr Minsch.

"The appreciation of the franc was so fast, 20% in the last 18 months. With that, Swiss enterprises have huge problems to remain competitive."

A survey carried out by the Swiss Business Federation suggested that one in five Swiss manufacturers viewed the strength of the franc as a threat to their existence. A further 20% regarded it as "extremely serious".

And although the Swiss National Bank did step in to peg the Swiss franc at 1.20 to the euro, Swiss exporters say this is still not competitive. They believe a realistic rate would be 1.40.

Industry effects

As a result, many Swiss manufacturers are introducing measures aimed at cutting their costs, from increasing working hours and pegging salaries, to actually laying off workers.

Markus Eigenmann, managing director of the Jaquet Technology Group, is confident his company will weather the storm. But that will involve increasing his market outside the eurozone.

"We export about 90% of our goods," explained Mr Eigenmann, "and we've seen a lot of turbulence on the currency exchange markets, which has been difficult.

"The euro crisis has become deeper, there are a lot of uncertainties on the market. That has translated into a lower order intake, especially in Europe."

Founded in 1889, Jaquet is a prime example of the kind of industry for which Switzerland is famous: precision engineering. Top of the range speed sensors are produced for a worldwide market at its headquarters in Basel.

But like many Swiss companies, Jaquet too has had to adapt to an increasingly competitive market. Items once produced in the Basel factory were first outsourced to the eurozone, then to eastern Europe, and are now manufactured in China.

And in the Basel factory, where many workers actually live just across the border in France or Germany, Jaquet has begun paying those workers in euros rather than Swiss francs in an attempt to offset the overvaluation of the franc.

Unemployment worries

Fortunately for Jaquet, it has growing markets in Asia, but for many other Swiss manufacturers, particularly in the textile and machine tool industry, the fall in orders from Europe combined with the strength of the Swiss franc has led to job losses.

Unemployment in Switzerland rose from 2.8% to 3.1% in November, still enviably low compared to many EU countries, but, Swiss trades unions say, this is likely to be just the beginning.

"Hundreds of people are losing their jobs," said Hans Hartmann of the Swiss trades union association Unia.

"Especially in the machine tools industry, also in the chemical industry. If the situation doesn't improve, we are afraid that in 2012 there will be 20,000 job losses just in the machine industry."

Unia and many Swiss citizens believe the Swiss National Bank should take tougher action to bring down the franc and increase Switzerland's competitiveness.

Many would also like to see more commitment from the Swiss government to protecting workers rights and jobs.

An opinion poll carried out by Swiss bank Credit Suisse said that unemployment is currently the biggest worry among Swiss citizens, overtaking fears about immigration, crime or the environment.

It is gradually becoming clear to the Swiss that their decision way back in 1992 not to take the path towards EU membership will not spare them Europe's economic fate.

"There's nothing like a free lunch," said economist Rudolf Minsch. "We are outside the eurozone, but we are hurt by the effect [of the crisis there] directly because the demand in these markets is lower and the Swiss franc is not only strong, it's overvalued."

"The whole exporting industry… has to cut costs in order to maintain its share in the European market. This is a hard job they have to do.

Switzerland is now predicting a growth rate of just 0.5% next year, a very gloomy outlook for a traditionally strong economy. If Europe's economic woes continue, Switzerland too will feel the pain.