Fundamentals Update as at 13 February 2014 by Lorenzo Beriozza
Last Sunday, the Swiss decided by a narrow margin to restrict “mass immigration”. This should not have any impact on the economy in the short term. The renegotiation of agreements is also likely to be low-key in order not to jeopardise close economic ties with the EU.
However, economic growth could suffer in the long term, because curbs on immigration will be greater and companies will become less flexible. The main damage as a result of this decision will therefore be sustained by Switzerland itself.
The narrow “yes” vote in the referendum against “mass immigration” will have a negative effect on existing agreements with the EU. For the initiative requires total immigration to be restricted by imposing annual peak levels and quotas. The Swiss government is now obliged to implement the initiative within three years.
In so doing, it will inevitably contravene the agreement on the free movement of persons. A “guillotine clause” will also reverse almost all the other agreements in the “Bilateral 1” package. However, EU and Switzerland will hopefully find a way forward in the renegotiations which will avoid any significantly negative impact on trade links. Ultimately, the EU has no interest in damaging the economic relationship with its third largest partner.
Contrary to claims from some sources, the free trade agreement between Switzerland and the EU is not part of the “Bilateral 1” package and will not therefore be overturned by the “guillotine clause”. The free trade agreement guarantees the unrestricted and duty-free trading of industrial products, which account for some 90% of Swiss exports. However, some agreements within the “Bilateral 1” package support the free trade agreement. For example, under the terms of the agreement “reduction of trade barriers”, a Swiss industrial product may be sold in the EU internal market if it has already been tested and approved for the Swiss market. Apart from the time-savings for businesses, estimates also assume that this generates annual cost-savings of CHF 200 to 500m. Changes to this agreement could hamper foreign trade.
The extent to which immigration will be curbed depends on the legal implementation of the initiative. However, fairly strict implementation is the most likely option. For, the “ecopop” initiative – which aims to specifically reduce net immigration to 0.2% of the population – will be the next issue to be put to a vote towards the end of 2014. After Sunday’s unexpected result, the government is likely to attempt to retain its freedom of choice and to take the wind out of the sails of this initiative.
So far there has been a close interdependence between economic growth and immigration. In the past, the economy has at times required larger quotas and politicians have agreed to this. Immigration by foreign workers has always followed after a time lag. This correlation has been evident as long as data has been recorded. A higher rate of immigration from 1998 thus followed the stronger economic growth of the previous years. Despite the free movement of persons, immigration has declined in recent years, because the consequences of the European sovereign debt crisis have been felt in the Swiss economy.
Long-term growth in the Swiss economy is likely to suffer, although the renegotiation of agreements with the EU is likely to have virtually no negative impact on foreign trade. If net immigration were to fall from around 1% recently to only 0.3%, this could also reduce the growth potential in the economy by 0.75% since the productivity of immigrants should not be much lower than the one of Swiss citizens. In the past years, more than 45% of all immigrants held a degree of tertiary education, among residents this rate is about 37%. Already now, the Swiss population cannot meet the demand for workers, since the domestic labour market has been almost completely absorbed. The unemployment rate is around 3.2%. The proportion of foreign workers in Switzerland currently exceeds 20%. In individual sectors, such as the catering and building, as well as in the manufacturing industry, the proportion is as high as 30%.
True, even after the initiative has been implemented, companies will not be prohibited from hiring foreigners. However, they will first of all have to prove that no Swiss citizen can fill the job vacancy. The employers’ association estimates that businesses would consequently have to lodge 190,000 approval applications which would then have to be processed by the government. This will mean higher costs for companies and less flexibility. Added to this, is the uncertainty surrounding the ultimate implementation of this initiative. Employers do not know whether they will be able to meet the demand for workers in future and will be reluctant to invest. This is unlikely to pose a problem for the Swiss economy this year; it will ultimately benefit from the recovery in the Eurozone.