Myth and Reality in Switzerland
first published on Aug 2, 2019 at CaymanFinancialReview.com
Reputation is gold. One can live off it. Switzerland does. The country is renowned for discretion, rule of law and stable institutions. Ten years ago, this was true. Today, it is not anymore. But not all is lost. The Swiss Bankers’ Association, a rather official, even officious, group of technocrats is worried. According to their most recent benchmarking study, Switzerland’s private banking lost its competitive edge. Comparable financial places, for example the US, Hong Kong, Bahamas or Luxemburg are faring better.
Examining 10 different competitiveness factors, the benchmarking study found out that Switzerland leads in only three – rule of law, digitisation and the labour market. The country is best case average in matters of information exchange and data protection. Regarding access to external markets as well as taxation, Switzerland holds the last place. But there is more: The Confederation is over-compliant in its capital and liquidity regimes for banks, in anti-money laundering and in corporate governance. Over-compliance equals cost, complication and loss of competitiveness.
Costly regulations …
This picture is not restricted to banks. Switzerland seems to be losing its competitiveness across the board. The domestic economy has been stagnating in terms of productivity. Export-oriented sectors like machine-manufacturing, the production of plastics, and tinting are struggling. Retailing is feeling the heat. Logistics, shipping and the trade in commodities are not what they used to be. Luckily, the science-industries, tourism and information technologies are flourishing.
Granted, some of the actual problems arise due structural change of the economy. These are quite natural and are traced back to digitisation, new sectors displacing old and young skillsets competing with old. But there is a significant group of problems that is self-inflicted – mainly by regulations. For example: In the last decade, Switzerland introduced all Basel III provisions to all banks. It did not use any of the rooms of manoeuvre foreseen by that framework. The country willingly became over-compliant in all matters related to international taxation and anti-money laundering introducing a lot of Swiss finish. On top of that, the alpine Confederation abolished bank secrecy. Similarly, the real economy is affected by the regulatory burden. Switzerland has the world’s strictest law on climate change with the steepest all-economy carbon-tax. It showcases the planet’s most rigid anti-trust regime, which is notorious for its application on small firms. Switzerland diminished tax incentives for multinational holdings and is in the process of increasing taxes on corporations and small and medium enterprises.
The total amount of regulation-induced costs makes around 10% of the country’s gross domestic product GDP, or, over US$70 billion per year. In addition to that, there is taxation; not to mention the many mandatory administrative fees, duties and charges: pension insurance, health insurance, highway due, public television levy and the carbon tax are just some of the many examples …
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Myth and Reality in Switzerland