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Switzerland Contributes to EU Growth

After the USA and ahead of China, Switzerland is the second largest buyer of goods and services from the European Union. With growth being on top of the Union's political priority list, Switzerland's role as contributor to the current growth agenda is not to be underestimated.

The European Union has expanded from six member states to 28 and with a population of more than 500 million it has become the world's largest single market. It is pretty obvious that Switzerland due to its location in the heart of Europe makes the EU its biggest trading partner. But most people are unaware of the close economic and financial ties existing between the EU and its main external trading partners, with the US in the lead followed by Switzerland and China. "They contribute to the EU's economic activity and welfare through trade, finance and other linkages," the Swiss Finance Council (SFC) writes in a discussion paper released in February 2015. (See box below for additional information about the SFC). The contributions of the EU's external trading partners to the union's economic growth and job creation are significant and should neither be overlooked, nor underestimated.

Large Trading Flows

Unsurprisingly, trade within the EU accounts for around 60 percent of the EU's total good exports and 55 percent of its services exports. But the EU's extra-European trade is also buoyant. The EU's largest external trading partner is the US. More surprisingly, the runner-up is Switzerland with a gross domestic product (GDP) 25 times smaller than that of the US. (See adjacent figure) Switzerland's ties to the EU are very close, with goods imported from the EU totaling three-quarters of Swiss goods imports, a figure exceeding 170 billion euros in 2013. Services imported by Switzerland from the EU reached a total of 83 billion euros that year. The large weight of the EU services exports to Switzerland is worth highlighting, as transportation costs for services are low and geographical proximity should thus be a less important factor. Cross-border trade is particularly intense in financial services, professional services, transportation and tourism. In 2013, the trade balance between the two economies resulted in a record Swiss trade deficit.

Switzerland Acts as Stabilizer in Difficult Times

The intensity of the relationship between the EU and Switzerland also reveals itself in their growth and trade dynamics. When an economy experiences a slowdown, exporting to another more buoyant economy provides important support. An acceleration of 1 percentage point in Swiss GDP, for example, boosts the EU's export to Switzerland by nearly 3.5 percentage points. The sensitivity of Swiss exports to the EU growth rates is somewhat smaller: a 1 percentage point increase in the EU's GDP leads to a 3 percentage point increase in Swiss exports. Prior to the first set of bilateral agreements between the two economies this acceleration effect was somewhat smaller: a 2 percentage point increase. "This shows how both sides can benefit from and reinforce growth in each other's economy, and suggests that abandoning the bilateral treaties poses major risks to Swiss and EU exporters," the SFC warns. Gains from extra-EU trade were particularly apparent following the recent financial crisis, especially in the wake of the euro crisis from 2010 and onwards. (See adjacent figure). The EU has since benefited from the relatively strong growth in demand from its extra EU-trading partners – particularly from the US, Switzerland, Norway and Canada.

Swiss Firms Create More Than 1 Million Jobs in the EU

A country's ability to attract foreign direct investment (FDI) is an important indicator and determinant of its competitiveness. Shared languages or other political, cultural and legal affinities typically also play an important role in facilitating FDI. The global stock of FDI was approximately 19.3 trillion euros at the end of 2013, with the EU being the leading FDI destination. Switzerland's openness to both trade and investment makes it the second-largest FDI investor in the EU behind the US, with 43 percent of total Swiss FDI invested there or 567 billion euros. The massive presence of Swiss firms across the EU results in the employment of nearly 1.15 million people. On the other hand, the EU companies made FDI worth 674 billion euros in Switzerland in 2013, employing around 230,000 people – a figure representing 5 percent of the total Swiss employment. "Swiss companies are important employers in the EU, creating almost five jobs in the EU for every one job created by EU employers in Switzerland," the SFC stresses.

Strengthened Cooperation Wished

Strengthened political ties between the EU and non-EU countries or other large trade areas could produce large trade-promoting effects. "It thus makes economic sense for the EU to establish ties that are as close as possible with economically large countries, such as the US, as well as with proximate, very open economies in Europe such as Switzerland and Norway," the SFC says. Exploratory talks between the EU and Switzerland with the aim of defining an institutional framework for further developing bilateral and sectorial cooperation have taken place, but the search for an agreed approach will take time, as Swiss voters last year approved an initiative requesting the country's government to steer immigration by means of quotas. Such quotas are, however, contrary to the very principle of the free movement of persons enshrined in the bilateral agreement between the two partners. "Over the coming years, both the EU and Switzerland would certainly benefit from a further deepening of their unique relationship, especially if the bilateral process can be reinforced by agreed institutional rules and be extended, namely to financial services. Consumers of financial services both in the EU and Switzerland would benefit clearly from a true playing field, as the cross-border expansion would add to the efficiency of intermediation of savings, with the Swiss capital markets becoming an important component of the future European Capital Markets Union," the SFC says. Europe stands at critical juncture now. Encouraging greater cooperation between the EU and its partners such as the financial center Switzerland would be highly welcomed.