Switzerland has enjoyed a vigorous economic recovery since 2004. Growth has exceeded euro area outcomes for three consecutive years, after having lagged behind throughout the preceding decade. However, some of the factors fuelling the current upswing are likely to prove temporary. The significant contribution of the financial sector to the expansion has benefited from cyclical strength in global financial markets, which could be coming to an end, and manufacturing from a depreciating exchange rate and above-potential growth in important trading partners, especially Germany. On the other hand, immigration flows have increased, and they have the potential to make a longer-lasting positive contribution to aggregate supply.

Switzerland has been enjoying a vigorous economic expansion, which has benefited from buoyant financial market activity, strong foreign demand and a depreciating currency. Some of the drivers of this growth may prove to be temporary, although large immigration flows, which have contributed to substantial job creation, are likely to make a longer-lasting contribution to the expansion of potential output. Supported by high levels of employment, GDP per capita is still among the highest in the OECD. Yet economy-wide productivity is well below levels observed in leading countries, reflecting relatively weak productivity performance in sectors not exposed to international competition. While the general government’s budget has swung into surplus in recent years, strong spending growth in social entitlement programmes poses risks for the capacity of fiscal policy to contribute to enhancing prosperity.

Switzerland has had a long-standing surplus on its current account. But over the past 15 years that surplus has surged to levels unmatched by nearly any other OECD country at any point. This chapter dissects the surplus from both a balance of payments vantage point as well as from the optic of the excess of national saving over domestic investment. It then seeks possible explanations for the uptrend and assesses whether it results to any extent from market, institutional or policy failures that could call for reforms. A number of important measurement issues are raised. But the key recommendation is that the authorities should prepare for a possible sharp increase in the value of the Swiss franc if and when investors engaged in the “carry trade” unwind their positions. To that end they should examine labour, capital and product markets with a view to ensuring they are as flexible as possible and that factors are as mobile as possible, both geographically and sectorally. This will allow any necessary adjustment to a higher exchange rate to be smoothly accommodated.

Switzerland’s fiscal institutions have been successful in keeping the overall level of taxation and spending at a moderate level, and the use of budget rules at different levels of government has improved the conduct of fiscal policy. However, in recent years the increase in spending, particularly on social programmes, has been considerable. Reform of these programmes is needed not only to guarantee budgetary sustainability, but also to free up public resources that can be put to better use in promoting growth. Retaining and reintegrating people with health problems in the workplace is called for in order to cope with the pressures on the labour supply that population ageing will create. The tax system could be simplified in order to reduce the administrative burden placed on firms, especially small- and medium-sized enterprises and start-ups. In addition, tax-induced distortions to labour and capital allocation decisions should be eliminated in order to increase productivity growth. This chapter examines the fiscal outlook and explores ways to improve the role of the government in establishing a firm basis for sustained growth.

Measures to make the regulation of product markets more conducive to competition play a prominent role in the government’s “growth package” of measures to stimulate economic growth which are in the process of being implemented. This chapter discusses these measures und suggests further improvements. Notwithstanding significant reforms in recent years, competition law and its enforcement are still weaker than in other OECD countries. Scope for making regulation of product markets more competition-friendly is large in the network industries. While sector-specific regulators have been introduced, their independence needs to be strengthened. The reform of the electricity supply law provides the main building blocks opening the industry to competition, but vertical separation requirements of the electricity grid from electricity generation and trading activities need to be strengthened. In telecommunications, restrictions in access of competitors to the local loop limit the scope for lowering prices and improving quality of service in broadband connections. Measures still need to be taken to prevent discrimination against market entrants in the railway passenger services market and much scope exists to widen competition in postal services. Progress in lowering the degree of protection in the proposed legislation on agricultural policy 2007-11 is modest. Trade barriers can also be lowered for manufactured goods through the adoption of the Cassis de Dijon principle.

Situated in the centre of Europe, Switzerland is among the OECD countries with the largest proportion of foreigners in the population. This immigration, which is closely linked to the attractive economic situation of the country, has become more diversified over the past decades, with the entry for instance of nationals of the former Yugoslavia. These often low-skilled workers have nevertheless faced difficulties in entering the labour market and integrating into social life. The Swiss migration policy was reoriented in the last few years with the adoption of the Agreement on the Free Movement of Persons for EU/EFTA countries and the recruitment of nationals of third countries focussed on skilled persons. Some efforts are also underway to improve the integration of the existing stock of foreign workers living in the Confederation. This chapter, which analyses the economic impact of immigration in Switzerland, examines the recent actions taken and proposed avenues, in particular in the education and social domains, for taking better advantage of the potential of the foreign labour force.