What the Draghi report means for Switzerland

The golden years are over. That is the unpleasant message of the Draghi report. On behalf of the EU, the former head of the European Central Bank investigated the state of Europe’s competitiveness. The facts are clear: the old continent is falling behind, prosperity is already a third lower than in the USA – and the gap is widening.

The ageing population in particular is weighing heavily on Europe: the economy will not be any bigger in 2050 than it is today, warns Mario Draghi. Unless we succeed in increasing today’s productivity growth. The situation is comparable to a cyclist who has been riding on flat ground and now has to climb a hill: in order to maintain the speed, he has to pedal harder.

This also applies to Switzerland. In contrast to the EU countries, we are initially travelling at a somewhat higher speed – this gives us a certain reserve. Nevertheless, we too will have to pedal uphill in the future. This is due to the domestic working population, which has recently been shrinking. In this decade alone, 170,000 more people will reach retirement age than there are young people coming up. In addition, because people are working less, the volume of work is also falling.

Immigrants fill the gap

But when the economy has fewer workers available, prosperity also comes under pressure. Of course, companies often recruit the missing people from abroad. Recently, immigration has increased sharply again – which the domestic population is feeling not least in the form of rising housing costs.

This shows the dilemma that our country is in. We would prefer to have a fiver and a roll – in other words: the foreign workers should keep the economy running, but should not place a burden on our own infrastructure. The closest that comes to this ideal are the cross-border commuters, whose numbers have also doubled in the last twenty years.

Regardless of how Switzerland wants to control its immigration, we can only defend our prosperity if we work more and more efficiently in the future. The Draghi report is helpful in this regard: both in Europe and in Switzerland, we are debating at length how we want to divide the cake. But at the same time, we are ignoring where the real problem lies: we have to ensure that the cake does not suddenly become smaller.

Productivity is key

One could dismiss this as a doom-mongering scenario: in our neighbouring country Italy, however, inflation-adjusted incomes have been stagnating for over two decades. This example shows what is wrong with Europe: the working population is not productive enough. The Draghi report has highlighted this perfectly. 70 percent of the lower prosperity compared to the USA is due to lower productivity.

Switzerland does quite well on this criterion – at least at first glance: Together with the Scandinavian countries Sweden and Denmark, we have also kept up with the productivity growth of the USA. Nevertheless, we should not be too quick to pat ourselves on the back. This dynamic is very one-sided: we owe a large part of our economic growth to a single sector, the pharmaceutical industry.

This is illustrated by the following calculation by the economic research institute BAK Economics: Over the last decade, the Swiss economy has grown per capita by 0.9 percent per year. Without the contribution of the pharmaceutical industry, however, this growth would have shrunk to a meager 0.4 percent – which means that Switzerland is lagging far behind even in sluggish Europe.

Not attractive enough for startups

Switzerland has 600,000 companies. Of these, however, only a small group decides how our country fares in global competition. These are the companies that can hold their own in the Champions League of international markets. This leads to a dangerous concentration of risk: Germany is currently experiencing this, where the crisis affecting the car companies has led to a general recession.

Switzerland must therefore create the necessary framework conditions so that as many companies as possible can compete in this top league. The USA is clearly ahead when it comes to innovative start-ups. For example, the Swiss founder of the language app Duolingo has stated that he would not have been able to achieve his success here. The company is now valued at 10 billion dollars on the American stock exchange.

It is companies like these that drive the economy forward. We have lost this awareness, too. Draghi’s wake-up call is aimed at the European Union, but the fact that we can only maintain our prosperity if we roll up our sleeves now is just as true for us.

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