In the Swiss Sunday newspaper, NZZ am Sonntag, of 8 March 2009, two economists express critical opinions on the government’s active economic stimulus packages.

Jean-Daniel Gerber, Director of the State Secretariat for Economic Affairs (SECO) and Urs Müller, Chief Economist of BAK Basel Economics, are reserved by comparison with others, such as Olivier Blanchard, IMF Chief Economist (see one of the most recent blog articles).

Müller draws particular attention to automatic stabilisers such as unemployment benefits. Expenditure in this area increases when unemployment rises, and this automatically counteracts the fall in consumption. In boom phases, by contrast, there are fewer unemployed people, and the unemployment fund accumulates a surplus.

If the public authorities maintain a steady expenditure path, this will automatically result in surpluses in boom phases and deficits in crisis situations, thereby helping to stabilise the economy. By comparison, the contribution of economic stimulus programmes is small. Moreover, they are only to be advocated if they kick in during the recession, are limited in time and are targeted at industries which are badly affected by the crisis, says Müller.

Since Switzerland is a small open economy, a large part of the economic stimulus measures are lost to Switzerland and dispersed abroad, via imports. For Gerber, the main task of the Swiss government is to create favourable conditions in the domestic market and open up foreign markets by means of free trade agreements.

In Switzerland, the current economic crisis must therefore be solved, first and foremost, by stabilising the financial markets. Economic stimulus packages should be restricted to measures that are effective, rapid, targeted and limited in time, he adds.

On behalf of the iconomix team

Ronald Indergand

Between October and December 2008, the Swiss National Bank (SNB) lowered its key rate, the three-month Libor, from 2.57% to 0.5%. The interest rate for one-week repo transactions is now close to zero. Given that interest rates cannot fall below zero, a further easing of monetary policy using the classic interest rate instrument is hardly an option, as there is very little room for manoeuvre left.

In a speech held on 21 January 2009 at the University of St. Gallen, SNB Vice President Philipp Hildebrand asserted that this did not mean that the SNB is incapable of action. There are other options available to it, he explained.

Here are the possibilities he mentioned:

First, the SNB can try to influence not only short-term interest rates, but also long-term interest rates. More often than not, investment and consumer decisions are based on the long-term rates. To this end, the SNB has already extended the terms of its repo transactions to up to twelve months. Another option would be to purchase Swiss Confederation bonds. This would push down the yields on such bonds and serve as a signal for lower corporate bond interest rates. The SNB could even purchase long-term corporate bonds itself. All of these measures would help lower private borrowers’ interest expenses.

Second, the SNB can also influence the exchange rate, as it has often done in the past, by selling the Swiss franc against foreign currency. A weaker franc encourages foreign trade and boosts the economy.

These steps would result in an expansion of the money supply. Hildebrand therefore added that the National Bank will [if necessary] reduce the liquidity which was temporarily created as soon as it is no longer needed; i.e. before it shows signs of becoming inflationary.

On behalf of the iconomix team

Boris Kaiser