Swiss experts: Debt brake worked for us

Euro sauvetage.jpg

As EU leaders will rubber stamp the new Treaty on fiscal discipline at a summit this week (1-2 March), Swiss policymakers have tried to reassure Brussels’ counterparts that “rigid” fiscal rules and tight budget discipline will turn out to be good for Europe, as they have worked out for Switzerland.

Even though there is spreading concern in the EU that rigid budget rules would hamper economic growth and development, the Swiss are confident that a debt brake to be enshrined in national constitutions will allow Europe to exit from the dire state it is in.

“The more rigid the rules are, the better it is in terms of credibility,” Fritz Zurbrügg, head of the Swiss federal finance administration, said at a gathering of policymakers in Brussels this week. “But we also need to get it right in terms of flexibility.”

The Swiss lesson

After a decade with large budget deficits in the 1990s, Switzerland introduced the so-called 'debt brake' in 2002, after it was approved by 84.7% of Swiss voters. The brake sets a limit on expenditures and sanctions kick off in case of deviations. Swiss public debt was reduced from 65% to below 40% of GDP today.

“If you don’t have rules that work, you will lose credibility and public support,” stressed Zurbrügg.

A European Commission 2008 study showed that there were 67 instruments put in place by EU member states to ensure fiscal discipline, on top of the Maastricht criteria meant to regulate the eurozone.  Yet, public debt grew from 70% to 85% of GDP between 2005 and 2010 in the euro area.

The fiscal compact treaty to be signed this week would normally require ratifying members to keep their deficits within 0.5% of GDP.  But it offers basic exceptions, such as a severe recession or an existing bailout agreement.

Still critics in Switzerland say that the debt brake, which also includes a flexible mechanism in exceptional circumstances, has prevented the country to invest enough, thereby harming the interest of future generation and reducing growth perspectives.

It is all a matter of flexibility, said Rolf Widmer, finance minister of the Swiss Canton of Glarus. The debt brake only applies for the federal budget, but cantons are able to set up their own rules to ensure their financial health and they do it responsibly. Indeed in 2009, cantons accounted only for 26% of the Swiss debt to €46 billion, out of the total €173 billion, while the federal budget amounted to €92 billion, or 53% of the total.

“The strength of the rules makes a difference,” said Lucio Pech from the European Commission, adding that it’s key for building confidence in financial markets, but more needs to be done in order to build political ownership in EU countries.

Balancing flexibility, credibility

Finding the balance between flexibility and credibility has been a difficult exercise, the Swiss experts agree.

“Fiscal rules are a part of a mosaic and the 10-year experience we have of the debt brake shows that in good time we were able to convince Parliament to save. But more importantly when we went into financial crisis in 2009 the debt brake proved we had enough flexibility to deal with the refinancing of UBS for example,” Zurbrügg said.

Also, at a time when the International Monetary Fund was urging Switzerland to pump more money into the economy and calling for a stimulus package, the Swiss Parliament decided to limit such money injections because of the debt brake rules. “It gives Parliament this self-control instrument and the backing is across all parties, because they know that 87% of the population has voted for it,” Zurbrügg added.

Brussels’ analysts concurred with the Swiss, but underlined that financial crises have long-lasting, if not permanent, negative effects. Most European countries have already lost several percentage points of GDP and it is expected that they would do the same in the second recession.

“There needs to be a balance between responsibility and solidarity,” cautioned André Sapir, professor of economics at Université libre de Bruxelles (ULB), stressing that fiscal rules cannot be taken in a vacuum.

Sapir stressed that countries cannot have balanced budget rules without having a stability mechanism at a federal level. “If you don’t have that kind of fiscal stabilisation mechanism you will only feel the budget rules and you will have to adapt by being flexible, and you are going to need so much flexibility that the rules will become meaningless,” he said, stressing the EU has focused too much on the fiscal rules overshadowing the stability and solidarity side.

The Belgian professor insisted that flexibility should not be set ad hoc but rather be foreseen in an institutional mechanism.

All EU countries – except Britain and the Czech Republic – have agreed on a new treaty for tighter fiscal discipline and deeper economic integration to save the euro currency.

But as attention now turns to the legal details and ratification process, questions are being raised as to what will happen to countries that fail to ratify, with some fearing exclusion from the club.

Read our LinksDossier: Europe's new treaty: Towards a multi-speed union.

Subscribe to our newsletters