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Executive summary.

The global crisis will have a lasting impact on the Swiss economy. Despite the recession, Switzerland has weathered the crisis better than other OECD economies in part owing to exports in goods less sensitive to the business cycle and resilient domestic credit markets, in part reflecting the absence of a marked housing cycle. Swift intervention by the authorities to support the country's largest bank also helped avoid an aggravation of the crisis, the large size of the financial intermediaries posing a potential risk for public finances and macro-economic stability. After a marked expansion of employment, unemployment is on the rise and some of the increase resulting from the crisis may persist. While living standards are among the highest in the OECD, the gap in productivity per hour worked relative to other leading OECD economies is considerable and trend productivity growth remains weak. Scope for expansion of financial services may have diminished.

Monetary and fiscal policies need to adjust in the medium term. The Swiss National Bank (SNB) took decisive action to dampen the recession by providing liquidity. The expansionary stance will need to be maintained until the recovery strengthens, but excess liquidity will have to be withdrawn gradually such as to ensure price stability over the medium term. On the fiscal side, stimulus has been modest. Nonetheless, expenditure reductions are needed in the medium term to adhere to budgetary rules and expected increases in ageing costs highlight the need for healthcare spending and pension reforms.

Macro-risks posed by financial intermediaries require further reforms. In view of the large size of bank balance sheets, relative to the size of the economy, there is a particular need for Switzerland to limit the probability of failure of its largest financial intermediaries. It should hence be ensured that the capital adequacy and leverage ratios for the two big banks are set such that they are dose to the highest actually observed ratios of major international banks. The SNB should lead, together with the financial market regulator, the elaboration of macro-prudential standards. The staffing level of the financial market regulator should continue to be reviewed.

Low productivity performance in sheltered sectors is denting living standards. Reforms in product market need to be pursued further. In addition, in the housing sector, restrictions on the setting of a new rental price should be removed and the adjustment of rents to market conditions ensured. Municipalities' incentives to develop buildable land should be strengthened.

Scope remains to improve productivity performance through education. The Swiss education system deserves its excellent reputation. However, outcomes at the end of compulsory education can be improved further, especially for children from modest background. Tertiary attainment of young workers is relatively low for a high income country Access to affordable childcare facilities should be widened, which would also benefit female labour supply, and early childhood education should be strengthened. Accountability of schools needs to be improved. The impact of socioeconomic background on attainment could be reduced, including by eliminating early tracking. In tertiary education, government-sponsored loan schemes for students with income-contingent repayments should be widely introduced to help students finance study fees and living expenses. With such loan schemes in place, higher study fees could be charged in tertiary academic education.
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Publication:OECD Economic Surveys - Switzerland
Geographic Code:4EXSI
Date:Dec 1, 2009
Previous Article:Basic statistics of Switzerland.
Next Article:Assessment and recommendations.

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