“We are gradually becoming a power-dominated economy”

Okay, let’s talk about the EU. How will it react to the current situation?Rathke: Two scenarios are conceivable: either it becomes more unified or it falls apart. Both are possible. But I am fairly optimistic. Germany’s growth package is a case in point. This will – at least potentially – stimulate growth.

Potentially?
Mikosch: Part of this package concerns defence spending. Although this is vital to security policy, it will have hardly any positive effects on the economy as a whole. You occasionally read comparisons with Silicon Valley, which is said to have emerged from military spending, but it is wishful thinking to believe that something similar could happen here and now.

The other part of the package consists of infrastructure investment. Could this boost the economy?
Mikosch: Absolutely. Germany has a lot of catching up to do – in transport, in digital technology and in human capital: the country invests less in education than the EU average. However, I take a critical view of funding infrastructure investment through debt.

Rathke: If the funds are used wisely, growth can certainly be stimulated. But we must not forget that this is still debt – a bet on the future.

Will Switzerland also be able to benefit from Germany’s fiscal package?
Rathke: Yes, if the economy improves in Germany we will also notice it here. Germany is still the main export market for Switzerland’s manufacturing industry.

Germany has relaxed its debt ceiling for its growth-stimulus package. Is this a viable option for Switzerland as well?
Mikosch: No. In Germany the funding of at least military spending can be justified by a security emergency. I don’t see any comparable emergency in Switzerland.

Rathke: Our low national debt is a strategic advantage. Switzerland is considered stable, has considerable fiscal headroom in the event of an emergency and benefits from a low cost of capital...

…but is grappling with an increasingly strong currency. Manufacturing industry is already being hit. Any further appreciation of the Swiss franc is likely to exacerbate the situation.
Mikosch: Yes, but you mustn’t forget that a strong currency also has advantages. Swiss industrial companies import many inputs – such as raw materials and semi-finished products – from abroad. These become cheaper with a strong franc. And consumers benefit too.

So will the Swiss National Bank (SNB) not intervene?
Rathke: In the past it would probably have weakened the franc to prevent inflation from falling below zero and thus outside the range defined by the SNB as price stability. This is now more difficult because the US has already accused it of currency manipulation. I therefore expect to see a rate cut in June – partly because of the impending economic slowdown.

Then we would be back to zero interest rates. Is this a problem because the SNB would then no longer be able to lower rates without entering negative territory?
Rathke: In the past the SNB has essentially based its monetary policy on two instruments: controlling short-term interest rates and intervening in the foreign-exchange markets. If one of these instruments is no longer available to the usual extent, the remaining one must take on its function. However, there is an effective floor for interest rates, above which investors begin to withdraw their money from banks and prefer to hold it in cash instead.

And the SNB’s American counterpart, the Federal Reserve (Fed)? What will it do?
Rathke: The Fed is under greater pressure than the SNB. In addition to price stability its mandate also includes the labour market. This dual mandate causes a dilemma: to combat inflation, it would have to raise interest rates; to create jobs, it would have to lower them. Trump wants to cut interest rates to boost employment. But his high import tariffs have increased inflationary pressures. If I had to venture a prediction, I would say that US interest rates will not fall much further by the end of the year.

Trump’s 90-day suspension of import tariffs ends on 9 July this year. What happens after that?
Mikosch: I suspect that ultimately only some of these tariffs will actually be introduced. Trump knows that if he goes too far, it will harm the US economy. He will probably apply the tariffs in a targeted way – for example against China or certain industries that he wants to bring back to the US. I fear that the pharmaceutical industry could also be affected…

Rathke: ...and that would hit Switzerland hard. Pharmaceuticals account for around half of our exports, and 23 per cent of these go to the US.

Are there any sectors in Switzerland that are benefiting from the current situation?
Rathke: Yes, the consulting industry is one example. Companies need to rethink their supply chains, adapt to customs duties and set up complex transfer-pricing systems. The financial sector can also benefit to some extent from higher volatility – at least as long as there is no systemic crash.

And, finally: protectionism was long considered outdated, so why is it now celebrating a comeback, even though its flaws are so obvious?
Mikosch: The economic doctrine that has prevailed since Reagan and Thatcher has long ignored its social consequences. It is true that the dismantling of government regulation, the opening of markets and the liberalisation of trade and capital flows have significantly increased global prosperity. But this model has also produced clear losers, and these losers are now rebelling.

Rathke: Anyone who has lost their livelihood as a result of globalisation – such as an assembly-line worker in Detroit or a machine operator in the Ruhr region – can hardly be comforted by macroeconomic prosperity statistics. They want their job back and so vote for the politician who promises them that.

Mikosch: Europe has tried to combat the social tensions of globalisation by, for example, expanding its welfare state. The US has not done this. However, redistribution to support the losers is the price that liberals have to pay in order to maintain social cohesion and economic openness.