Zurich/Basel, 10 November 2014 – Following the referendum on mass immigration, Switzerland is at a crossroads in its European policy, as it was after the "No" vote on the EEA in 1992. Adoption of the initiative to limit immigration and the associated possibility that quotas may be introduced bring a certain risk that the EU, by canceling the agreement on freedom of movement, could terminate the Bilateral ITreaties by invoking the "guillotine" clause.

In the current debate on European policy in Switzerland, two points of view collide. There are those who see a success story in Switzerland's independence, while others see the success of Switzerland in its openness and the closest possible integration into the European domestic economy. In view of the split in the country's European policy, the forthcoming debate should focus on which direction might be more promising in the long term. The bilateral agreements can be viewed as a middle ground between the two opposing viewpoints, resulting out of necessity from the "No" vote on the EEA. According to UBS economists, the objective of the bilateral agreements remains integration of Switzerland into the EU that is as advantageous as possible. At the same time, however, political autonomy and economic independence should be preserved to a large extent.

The bilateral approach has been very successful from an economic perspective so far. While most countries suffered deep recessions as a result of the financial crisis and are only slowly recovering, the Swiss economy positively flourished during the same period, with average growth of 2%. UBS attributes half of the economic growth to immigration, which has greatly increased as a result of the agreement on freedom of movement. In this respect, Switzerland has benefited to an enormous extent from a "brain gain" from European countries.

The uncertainty in the aftermath of the referendum to limit immigration now threatens to adversely affect Switzerland's economic development. According to a survey by UBS, 26% of companies plan to reduce their investments in Switzerland as a consequence. The majority of companies are concerned about the future availability of skilled workers.

It is difficult to forecast which way Switzerland will take in its European policy. It also depends on what the EU does. As UBS Chief Economist Switzerland Daniel Kalt said during a media breakfast in Zurich, bilateralism should still be followed for the time being, as a middle path that has so far been successful. This would reduce uncertainty not only within the country, but also internationally. In addition, it would help to ensure that Swiss companies retain access to the European single market and stabilize relations with the EU.

UBS revises forecasts for Swiss economy

The revision of the national accounts has brought about a change to the previous history of gross domestic product growth. UBS has adjusted its growth forecasts accordingly. It expects gross domestic product will grow 1.6%, despite a rather disappointing second quarter in the current year. For 2015, UBS economists expect slightly lower economic growth of 1.4% on an annualized basis. The main drivers of solid growth, i.e. low interest rates and high immigration, should continue to support the economy beyond the forecast period to the end of 2015. The increasing economic uncertainty is also likely to dampen the level of investment in the future.

Sources: Seco, UBS

In developing the UBS CIO WM economic forecasts, UBS CIO WM economists worked in collaboration with economists employed by UBS Investment Research. Forecasts and estimates are current only as of the date of this publication and may change without notice.

UBS AG

Media contact

Daniel Kalt, Regional CIO Switzerland
Phone +41-44-234 25 60, daniel.kalt@ubs.com

Veronica Weisser, UBS Chief Investment Office WM
Phone +41-44-234 50 62, veronica.weisser@ubs.com

Sibille Duss, UBS Chief Investment Office WM
Phone +41-44-235 69 54, sibille.duss@ubs.com

UBS outlook Switzerland: www.ubs.com/outlook-ch-en
UBS publications and forecasts for Switzerland: www.ubs.com/investmentviews