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Corona and the Future

Crisis-Proof: Switzerland and the Pandemic

Now that coronavirus cases are dwindling, the economic fallout of the pandemic is becoming more apparent. One thing is clear: Countries that were well equipped before the crisis – like Switzerland with its social welfare system – will be able to cope better and get back on their feet more quickly.
Thomas Gull and Roger Nickl


Social Distancing
Switzerland is relatively well prepared to absorb the economic shock of the coronavirus pandemic. In a crisis like this, states with less well developed social services show structural weaknesses.

Coronavirus has washed over the world like a tsunami, leaving death and destruction in its wake. The toll is great – not only in terms of lives, but also socially and economically. However, not all countries have been hit equally, with the Southern European states of Italy and Spain, Latin America, and (somewhat more surprisingly) the United States bearing the brunt of the pandemic. These countries have seen a collapse of both the health care system and the economy alongside a mounting federal debt load.

That a deep economic crisis would follow on the heels of a health care crisis was not inevitable, however. The origins of the economic crisis are structural in nature, and the weaknesses of certain countries are now being exposed. States like Spain and Italy were already vulnerable before the crisis. Their ailing health care systems had been weakened by austerity measures, and their economic structures and social welfare systems were less resilient and productive than those of their Northern European counterparts. Take the example of the tourism sector, which has been hit particularly hard by the crisis: In Southern Europe, it comprises 10 to 20 percent of the GDP, while this figure amounts to just 5 to 10 percent in Northern Europe.

Losing your job – and your health insurance

Even more devastating is the fact that many people in these countries work in the informal economy – meaning they work under the table, have precarious employment contracts or no employment contracts at all. This means that they have insufficient access to social security programs – and in the US, also to health care services. “These people fall through the cracks in times of crisis,” says Silja Häusermann, professor of comparative political economy at UZH. In contrast, most employees in Northern Europe have regulated employment contracts that grant them access to social insurance and workers’ protection. “Switzerland and Germany don't have to improvise during the crisis because they already have the right tools for stabilizing the job market and helping workers,” says Häusermann.

While Southern Europeans and Americans had to find creative ways to help the uninsured during the crisis, this wasn't necessary in countries with well-developed social welfare systems. Switzerland's primary weapon has been short-time work compensation, a system in which companies can temporarily reduce their staff’s working hours without having to lay them off. The unemployment insurance fund covers up to 80% of their earnings.

The short-time work system is an instrument that is well tailored to countries like Switzerland and Germany, where the most important industries require a workforce of well-educated specialists. “These specialists should be able to keep their jobs, even if production takes a temporary tumble during a recession,” says Häusermann. “In this kind of coordinated market economy, it would be highly inefficient for engineers to have to work as waiters and then miss the opportunity to reenter their profession.” One important advantage of short-time work is that it allows companies to retain their talent pool during a crisis so that they have the right staff on hand when the economy starts to recover.

As it turns out, the welfare states of the developed world are set up in very different ways. Häusermann explains it as a scale with three points: At one end you have Scandinavia, with generous benefits funded by high levels of taxation and wealth redistribution, and at the other end sits the United States, with lower taxes and a greater emphasis on freedom and risk. Countries like Switzerland and Germany lie somewhere in between, and according to Häusermann, at the present moment this is ideal: “Because the social security systems in these countries are primarily set up to stabilize the job market.”

Learning from history

Switzerland is relatively well prepared to absorb the economic shock of the coronavirus pandemic. This is the result of a learning process that started around 100 years ago, says historian Matthieu Leimgruber. During the First World War, many families fell into poverty as the male heads of household were forced to serve in the military, and their meager pay was far from sufficient. The misery of many working-class families was one of the factors that triggered the national strike of 1918. “To prevent this from happening again, Switzerland introduced income compensation allowance in 1940,” explains Leimgruber. This covered part of earnings lost as a result of military service.

The program was a success and had an incredible teaching effect. “People realized that these kinds of instruments can solve big problems in an easy way if everyone contributes a relatively small amount,” says Leimgruber. The income compensation allowance paved the way for the AHV – Switzerland's old age and survivors' insurance program – which was founded in 1948 and expanded in 2004 to include maternity coverage. The AHV is also being used during the current crisis to help self-employed people who pay into the fund but are usually not entitled to unemployment payments.

Unemployed overnight

Many people in Switzerland are having a new experience with their institutions, says Leimgruber. “They aren’t free and sometimes seem bureaucratic,” he remarks. “But they are liberating people from fear of the future.” This is playing out in the current crisis: While millions of Americans experienced an overnight loss of their livelihoods – and often their health insurance, too – unemployment figures in Switzerland have only risen slightly thanks to the short-term work system. What's more, even people who have lost their jobs still receive 80 percent of what they previously earned. Leimgruber expects that the Swiss unemployment rate will also be high by the end of the year, but not nearly as severe as in the US.

He says that collective institutions such as the unemployment insurance fund allow us to live lives that are more worry-free – and more democratic. “People in poverty are not really free and have difficulty taking part in democratic dialogue,” explains Leimgruber. He says that this was an important argument made in support of establishing the AHV. The system has proven to work. Following the Second World War, many of Switzerland’s elderly fell into poverty. Today, poverty in old age has largely been eradicated. The history of the Swiss welfare system shows that we are more than capable of learning from the problems of the past and taking the right steps to correct them. As Leimgruber puts it, “Societies that head into the future while being conscious of the past will be better prepared.”

The crisis is also allowing an institution to shine that is often decried by liberal economists as unnecessary or invasive: a strong state. It currently seems as though a strong state – with its seeming omnipotence and all the power that it usually wields behind the scenes –  is the only institution that can save us. “With the widespread implementation of short-term work and emergency federal loans, we are currently witnessing the invisible hand of the state and its power to do good,” says Leimgruber, referring to the invisible hand of the market – a term famously coined by economist Adam Smith (1723–1790) to push back against state intervention in the economy. However, the situation is currently reversed: The free market is begging for a handout while the state shows its Herculian might – a situation that can trigger fears not of economic ruin but rather of a creeping pandemic socialism.

Economic historian Tobias Straumann is convinced that this won’t come to pass. “After the 2008 financial crisis, the state withdrew from the economy again rather quickly,” he says. Straumann also doesn't believe that the state will gain any long-term power or repute from the situation. “When we lay out all the facts, we could very well end up with all of this potential trust actually transforming into growing mistrust,” he says. “This could happen if social distancing policies and the economic limitations and fallout come to be seen as exaggerated and unjustified.”

Straumann is optimistic that society will be able to digest the economic consequences of the pandemic, just as it did with the financial crisis of 2008. He predicts that polarization within society will continue to pick up pace, however: “The election of Donald Trump and Brexit were also consequences of the 2008 crisis. The current crisis will widen the political divide even further.” Häusermann shares this view. “The crisis will exacerbate existing inequality,” she says. This applies not only to inequalities between countries but also between different segments of the population within a country. According to Häusermann, the fallout from the corona crisis – particularly higher levels of state debt and lower levels of tax revenue – will weaken rather than strengthen welfare states over the medium term. “This creates less space for balancing out social inequality,” says the political scientist.

Solidarity wilting on the vine

One of Häusermann’s own research findings is particularly relevant in this context. As part of the Welfare Priorities project funded by the European Research Council, Häusermann and her team examined which social benefits people prefer in times of austerity. According to Häusermann, when people perceive resources to be scarce, they show more self-interest rather than more solidarity. For instance, they rank their own pension payments as more important than wealth distribution measures in support of people with low incomes, the unemployed, migrants or childcare services. The much-lauded solidarity shown during the corona pandemic may turn out to be a delicate plant that wilts just as quickly as it sprouted up.

It is clear that we need to prepare ourselves for future crises – for instance by creating more buffer, as was done in the wake of the 2008 financial crisis when banks were forced to increase their capital reserves. “Big crises like these simply cannot be predicted. This means that we need to have strategic reserves of things like medicine, medical products and infrastructure,” says Straumann. “These are things that may sit untouched for years and years but that need to be immediately accessible when a crisis strikes. This is incredibly expensive to maintain, but it is the only course of action we can take.” He also believes that our dependence on China also needs to be reexamined. According to Straumann, China has not been a good team player in the international system for many years, for instance when it comes to participating in the World Health Organization or the international trade and patent system. He says that China needs to be pressured to adhere to rules, perhaps even with the use of sanctions. “We also need to diversify a lot more and invest in other countries like India and Indonesia. When it comes to outsourcing production, it doesn't always have to be China,” he says, pointing out that the production of certain goods, particularly medical items, should in any case be reestablished domestically.

Weirdos to the rescue

Economist Joachim Voth has a unique suggestion for preventing future crises. “Maybe we need to set up a committee of science fiction authors,” he says. According to Voth, people tend to try to fix crises by using the same methods that were applied during the last crisis. “But things change,” he says. “So maybe we need to fund 10 or 20 weirdos to reflect on what the future may hold and what it could all mean for us.” Voth expects that our experiences during the corona crisis will compel us to reveal more private information in the future – cell phone data, for instance, that can be used to trace infection chains. We should also expect more limitations on our freedom of movement.

Our enormous level of international mobility is one of the main reasons that the virus was able to spread so quickly and extensively. Voth says that it would be conceivable for Europe to set up special quarantine measures for travelers coming from regions at higher risk of zoonotic diseases. “This would primarily apply to countries in the Far East and Africa,” he says. “People from these disease hotspots would have to be quarantined upon entering Europe.” Measures like these could remain in place until there is evidence that the travelers’ countries of origin have no more cases of zoonotic disease for a particular period of time. Voth acknowledges that such a scenario may sound discriminatory – and it is. “But we have no other way of protecting ourselves,” he says.

He also urges people to approach the future with a healthy dose of pessimism, which he claims is a better guide to navigating a crisis than optimism: “You have to be a pessimist by nature to understand how bad things can truly get during a crisis. Optimists who always see the world in a rosy light have a lot of advantages in life – but not during a pandemic.”