
Global Debt, Tariffs & Extreme Government Cuts | Stefan Legge (#16)
Episode Summary
Stefan Legge, Vice Director and Head of Tax & Trade Policy at the University of St. Gallen, joins me to unpack the economic forces shaping Switzerland and the world. With his expertise in trade, debt, and policy reform, Stefan explores how small countries like Switzerland navigate a rapidly changing global economy.
Expect to learn why free trade agreements with countries like China and India are critical for Switzerland, the potential fallout of U.S. tariffs, and what lessons can be drawn from Argentina’s experiment with extreme government reduction. Stefan also dives into the challenges of managing national debt, how Switzerland maintains its economic stability, and his surprising take on Bitcoin’s role in the future of finance. This conversation is packed with insights for anyone curious about global economics and Switzerland’s unique approach.
Meet Stefan Legge: International Tax & Trade Expert
Stefan Legge is the Vice Director and Head of Tax & Trade Policy at the University of St. Gallen. With extensive experience in international economics, Stefan focuses on trade relationships, public finance, and the dynamics of global economic policies. His work offers invaluable insights into how small nations like Switzerland adapt to global challenges.
Contact
linkedin.com/in/stefan-legge-b35611132
Episode Transcript
Mike: [00:00:00] I thought an interesting place to start, especially given your background, is Switzerland’s trade relationships and where we are today, especially with a lot of the news regarding the US.
But before asking you anything specific, um, diving into this really as someone who isn’t knowledgeable in this area, can you first define for me what is a trade relationship and what are the different types of trade relationships that countries can have with each other?
Stefan: Yes, uh, sure. And, uh, the first thing you probably want to know is that, uh, pretty much every country in the world is a member of the World Trade Organization that was founded in 1995, um, as a successor to what was known, known as gat, the General Agreement on Tariffs and Trade.
All you have to know about that is that pretty much every country in the world [00:01:00] has signed up. To an international trading system and in that trading system Um, there’s a principle that’s called most favored nation, which means that any preference switzerland or any other country gives to Another country has to be given to all countries.
In other words if switzerland Uh, import something from Germany and we say, well, t shirts or cars from Germany are duty free. There’s no import tax, then that has to apply to all other countries. So, in principle, all countries of the world, if they have no additional agreements trade on that basis. Now, the relationship can be better and the relationship is better if you have a bilateral trade agreement, a free trade agreement.
That means, uh, for example, Switzerland with the European Union or with China or many other countries, we have signed a treaty that says, well, [00:02:00] we actually favor you. So imports from China, for example, are duty free, whereas from the United States, they might not be duty free. So this is a free trade agreement.
It doesn’t mean that all imports are free of tariffs, but usually most of the imports are then freed of any tariffs. And you can go beyond that. The trading relationship with the European Union, of course, is a lot more than just a free trade agreement. We have many other additional agreements that facilitate international trade.
between the European Union and Switzerland. So for example, the mutual recognition of standards or free movement of people or any other additional, um, access to, uh, uh, in, uh, to the, to the market of the other country. And so if you want to go beyond that, then you have something like a common market, as you see in the European Union.
Um, and eventually you might have something even closer when you have a common [00:03:00] currency. So, to, to put it into a nutshell, um, all countries of the world can trade with each other, uh, but, uh, you have additional agreements that facilitate the international trading relationship.
Mike: What goes into a free trade agreement?
So, my understanding is, I mean, Switzerland has few, there’s one that’s been around for a long time with China, there’s one that’s quite recent with India, which I’ll ask you about later, but in general, to develop something like this, is it, who’s involved besides the two countries wanting the, um, change in trade?
Stefan: Well, that depends if it’s a bilateral trading relationship, or bilateral free trade agreement, then Uh, it’s the two parties. Um, of course switzerland, uh often signs free trade agreements with what is called after That is including norway Uh iceland and lichtenstein. So we sometimes do that as a group.
Um, but then yeah, it’s uh, the two countries, uh sitting down [00:04:00] and uh Figuring out what concessions they want from each other and what they grant Um, the starting point is usually on international trade regarding tariffs Um, which tariffs is Switzerland willing to cut or, you know, completely abolish, um, on which product?
So you really go through product by product. So for Switzerland, it’s typically very important that when we sign a free trade agreement, we have very good access to the foreign market for the product that we actually sell. Um, or that we want to sell, uh, to the, to the foreign market. Um, and of course the other party, the other country will ask Switzerland, uh, to lower tariffs on products that they want to sell.
And, uh, then, you know, for many products, there’s not much of a dispute because countries have different strengths. Um, but sometimes when we can currently negotiate with what is [00:05:00] called Mercosur countries in. South America, like Brazil, they want to export agricultural products to Switzerland. And of course here in Switzerland, uh, not everyone is in favor of agricultural imports.
And that means, uh, uh, one party might ask for a concession that Switzerland is then not willing to grant. So the starting point is the reduction of tariffs, but over 10, 20 years, increasingly. Uh, bilateral trade agreements are about more than just the reduction of tariffs, that is partially because tariffs are already very low.
And in the case of Switzerland, uh, starting in this year, all tariffs on industrial products have been abolished. No matter where they come from.
Mike: But in, so I understand it would be between those two parties, but in reality, what are What influences, what other influences are there? So take an extreme [00:06:00] example, say if Switzerland today decided they want to enter a free trade agreement with the Russia as an extreme example, what, I’m sure there would be other parties involved, um, wanting to get in between this agreement.
No, like the U. S., the, the EU.
Stefan: That could happen. Uh, although usually, um, that doesn’t play a big role. Uh, of course, a very controversial, uh, trade agreement. So if Switzerland were to sign or negotiate a free trade agreement with Russia, Um, that would, of course, uh, probably trigger a response from other countries, but usually that’s not so much the case that the other parties that are involved are, of course, businesses and business associations.
They have a key interest and when that, uh, when Switzerland, for example, signed the free trade agreement with India, that, uh, Switzerland gets. India to make concessions, which are particularly important for a particular industry. Uh, but, uh, other [00:07:00] countries are usually not involved. That could, however, change.
Uh, you already mentioned that Switzerland has a free trade agreement with China. And of course, uh, to the extent that, uh, with a new Trump administration, uh, there might be an attempt, uh, to negotiate a free trade agreement with the United States, but then the United States might ask about our free trade agreement with China.
So that could happen, but usually it doesn’t play a big role.
Mike: What is the significance of a treat free trade agreement? Say, take the, I think it’s the most recent one with India. Like what, what does the expected change when a new agreement? Like India happens.
Speaker 4: Yeah, that’s a big question. Uh, how significant are these free trade agreements?
Um, the literature says, uh, well the effect can be very small or very big, and that’s pretty much the result. Uh, you get if you look at what’s actually in that agreement. Now, give you a few [00:08:00] examples. Switzerland has a free trade agreement with Canada. Um, but if you look at what we actually trade with Canada, um, and you look at what is in the trade agreement.
You would probably conclude that that agreement doesn’t have much of an impact.
We would pretty much see more or less the same trade between the two countries if it hadn’t been, uh, for this free trade agreement. There are other trade agreements which are more significant. Obviously, the one that Switzerland has with the European Union.
Obviously the one that we have with China, um, that is, is significant if only because it’s such an important trading partner and we’re exporting goods, which otherwise would be subject to very significant tariffs. So the importance of a free trade agreement. varies from almost irrelevant to Very significant the one you mentioned with india.
Well, we have to see Um, I think [00:09:00] it’s mostly a free trade agreement that is focusing on the future India right now is not that important of a trading partner for Switzerland. But if you look at, uh, India over the next 10, 15, 20 years, currently it has a GDP per GDP, uh, the size of the economy of about 4 trillion, that’s about the size of Japan, it won’t take long.
And India will overtake Japan. It will overtake Germany. And then it will be the third largest. economy in the world. And of course, when India reaches that level, it will probably be more difficult for Switzerland to sign a trade agreement. So it’s a good idea to sign a trade agreement, even if for the next three, four, five years, the impact might be small because eventually, hopefully in 10, 15 years, when the Indian economy is larger.
Switzerland will be in a prime [00:10:00] position to have a favorable access to that market. So the benefit might come over time also because some of the, um, reductions in tariffs might be, uh, such that they only, uh, are implemented over time.
Mike: What is, I can understand why Switzerland would benefit from importing a lot from other countries given we’re small, landlocked, doesn’t have any natural resources.
What are the big exports of Switzerland which other countries desire?
Stefan: Well, if you look at the statistics for Switzerland, um, it’s actually quite diversified. Um, it’s, and, and it contains a lot of surprising products. Like what is Switzerland exporting? Obviously the most important goods, uh, by far are pharmaceutical products.
Uh, but then, uh, what else is there? Watches are very significant. Uh, then you have machines, all kinds of precision instruments. [00:11:00] Switzerland is very strong, just like Germany and Austria, very strong in the B2B business to business sector. So these are products that you and I. We’ll probably never know, never see.
Um, but they are very important to produce the products that you and I buy. And, uh, you know, these machines are an important part of Swiss exports. And then you have many of the surprising things. Uh, do you know that Red Bull is only produced in Austria and Switzerland? So the whole world is supplied with Red Bull.
But just from two countries, one of which is Switzerland. Do you know that the most important agricultural export of Switzerland is coffee? It’s not chocolate. It’s not cheese. Uh, it’s coffee. And why is that? Because, well, we import pretty much raw coffee, roasted, [00:12:00] grind it, put it into little aluminum capsules and sell them to the rest of the world at very high prices.
And so. What does Switzerland export? Well, quite a lot. It’s very diversified, and in addition to the big ones, uh, that everyone probably knows, there’s a lot of smaller ones, but they add up, especially for a country that only has 9 million people.
Mike: Yeah, I guess when I think about exports, I think of agriculture, natural resources, but perhaps that’s just because I come from Australia.
Um, my, uh, my imagination’s a bit narrow. Does Switzerland have a free trade agreement with the U. S.?
Stefan: Well, probably because the United States has very few trade agreements to begin with. Um, it’s a very large country. It’s a very, it’s the biggest economy of the world. Uh, it has a trade agreement with, uh, its neighbors, Mexico and Canada since [00:13:00] 1994. But other than that, there are very few free trade agreements that the United States has ever signed.
Um, and so. Switzerland has tried a couple of times to sign a free trade agreement, um, but, uh, it never got through. And the most recent attempt was, uh, during the first Trump administration, when the ambassador to Switzerland, Ed McMullen, actually really wanted to have, uh, Switzerland and the United States to sign a free trade agreement.
But, uh, in his own words, uh, COVID happened. Um, and so then the focus shifted, although anyone involved in the talks probably would say that there were other issues as well that prevented signing a free trade agreement.
Mike: Speaking of Trump. What do you think the impact would be to Switzerland or the EU if he goes ahead and implements these tariffs as he’s been talking about the [00:14:00] last six months?
Stefan: Well, it’s hard to say because we don’t know yet what exactly he will do. Um, whether he will announce these tariffs, um, as a way to, um, sort of, uh, negotiate whatever kinds of deals he wants to see, or whether he will just outright implement the tariffs. Um, the important thing about tariffs is that they’re actually not that damaging, um, because, uh, it’s like a tax on imports.
Uh, and, uh, It basically means that, uh, companies like companies here in Switzerland that export to the United States, if their products become subject to the tariff, um, the question is, are they still the best source, uh, for these products, uh, even if there was a 10 percent tax on that? For the most part, the answer is yes.
So the American consumers will simply pay more for the goods and services. However, the question is, can [00:15:00] Swiss companies pass on the entire tariff, uh, in the form of higher prices to the American consumers? So if right now we sell a pharmaceutical product for 100 Swiss franc to the United States and there is no tariff And then trump imposes a 10 tariff.
Can we sell the whole thing for 110 if so if we have that pricing power Uh, it’s basically a tax on on on american consumers And to my knowledge For the most part, if you look at Swiss exports, um, because Switzerland is such a rich country and because we’re so specialized in products, uh, for which there is hardly any good alternative or comparable alternative in the world, uh, Swiss companies usually have a lot of pricing power.
And so I wouldn’t be too worried about it. Of course, if the tariff is not 10%, but 100%, it’s a different story. Um, and so we have to still [00:16:00] wait, uh, what Donald Trump really wants to accomplish right now, he’s threatening these tariffs, but at the end of the day. Donald Trump is a very transactional person.
He wants to make the next deal and, uh, we have to see how, uh, he will actually behave once he’s in office.
Mike: As you were talking, I also just thought, do you think there is a risk for Switzerland with Robert Kennedy Jr. declaring war on big pharma in the U. S. and sort of really pushing to try to cut costs?
That sounds like, given that’s one of our biggest One of Switzerland’s biggest exports that could also be a potential, uh, danger.
Stefan: Yeah, um, the, the, you know, most important export to the United States is indeed pharmaceutical products, uh, for Switzerland. And that means, uh, access to that market. is crucial.
And most importantly, the ability to set prices [00:17:00] in that market is crucial. Unlike, for example, European market, the pharmaceutical prices are not strictly regulated in the United States, which is why pharmaceutical companies make most of their money in the United States. That is something any U. S.
Administration could change. And, uh, you know, Kennedy, if in office, uh, could institute some new red, some new legislation. But what we’ve seen under the Biden administration is that for the first time, uh, several, uh, pharmaceutical products were actually. Uh, uh, uh, uh, uh, regulated in terms of a price, and that is a risk.
Uh, so in some sense there is a risk that Swiss pharmaceutical companies, uh, will lose some of the revenue they currently earn in, in the United States. It will probably take a little bit of, uh, you know, lobbying effort, uh, to make sure that, uh, that that won’t happen. [00:18:00] Um, the question is. Yeah, to some extent, uh, how long the American people will tolerate the fact that effectively they subsidize, uh, pharmaceutical products for the rest of the world.
That is something that indeed any administration could very much look into. And so, yeah, that is a risk, whether there is a Republican or a Democrat in the, in the White House. Uh, that is something to keep in mind.
Mike: Now, I wanted to ask you a bit about debt and country’s debt. And it’s something which I’ve always struggled to wrap my head around and that is the implications of countries with large amounts of debt because it seems like For most countries just keeps getting bigger and bigger and bigger.
Um, and if you have these extreme cases like Greece and Italy, where the GDP ratio jet debt to GDP ratio is well above a hundred, the U S I think is above a hundred to Switzerland. I know it’s a lot much, much lower. But what is the limit [00:19:00] to how much debt a country can sustain before finally facing serious consequences?
Stefan: Well, in principle, a country can borrow as long as it wants. Uh, there is no limit, uh, as long as you have someone to buy all of these government bonds. That’s how government runs a deficit and finances a deficit. It basically borrows the money by issuing a bond. Now, typically these bonds are auctioned off and, uh, financial institutions, uh, typically buy them now they buy them at a certain price.
Uh, and that price will reflect, uh, how risky the bond is. How likely is it that the government might not pay back? Typically, there is no risk. Nobody. expects that France will default or the United States will default. Uh, so there’s very little risk, but there can be risk. We’ve seen [00:20:00] that recently with Greece, that there was indeed a concern that if you buy that government bond, which promise you some money to be paid in the future, that you might not see that money.
Then, of course, the interest rates go up. And that means for government that it’s very expensive to borrow money. It has to borrow money at a very high interest rate. And if you already have a lot of debt and the interest rates go up, then eventually just the interest payments will consume much of your budget.
So any government has a certain budget. That’s the tax revenue. The question is how much of that tax revenue do you have to spend on interest payments? And what we’ve seen over the last a couple of years is that because of rising interest rates and because of the very high levels of debt in various countries, the interest payments have gone up a lot.
And that is a problem because eventually, Um, [00:21:00] you have a, uh, very tough decision to make because you spend more on, on, on, on interest payments and you’re already running a deficit. That means you probably have to cut spending somewhere else, maybe on welfare spending, maybe on the military, maybe on investments.
And so that’s when countries run into trouble. Um, of course, uh, there’s still no risk of default to the extent that you have a central bank, which in theory can print money and buy, uh, your bonds. Uh, but that of course would undermine the value of the currency. So there is a limit, uh, but it’s not precise where that limit is.
It depends a little bit on what country we’re talking about.
Mike: If we keep it within the EU and you What impact does a country’s debt like Greece have on the rest of the EU? My understanding is there is some kind of balance within the European Union. So some better performing countries would help balance out [00:22:00] the debt.
underperforming ones in terms of managing their money. Is that right?
Stefan: Well, uh, we shouldn’t forget the lessons of the Euro crisis 10 years ago. Um, or, you know, rather 12 years ago, we want to take the peak. Uh, the problem was that prior to the financial crisis, prior to 2007, 2008, all the members of the European union, uh, sorry, all the members of the Euro area, uh, all of the governments that borrowed money.
Could borrow at the same interest rate because there was no perceived risk of default. And, uh, it was always clear that they now issue these bonds in the same currency. So there was no difference in the interest rate that these countries had to pay on their debt. But then starting with the financial crisis and the fact that, uh, countries had to run large deficits to support their economies.
Um, there was [00:23:00] indeed a perceived risk that a country like Greece and later Italy and Spain, that they would not service their debt, they would not pay back. And that led to the situation that, uh, the interest rates on these bonds searched in the case of Greece, all the way up to 40%. Which then of course is no longer sustainable.
So in the case of Greece, you actually saw a haircut Some of the debt was actually not paid back and you saw a little bit of a bailout But in the case that was much more important Much more worrying than Greece Uh in the case of Italy and Spain you saw something very different because Greece was never really that important If Greece defaults, it’s not a very big country.
It’s not You know, huge amount of bonds, but everyone would understand that if Greece doesn’t pay back, who’s next? So the danger of the Euro [00:24:00] crisis was that it’s spreading from one country to the next, and the next one could be a very big one. like Italy and Spain. And so what happened in the summer of 2012 is that the interest rates of Spain and Italy went up to six and seven percent to a level that these countries would not be able to afford.
And that was the moment when the former president of the European Central Bank made a very important speech, uh, the famous, whatever it takes speech. He essentially figured out the problem. Uh, the problem was that every country in the Euro area effectively borrows money in euros, but it cannot print euros.
So you’re basically borrowing money in a currency that you your country cannot print so you can actually default It’s [00:25:00] very different from the united states or switzerland. We have our own currency So we can if we if we ever have trouble to pay back our debt, we just print the money That was perceived as not possible for countries in the euro area And so what Mario Draghi famously said in his, whatever it takes speech is no, no, no, no.
They are not boring in a foreign currency. If necessary, we will basically print the money and buy these bonds. So there’s no risk of default. And so within the Euro area, um, it has been made clear that this kind of, uh, a risk. The risk of a, you know, sovereign default is not there because if push comes to shove The ecb the european central bank will buy these bonds And so there’s no risk of losing your money.
The only risk you have, if you, you know, give your [00:26:00] money to a government in the Euro area is that you are paid back with Euros, which will be worth less than they are today because new money has been printed.
Mike: Who controls inflation in, in Europe? If it’s independent, if each country can’t print money, then who is, so European central bank is the one who decides if Euros can be printed.
Right?
Stefan: Yeah, pretty much. Um, who controls inflation? Well, uh, in principle, it’s the mandate of the European Central Bank. Um, the question is whether they can control it and whether they want to. And, uh, what we’ve seen over the last 25 years is something quite extraordinary that when the European Central Bank was actually founded, And the euro was created, um, Article 127 of the Treaty of the Functioning of the European Union says that the ECB’s mandate is price stability.[00:27:00]
Now, if you ask anyone, you know, on the street, what does price stability mean? It means 0 percent inflation, but the European central bank over time interpreted price stability as something between zero and 2%. Then they aim for something just below 2%. Then they aimed for 2 percent on average. And, uh, if you look at the most recent statements, It’s unclear what they’re actually aiming for.
So, who’s in charge of controlling inflation? Well, it’s the mandate of the European Central Bank, but increasingly it has walked away from that mandate.
Mike: Switzerland has quite a well balanced budget, or at least compared to most of the rest of Europe. Why is that? Why is Switzerland so much better in terms of, not better is the wrong word, why is their debt so much lower?[00:28:00]
Stefan: Well, uh, part of it might be the debt break, um, that was introduced about 20 years ago. Uh, since basically in the constitution that the country cannot run, uh, large deficits. That certainly helps, uh, because it’s a mechanism that forces politicians to spend less money. They always, there’s always an incentive for policymakers to spend money.
And I’m not criticizing them because policymakers, uh, they have to win elections every couple of years and the public simply wants to have more spending. All of us have a wish list. Christmas is coming up. We all would like to have, you name it, someone to have more spending on, uh, you know, education, someone to have more spending on infrastructure, someone to have more spending on the military.
So there’s an endless demand on the government to spend money, but there’s very little [00:29:00] appetite among the voters to pay taxes. And so there is a sort of an, sort of an ingrained, Uh, imbalance. The voters want more spending, but they don’t want to pay for it. So essentially, politicians are asked to run a deficit.
Um, and so in some sense, it helps them, but in Switzerland, politicians have an institutional barrier to run this deficit. And so whenever they come together, They say, yeah, we would like to spend more, but we’re not allowed to. And that’s currently the discussion you have, but you see how hard it is for policymakers to then decide where not to spend that much.
Um, so, uh, that is part of the reason why Switzerland has relatively low debt.
Mike: If you’d played the thought experiment and Switzerland joined the EU, what would that, how would that impact Switzerland’s current, uh, balance?
Stefan: Well, it depends very much on [00:30:00] how exactly, uh, Switzerland would then join the European Union. But, uh, within the European Union, just to give you one example, there’s a minimum value added tax of 15 percent as far as I know, and so in some sense, we wouldn’t have to double more or less our value added tax.
So we would have more tax revenue just because of that. Of course, a lot of other changes would happen, um, uh, it’s, it’s a bit unclear what would be the net effect on our budget. Uh, but then again, I don’t see anything like that on the horizon. So it’s a scenario which is largely hypothetical.
Mike: I wanted to now ask you about, because I was thinking what happens to countries, like how do they ever recover from extreme cases?
And then I was sort of trying to. In preparation for this interview, wrap my head around what’s going on in Argentina and what’s been going on there last since the, um, Javier Millet, um, so I’ve been trying to understand [00:31:00] essentially extreme government reduction and surface level information that I’m consuming, like, um, articles and even his podcast where he’s been on talking about it, but it’s obviously from his perspective.
So I don’t really have a clear picture about whether. this extreme change has a net positive, at least in the long term. So I wanted to get your view on that.
Stefan: Well, Argentina runs a very important experiment. And I think, uh, one of the things we should do a bit more often is look at other countries and what they do and what works and what doesn’t work.
Um, and, uh, Argentina is quite interesting because, uh, it’s actually a country Probably the only one we’ve ever seen that was among the rich countries and has fallen down to middle income level. Uh, that tells you just how bad the situation is. And you see the numbers of inflation, for example, 200 plus percent.
So inflation is so high that, uh, you typically [00:32:00] measure it, uh, on a monthly basis rather than as is usual on a yearly basis. So the situation is really bad. And, uh, then the question is, uh, uh, what can you do? And one attempt that is hardly practiced or exercised is drastically cut. The size of the public sector, and we will see how it how it plays out.
There are many, many people, many economists who sort of lean towards a small government position. For them, it’s very important that this experiment will actually pay out. But what is clear that many of the, you know, public expenses and many of the regulations, uh, they exist because there are people who benefit from that.
And so if you cut the government on the one hand, that means. less government spending. On the other hand, it means deregulation. There will be a [00:33:00] lot of losers. There will be a lot of people who currently benefit from that spending and that regulation. Give you an example. Welfare spending. If you cut welfare spending, then certainly in the short run, many people will be worse off and there will be more poverty.
Will Malay be able to survive this politically if many of these people take it to the streets? We’ll see. Another example, regulation. Rent control, for example. We have rent control in Switzerland as well. Rent control is fantastic for the people who have rented an apartment many years ago. Because their rent doesn’t go up.
And you see it also here in Switzerland, that people who have been in the same apartment for 20 years, they pay a rent which is far lower than what you would pay for a similar apartment on the open market. And so if you get rid of that regulation, obviously in the short run, uh, and maybe even in the long [00:34:00] run, many will be worse off.
It might be good for the whole country, but it’s certainly creating a lot of losers along the way. And so it’s a very interesting experiment in Argentina and we should pay close attention to it.
Mike: Have you seen a lot of economic positives coming out of this? I can imagine that one of the ways in which you would measure success is the amount of money flowing into Argentina because of the investment into the future.
Is that also happening?
Stefan: Yes. Right now, I think it’s still early days of this, uh, transformation. So I think international investors are still hesitating to invest in Argentina because it’s still unclear whether Malay will actually succeed with his reforms. Um, but of course that is one indicator to watch.
Uh, so first of all, what you will see or hope to see is that inflation actually comes down. Um, the next thing that you want to see [00:35:00] is, uh, is growth picking up. Uh, so the economy obviously falls into a deep recession. If you cut government spending so dramatically, recession is almost inevitable. Uh, but, uh, you want to see signs of recovery of the economy.
And then foreign investment coming, uh, back in. So, uh, I think it will, it will take some years, uh, but, uh, uh, so far the early signs, uh, are quite promising. Inflation has come down. And, uh, most surprisingly probably is that the poll numbers, uh, for a melee are actually quite strong. I mean, that tells you something.
Uh, because usually if a politician cuts government spending and cuts regulation, uh, he or she won’t be very popular, but the situation was so bad in Argentina that, uh, uh, people might actually support him even though the country goes through a very, very tough time.
Mike: Do you think, because [00:36:00] if this is a success, then this is a potential blueprint for other countries to adopt.
But I wonder, If it’s even possible to go through something like this, if things aren’t as extreme as what Argentina was before they started it. So if you took a country like the US or Germany, or basically anywhere where there seems to be complaint about too much regulation, do you think it has to get a lot worse before something like this begins to
Stefan: Hopefully not, uh, but, uh, I see your argument that, uh, often, uh, the situation has to be pretty dramatic, uh, before any reform has a chance of, of, of finding a majority in a democratic country.
Yes, but I hope we can address problems, um, earlier than that. And that goes for, you know, too much bureaucracy or inefficient spending or climate change or take climate change as an example. [00:37:00] Um, how long do we have to wait? How much damage has to be visible? Before we take serious action, um, so far, uh, you know, we haven’t done much because, uh, CO2 emissions are continuing to rise.
And so, uh, I, I would hope that we can spot a problem, uh, and address it. Uh, before things get really terrible.
Mike: Yeah, and I, I like what you said when, when you go through something like this, there are a lot of losers. And I think that’s one of the reasons it’s so hard to understand if something like this is a net positive, because depending on the information source, if they are on the side of the winners or the losers, you get a very different report in terms of, um, how things are going.
And it’s so, it seems to be so polarizing. Exactly. And, uh, don’t forget
Stefan: many people don’t know ex ante. In advance, whether they will be on the winning side or [00:38:00] not. And just as uncertainty of how will this all affect me, uh, can lead to what is known in the literature as a status quo bias. Uh, so even if you have reforms which make most of the country overall better off and most of the population will benefit, uh, it can still be something that the majority of the people will reject simply because they don’t know how exactly they will fare under this reform.
And so take an example, you mentioned too much bureaucracy and too much regulation and too many exceptions and rules, et cetera. Imagine, you know, for the, for the, for the income tax, we would get rid of all the exceptions, all exceptions, all deductions, et cetera. No, we make it plain and simple. Uh, this is your income.
There is a certain percent you have to pay and that’s it. Would you support that? Well, certainly you would then think, but I [00:39:00] lose that deduction and that deduction, how much will the, you know, tax rate come down? And the very fact that this is uncertain, uh, tells you, well, should I really risk it? And maybe then the inclination of many people is to say, well, let’s, uh, let’s stay with the status quo.
Mike: Yeah, and I think for topics like this, I mean, you need a PhD in macroeconomics to barely begin to understand the proper consequences of things like this. And for the average person like me, who spends 15 minutes on their way to work, listening to a podcast about it, it depends on the person speaking that forms my decision.
So yeah. It’s a, it’s a pretty difficult, this is a, with, this is a lot of things. This is politics. This is economics as everything’s so global and everything is so complicated. Forming an opinion that’s rounded is for me. It’s almost impossible because I’ve, I listened to one expert one day who has an opinion.
He sounds incredible, very knowledgeable, puts his arguments forward. How could I possible possibly dispute [00:40:00] them? He knows a lot more than I do. Then the next day, I listened to a different person with the other different perspective. Sounds equally convincing because it’s also very, very knowledgeable in an area and you listen to both of them and you think, yeah, that my opinion hasn’t shifted because so I wanted to ask you, where do you get your information from if you want to make a decision on whether you think something like this is good or bad?
Stefan: You’re absolutely right. Many of these topics are very complicated, very complex. So if you really want to have your own informed opinion on something, uh, what you have to do is, uh, read a lot, um, listen to a lot of people from the different, uh, perspectives. Um, and then of course, think for yourself, but something, uh, as simple in economics as a minimum wage, it simply has pros and cons.
And then it comes down to how you, [00:41:00] um, value the pros and the cons. So even if you go through the entire literature on that topic, and there is a, you know, long, long literature on, on, on minimum wages and their effects, um, some things are not clear. Some things are relatively clear and then the question is how do you value this?
So how much do you appreciate some of the the the sort of positive effects of a minimum wage? And how do you think about and and how much weight do you give to to the negative effects? So, how do I do it? Well, if there’s a topic that I want to be informed about Every couple of months I have to vote on on certain topics.
There are some topics that I Are not particularly important to me. Uh, probably not as important to other people as well. I might then go with what certain people or parties say about it. Often, if they’re not very controversial, many parties in [00:42:00] Switzerland support a certain initiative or a certain, uh, reform.
Uh, but if it’s a controversial topic, um, I read what people have to, to, to, to say about it. Uh, always from the left and the right. You always want to hear both opinions, uh, and then you have to make up your own mind. Uh, the most important thing is that you, that you source information from different people.
Uh, you deliberately ask for the argument in favor, and then you ask deliberately for the argument against it. So if you’re supporting, let’s take a recent vote, if you were in favor of, uh, you know, building more highways in Switzerland, if you’re in favor of this, ask specifically for the arguments against it.
And see if you’re still in favor of it. If you hear the other arguments, um, uh, but yeah, at the end of the day, it’s, uh, it’s, uh, it’s, it’s, it’s not [00:43:00] clear because there are good arguments often. Uh on on both sides, which is why it’s a controversial topic if it was so clear that something is good or bad Then usually 80 are in favor or or opposing it
Mike: Controversial is a good word.
Um, I that was a really great recommendation And whilst we’re on the topic still I did want to quickly get your view on the u. s and musk’s intention on also drastically cutting government spending. How similar is this, do you think to Argentina in terms of what he plans to do? Or is it incomparable given the countries are so different?
Stefan: It’s, it’s, it’s, I think it’s mostly a sideshow. Um, if you look at what, you know, Elon Musk and Vivek, uh, what, what they’re talking about, Uh, it sounds like they can cut so much spending and wasteful spending in the U. S. government. And [00:44:00] certainly there is some waste. Nothing is easier than to show some wasteful government spending.
But then you look at the whole budget of the U. S. federal government and, uh, you look at where most of that money is spent. Most of the money is spent on welfare in one way or another, and Donald Trump has made it clear that he wants no cuts to that to that part of the budget. So the most important part of the budget, we won’t see any cuts.
Then you have spending on the military and spending on interest. There’s not going to be any cut there. So what is left? You know, these are usually peanuts. Uh, so we will see nothing like, uh, what we, what we observe in Argentina. It will be mostly a sideshow. And probably Trump understands that this is a narrative that can get him some votes.
The narrative being government is too [00:45:00] big and government is wasteful, etc. So you talk a lot about it. And it was probably a clever marketing move to hire Elon Musk for this. And certainly there’s something he can do. It’s not like he can do nothing. Certain Uh, changes are possible and improvements are possible.
And it’s a good idea to take someone, you know, from the outside, maybe to take a fresh look at how things operate. Um, but don’t expect anything like what we see in Argentina.
Mike: Yeah, it does. It did make me wonder what I Why he picks Elon Musk and not a professor in economics to do this job. Um, it’s got to be some kind of marketing campaign to essentially pull a celebrity in to, to, um, play that role.
Do you think, um, Switzerland can benefit at the moment from, uh, decreases in, uh, Uh, government spending, maybe obviously not to the drastic [00:46:00] degree of, uh, across the pond, but I mean, I’ve also been reading that there’s lots of articles as well when they’re comparing what’s intended in the US that there’s also quite a lot of fat built up in the Swiss government.
And I wanted to get your view on that.
Stefan: Well, it depends on what you consider as fat. Um, and quite frankly, the spending that we see here, the government spending we see in Switzerland is something that, uh, the voters have asked for. Take a recent example, the very fact that the, uh, Uh, you know, pensions, uh, there will be a 13th monthly payment.
Uh, that is something that, uh, was supported by a majority of the people. Now, you might think, you know, there’s too much welfare spending in Switzerland, but then again, uh, cutting it finds no majority. So where else do you want to cut if it’s not welfare spending? Do you want to cut for the military? Do you want to cut on infrastructure spending?
Where do you want [00:47:00] to cut spending? Certainly there are some wasteful spending. But again, this is mostly at the margin Um, it’s not like 20 percent of government spending is is utterly wasteful and we can easily get rid of it Um, you can cut some of the spending Don’t get me wrong. Uh, but then again, uh, you are not a dictator.
Uh, we live in a democracy and, uh, for these kinds of reductions, even a 3 percent or 5 percent reduction in, in government spending, it will be very hard to find a majority. And so you and I can agree that there are certain parts of the government budget in Switzerland that, that should be reduced. Um, but, um, yeah, unless you, you, uh, find a majority for that, uh, I would say, yeah, it’s, it’s pretty pointless to argue that, uh, these kinds of reductions, [00:48:00] uh, should happen.
Because that’s your opinion. Fine. But, uh, sorry, the majority of the people here think otherwise.
Mike: That’s very interesting to hear. Thinking about now, more about the looking forward, um, are there any trends or developments, um, going on? Which Swiss residents or policy makers should be particularly aware of, um, when it comes to the future?
Stefan: Yeah, uh, the most important development I think is that, uh, there’s always to some extent a big narrative in the world. And the, the big narrative when I grew up. Mostly in the 1990s and early 2000s was that, uh, we have a globalized world. If you, if you take a look at bestselling books of that time, you had books like the end of history published in the [00:49:00] early 1990s.
End of history, meaning we no longer have to fight about capitalism versus socialism. And we no longer have to fight about democracy versus dictatorship. It was clear. Uh, we should all follow the American lead because America won the cold war So it was clear that we will all have market economies. We have deregulation.
We have privatization We have globalization We will have free trade. Uh, the world will be flat. That was not the flat earth movement we have today. Uh, Freedman was talking about a flat earth in the sense that barriers to international trade would come down. Uh, there was a book published called the global village, uh, in the sense that also values would converge that, uh, the whole world would recognize that the values we have in the West, so to speak, are the best in the world.
Now, of course, it didn’t take long and you had 9 11 and you had the financial [00:50:00] crisis and many other developments and they have sort of changed over time the narrative. And so the narrative we have today is that geopolitical rivalry is back, uh, globalization is called into question. Um, the rule of law internationally is called into question.
So we’re moving away from a world that is rules based, and we’re going back to a world order that is mostly power based. And for Switzerland, that’s not very good because Switzerland is a small country and relies heavily. On international trade and good relationships with other countries. And, uh, we would love to have a world that is rules based.
Uh, think about it this way. Uh, you and I were probably weak. So if we walk outside here in Switzerland, uh, we want to have a rules based country, not a power based one. Because I don’t [00:51:00] have a gun. I don’t have a, I don’t have a big stick. I’m not very strong. Uh, you know, if, if, if, if, if conflicts were solved by power in this country, uh, you know, we wouldn’t like it.
And so Switzerland is a small player in the, in the international order. Uh, but it has to play by the rules which are set by the other, other big countries. And so the most important challenge I see for Switzerland, Is to navigate in a very different world. Uh, it’s possible. Uh, but it’s going to be very difficult and requires probably a different mindset.
Uh, the worst thing you can do is to still think we are in this. Old narrative when the world has moved on, when the world is very different. So update your beliefs about, or your, your information about how the world works. Uh, especially if you grew up with a certain perspective, people tend to keep their perspective.
They don’t [00:52:00] update their worldview. Um, but I think we have to do that. The world is different from. Uh, from what was promised to, to, to, to us, uh, when we were younger.
Mike: Couldn’t you argue that Switzerland has navigated the power dynamics of the world for the last hundred years very well?
Stefan: Yes, Switzerland has navigated quite well, uh, in the past, uh, so if you go to the, you know, first half of the 20th century, when there was a world war, and then there was a second world war, uh, Switzerland fared reasonably well during that period, um, however, however, The policy makers and the decision makers of Switzerland back then had a different mindset, uh, from the decision makers we have today.
And that’s not because of today’s decision makers are stupid, but today’s just this decision makers grew up in a different world. And so we have to adapt. So yes, [00:53:00] Switzerland can navigate in a different world and can be quite successful. Uh, it would still be better if the world was not moving in that direction.
Yeah. Uh, but we can still be reasonably successful, uh, even if, uh, even in a, in a world of geopolitical conflict to the extent that it doesn’t turn into a nuclear war or something. Uh, but it requires, uh, a different approach. And so we probably should dust off some of our history books and see how we managed, uh, to, uh, build good relationships or decent relationships with, uh, countries.
That we’re on a very different policy trajectory than we are.
Mike: Is there anything, is there any particular Swiss policy that you believe deserves more attention? Because of, you know, how much has gone into creating it or the benefits that we get from it but isn’t? [00:54:00] Is it isn’t there’s no there’s no attention for it.
Stefan: Um, There are some very important aspects about switzerland that probably don’t get as much attention One might be the swiss national bank and the swiss franc Uh, we probably take it a little bit too much for granted that we have this currency, which Does what a currency is supposed to do, uh, in the sense that it provides us with a, uh, stable money.
Why is that so important? Well, Think about it this way. Most people are in this very favorite, uh, you know, position that they have more money today than they want to spend. So you have that challenge that some of your wealth has to be moved into the future. Now, if you have something like the Swiss franc, it’s easy.
You just keep your money. If you are in Turkey, uh, or in Argentina, you can’t do that. So a [00:55:00] functioning currency, a stable currency is incredibly valuable. Um, and so one of the things we should definitely do going into the future is make sure that the Swiss national bank can continue to do its job. And so I recently wrote a piece with colleagues about it, arguing that we should really not.
undermine that important institution of the country. It should do what it’s supposed to do. Provide us with a stable currency and nothing else. If only they accomplish that, it’s incredibly valuable. And you have to look around the world and you will find no country, virtually no country that has a currency like we have.
Uh, the only country that probably came close in recent times was Germany with its Deutsche Mark, and they got it, uh, you know, changed it for the, for the Euro. So, I think people don’t fully [00:56:00] appreciate. Just how important that currency is for us. And so if I have one request, uh, uh, uh, don’t undermine it. Uh, appreciate the fact that we have money, which is, uh, uh, so stable and over time appreciating quite a lot.
Mike: Yeah. I guess in some countries, in many countries, you need a degree in macroeconomics just to not lose your money, let alone, I mean, here you can just put it in a bank account tomorrow, it’ll be worth the same amount. Other countries, you have to be, my, my brother lives in, uh, well has lived for a while in Bolivia and just the difficulty you have of ever having a shot of making money or leaving the country with money is just unbelievable.
Stefan: Exactly. And that’s, that’s, uh, sort of countries with very high inflation, but even if you just live in, uh, other European countries, I’ll take Germany or if you live in the United States over the last couple of years, uh, the purchasing power of your currency [00:57:00] lost about. Uh went down by about 20 30 percent.
Um, that’s a lot So if you have built up through hard work and savings, maybe 30 euros um And then just in a couple of years because of inflation you lose, uh, 20 of that That really hurts. And you’re absolutely right. What can you do to prevent losing, you know, your wealth? Well, you then have to invest it into real assets, you buy stocks or you buy real estate, but that is something which is not free.
It does come with some cost and it does come with some risks and you have to know what you’re doing. Uh, you know, if you go to the stock market and you don’t know what you’re doing, you might even lose more. So for many people, it is incredibly important that the currency is stable, uh, so that they can just hold cash and it preserves its [00:58:00] purchasing power.
Uh, if only there was a little bit of inflation, like three or 4 percent a year. Over, you know, 10 year period that eats away much of your, much of your, uh, uh, of your savings. If you don’t get the respective interest on your savings account, which for example, in Germany, you don’t get
Mike: Stefan I have one last question for you before we wrap up.
And that is, do you own any Bitcoin?
Stefan: No, I don’t earn any or don’t hold any Bitcoin. Uh, but Let me say one thing about it. It’s, uh, it’s for me an indication of a couple of things. First of all, it’s a new technology and, uh, uh, it’s, it’s, it’s fascinating because it’s a new technology that is, as far as I understand it, uh, set up in a way that you create something that Is rare and you can’t just create more of it [00:59:00] for technical reasons.
And that is something which could work as a currency, as money, uh, go back, you know, thousands of years. And what you see is that people use very rare muscles or, or stones. Or gold or silver. They were always looking for something which is very rare and thus, you know Can be used, uh if if people agree on it uh as as money and so I I I cherish this idea that we find the 21st century equivalent of that and bitcoin and other cryptocurrencies are an attempt to create Uh, something, uh, very stable in this regard, sort of a digital gold, which then could be used in one way or another as money.
However, uh, it’s sort of still early days, uh, uh, uh, of, of, of, of that technology. So you see the wild swings in the, in [01:00:00] the value against the dollar, uh, which means right now it’s, it’s more speculation rather than, than a currency. The big problem going forward for the cryptocurrencies. Uh, uh, is that if you think this will be used as money, uh, I don’t think the, uh, big governments of the world, the U.
S. government or, you know, European governments or the Chinese government, God forbid, they will not tolerate this. So the ability of a government to control the currency is an enormous lever of power. And I guarantee that the governments we have in the world will not tolerate losing that important part of their power.
So any great hopes on the currency will run into a fight with governments. So I cherish the idea. Uh, and I would love to see, uh, uh, sort of a, uh, a good alternative to the kind of [01:01:00] money you have in many parts of the world, uh, maybe not so much the dollar, but think about poorer countries that really struggled to set up a currency, uh, for them, that could actually be quite a, quite a, quite a valuable innovation because countries that struggle to, uh, to, uh, provide a stable currency might tap into this modern, uh, technology to solve a very big problem.
Mike: Yeah, I am also quite moved by the, the story, which like the, the, the story is quite compelling. Um, that’s true. And I hope at least that it sticks around and becomes a store of value. So at least there is an option to hold it, um, for countries and for people who want to, who don’t have a currency, which they trust in their own country.
Stefan: And it could facilitate international payments. Um, so if you want to wire some money, there are a lot of people, you know, they come from very poor countries, uh, and they want to send money [01:02:00] back, uh, remittances, uh, often the very, very large fees on that. Uh, so if you can reduce that, I’m all in favor of new technologies that helps us, uh, get the jobs done that people need to get job.
get done in a better way. And so, uh, of course there’s a lot of fraud and there’s a lot of speculations and a lot of negative things to say. Uh, but, uh, I’m more on the positive side focus on what could this technology be used for, uh, uh, important problems that we need to solve. And, uh, I see some potential there, but for the time being, yeah, I think it’s a very, very, uh, risky and very speculative, uh, partially because we don’t know yet which of these cryptocurrencies will eventually succeed.
And if anyone will succeed, uh, So I wouldn’t recommend necessarily putting your savings into it, uh, but if you, if you, if you, if you want to speculate a bit, yeah, well, go ahead. Go ahead.
Mike: Well, that sounds [01:03:00] ending on a positive note. Sounds perfect. Stefan, this has been a incredible, incredibly informative and enlightening conversation.
Thank you very much for your time.
Stefan: Thank you very much for having me. It was a great pleasure. Thank you. good bye.