The Swiss Way to Beat a Crisis.(Global Investor)

Byline: Holger Schmieding; Schmieding is chief economist for Europe at Bank of America in London.

When trust among banks evaporated, the Swiss acted firmlyand within three weeks brought the key rate under control.

The global recession knows no sinners, and it knows no saints. Even countries that did not feast on a credit binge and did not inflate their economies with a ballooning real-estate bubble have now been pushed into the sharpest downturn in at least 40 years by the collapse in their export markets and the fear paralyzing the normal flows of money and credit since Lehman Brothers went under in September.

But there are still differences. Take Switzerland. The tiny country nestled away between the Alps and the lakes in the heart of Europe had been among the saints ahead of the crisis and did get its act together faster than anybody else once disaster struck. It may well show its bigger neighbors the way to get out of the mess.

First, Switzerland had done its homework ahead of the crisis, making its economy fit for the good and the bad times. Swiss industry and many of the modern services are completely open to unfettered global competition. Swiss firms have been whipped into shape as a result. And in two giant steps in the past six years, the Swiss opened their labor market to their neighbors from the European Union. Swiss firms can now draw on a vast pool of highly qualified workers from France and Germany, from Poland and the Czech Republic. With a few strokes of a pen, the Swiss thus raised the average rate at which their economy can expand throughout the cycle from less than 1.5 percent to at least 2 percent now. Strong tax revenues and a healthy budget surplus are among the tangible rewards for such virtue.

The Swiss National Bank, arguably the best-managed central bank in the world, was also well prepared for the turmoil. Most central banks focus on an interest rate they can directly set themselves, usually the rate for their own overnight or weekly injections of money into the financial system. However, the Swiss target the rate at which commercial banks lend to each other in the money market for three months. This rate is more important. Because it determines how much banks have to pay to fund themselves in the money market, it influences the interest rate at which banks can then lend on the money to households and businesses.

When the credit crunch struck and trust among banks melted like snow in the sun, the rate at which commercial banks were ready to lend to one another for three months skyrocketed. This hit the economy like a major tightening of monetary policy through the back door. Because the Swiss pay so much attention to this rate, ...