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The Wall Street Journal Europe

March 8, 2001

State of the Union:
A Model in Miniature for Europe

By Keith Marsden, an economist living in Geneva.

     In a national referendum last Sunday, Swiss voters emphatically rejected a proposal to open immediate negotiations for European Union membership. The result was greeted with consternation by parts of the (French language) Swiss media and in some political circles, Socialist and Green in particular. "Goodbye to Europe" lamented Le Temps's banner headline. "With a 77% no vote the Swiss sweep aside the European ideal," it cried, and called the vote "a terrible defeat."

     A defeat of what and for whom, you may ask? I don't pretend to have any special insights into the Swiss psyche. But as a foreigner based in Switzerland for half of my last 50 years, and having worked as an economist in more than 60 countries, I've had the opportunity to compare the Swiss way of doing things with that of many other states and nationalities. And nowhere does Switzerland compare more favorably than in areas the EU has laid down as being of special importance to Europe. Consider the following categories:

     * Peace. A main motivation of the founding fathers of the EU was to bring previously warring nations into a framework for peaceful cooperation. The Swiss have been doing this since 1291, when three cantons agreed to a defensive alliance to safeguard their freedom. A new constitution in 1848 created a federal state, but Switzerland has retained a system of decentralized government and direct democracy that allows different language groups to live and work together in relative harmony. It doesn't need to join the EU to prove its peaceful intentions. On the contrary, membership in a partisan bloc might damage its reputation for independence and neutrality, things that are still useful in its roles as founder and headquarters of the International Red Cross and site of several U.N. agencies.

     * Economic Integration. The EU treaties seek to advance European integration by "a process of creating an ever closer union among the peoples of Europe." Switzerland has, of course, succeeded in doing this within its boundaries, without weakening its links to the rest of the world. Its total trade in goods (imports and exports combined) represented 103% of its GDP measured in purchasing power parity dollars in 1998, nearly double the level for the euro zone. Its exports of services easily top those of EU members of a similar size, such as Sweden, Denmark and Portugal. It is both a host for and a source of massive foreign direct investment. Its stock of inward foreign direct investment totaled more than $60 billion in 1998; its stock of outward FDI had reached nearly $170 billion.

     Recent bilateral agreements between Switzerland and the EU provide for gradual dismantling of trade barriers in certain agricultural products and foresee mutual recognition of technical rules and procedures and reciprocal liberalization of road and rail transport. True, given Switzerland's heavy volume of trade with its neighbors, one could argue that the most sensible course for Switzerland is to join the EU and adopt the common currency. Yet while the barriers to trade that remain are something the Swiss could do without, staying outside the EU has one major compensation: namely, freedom from the economically burdensome social and regulatory chapters of EU law. As it is, tariffs (outside of agriculture) between the EU and Switzerland are negligible.

     * Freedom of Movement. Without the imposition of EU directives, Switzerland has welcomed a higher proportion of immigrants than any EU member except Luxembourg. Foreigners represent 19% of its resident population and 25% of its labor force. 

     Contrast this openness with the barriers to, and barely disguised antipathy toward, foreign workers found in some EU countries. Moreover, in a bilateral agreement with the EU already accepted by the Swiss through a referendum, (though still to be ratified by some EU members), freedom of movement will be extended by Switzerland in several ways. Preferential treatment granted to Swiss nationals will be eliminated, and its quota system for work permits to EU citizens phased out.

     * Subsidiarity. Title I, article 1 of the EU Treaties refers to the creation of a Europe "in which decisions are taken as openly as possible and closely as possible to the citizen." The Swiss constitution also lays down the principle of subsidiarity. The difference is that while the EU often ignores subsidiarity in practice, Switzerland systematically applies it throughout its 26 cantons. The Swiss Federal Government is formally responsible only for defense, foreign and economic policy. It accounts for only 30% of total public spending, or about 34% of GDP compared with a Euroland average of 47%. Value-added taxes range between 2.3% and 7.5% -- half the EU level. 

     It is the cantons, then, that are the country's most important political units. Each has its own government and parliament. And each is in turn divided into communes, of which there are 3,015 throughout Switzerland.

     Swiss personal income tax levels vary substantially from canton to canton. For a family with two children and a gross income of 100,000 Swiss Francs ($60,000), they ranged from 6,080 francs (including Federal income tax) in Zug to 13,990 francs in Geneva 1998. But each local authority has to justify its tax level to its electors. A popular referendum in Geneva in 1999 voted to reduce taxes by 15% over a three-year period.

     People's initiatives and referendums are salient features of direct democracy in Switzerland. They ensure that elected representatives don't get inflated ideas about their self-importance or run too far ahead of the will of the people. Membership of the EU could mean giving up this constraint on overweening political power.

     Rather than bewail the supposed abandonment of the European ideal, good democrats should congratulate Swiss voters for once again showing sound judgment. It took a paid announcement (by a private banking firm) in last Monday's Le Temps to put their decision in proper perspective: "What seems to divide the Swiss is, in reality, what brings them together. The spirit of independence, faith in private initiative and -- better than tolerance -- respect for differences: these values built Switzerland." As European statesman ponder the future of the EU and debate the relative benefits of enlargement vs. deepening, the community method vs. intergovernmentalism, one-speed vs. two-speeds vs. 10-speed and so on, they could hardly do no better than to keep the Swiss example foremost in their minds.

     -- From The Wall Street Journal Europe


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