Commentary

Helvetian Swan Song?

This article appeared on Techcentralstation.com, November 17, 2004.

Switzerland’s October accession to the Schengen Treaty, which allows for a passport-free movement of people across European borders, has been portrayed as a sure sign of better days ahead for EU-Swiss relations. But in fact, the Swiss accession was preceded by exceptional acrimony. It has exposed the EU as a bully set on destroying tax competition in Europe and forcing all countries in its orbit into a job-destroying high-tax regime. The Swiss will be allowed freedom of movement across Europe in exchange for sacrificing their tax autonomy. The agreement shows the extent of power asymmetry between the EU and non-EU countries in Europe, and points to difficult days ahead for the independence of the Helvetian Republic.

The relationship between the EU and Switzerland has always been marked by ambivalence. The Swiss recognize the need to trade and cooperate with Europe, but wish to preserve their national independence. Swiss cantons, jealously guarding their autonomy from encroachments by Bern, the Swiss capital, are loath to cede it to bureaucrats in distant Brussels. Not surprisingly, in a nationwide referendum three years ago, Swiss voters overwhelmingly refused a motion, backed by the socialist New European Movement, to start negotiations about Switzerland’s entry to the European Union. The motion was defeated by 77 percent to 23 percent. The pro-EU campaign failed to carry a single canton of the Swiss federation.

In the past, the main vehicle of interaction between the nascent EU and Switzerland was the European Free Trade Association (EFTA). EFTA provided a home for all those European countries that wanted to trade with one another but wished to preserve their political autonomy. For years, the EU and EFTA competed with one another. The equilibrium was upset in 1973 when Denmark, Ireland and Great Britain left EFTA and joined the EEC (later to become the EU). Subsequent desertions by Austria, Portugal and Sweden terminated EFTA as an alternative model of European integration. Today, EFTA consists of only Iceland, Norway and Switzerland. Those three countries need the EU more than the EU needs them. As Astrid Epinay, professor of European law at the University of Fribourg, points out, “It is a fact that Switzerland doesn’t count for very much in terms of power when it comes to [dealing with] the EU.”

Switzerland’s deteriorating position vis-à-vis the EU has become apparent as a result of a dispute over taxes. Switzerland has been a place of refuge for over-taxed European citizens for decades. That presented a growing problem for western European politicians, whose populist domestic policies resulted in out-of-control public spending and growing budget deficits. In pursuit of more revenue, they decided to make it more difficult for European taxpayers to shelter their savings from high taxes. Switzerland resisted the pressure to tax the savings of those Europeans who held Swiss bank accounts for 15 years.

And so the EU decided to tighten the screws on the land-locked Helvetian Republic. In March 2004, Germany imposed stringent checks on her border with Switzerland, effectively bringing traffic between the two countries to a halt. That was a departure from the casual way in which the Germans treated Swiss traffic in the past. The German border authorities claimed ignorance, but the Swiss knew the real reasons behind the border blockade. As Jacques Strahm, who headed border authorities in the French-speaking cantons, opined, “I think it’s a way of applying pressure on Switzerland…. It could be linked to bilateral treaties.” German Socialist Finance Minister Hans Eichel, who recently made the news by attempting to bully the new members of the EU into raising their corporate taxes, confirmed the political nature of the measure. According to Eichel, “I assume that no country in Europe wants to make its living in part by making itself into a hideout for tax-evaders from other countries…. I assume this is also [true] of Switzerland.”

As a consequence, Switzerland has been forced to allow the governments of the EU member states access to information about EU citizens’ Swiss bank account deposits. Under the euphemism of “information sharing,” Swiss banks will be required to inform on the amount of money the EU citizens hold in Swiss bank accounts, or else will have to assess a 35 percent tax on the EU citizens’ savings, 75 percent of which will be repatriated to the appropriate EU governments. In exchange, German police will no longer harass Swiss traders and travellers-at least for now.

So what does the future hold for the EU-Swiss relations? Professor David Landes of Harvard University writes that it was Europe’s political, economic and cultural “fragmentation [that] gave rise to competition, and competition favored good care of good subjects.” In contrast, the EU uses “enlargement” as a preferred way of stifling growing international competition. The EU is, therefore, likely to continue to tighten its suffocating embrace of the Helvetian Republic, with Norway and Iceland surely to follow. That is a bad news for both the long-suffering taxpayers of Europe and the freedom-loving people of Switzerland.

Marian L. Tupy is assistant director of the Project on Global Economic Liberty at the Cato Institute.