28 November 2014

Switzerland at a crossroads


November 30, 2014 might become a date for the Swiss history books. This upcoming Sunday, more than 5 million voters are called to the ballot to decide on three important issues launched by popular initiative: immigration, monetary policy and flat-rate taxation for wealthy foreigners. From an economic point of view, all three are problematic. With regard to Switzerland’s priceless world-wide reputation as a land of freedom, however, as an island of classical liberal persuasion within the vast ocean of bureaucratic social-democratic European welfare-states, it is especially the first of the three proposals that might have disastrous consequences. Opinion polls show a seriously divided country, the outcome is uncertain. Here in Zurich, most people seem to be holding their breaths.

Traditionally, the Swiss are tremendously proud of their system of “direct democracy”, where people have the right to launch initiatives and referenda on their own instead of having to rely on the hopefully wise politics of their once elected government, as with representative government. There are indeed many advantages to direct democracy, which understandably is a darling to libertarians: it clearly provides the most straightforward realization of political liberty; it incentivizes citizens to get informed; it strengthens their identification with the community and the political system; and it focusses politics on issues rather than persons. Nonetheless, heavy doubts are now creeping in.

What if people are too economically illiterate to really understand the consequences of their votes? What if they mean their vote to be merely “expressive”, not anticipating that it might have a decisive harmful effect? Haven’t political scientists long warned that direct democracy increases the danger of a majority exploiting the minority, whereas a representative system provides better protection for minorities? And doesn’t the usually low participation rate limit the democratic legitimacy of the whole procedure? How clever is it to let people vote on a discrete topic without any regard to interrelated issues and the global context? What if direct democracy works in small groups with functioning social control, but not in a growing, increasingly anonymous society? Shouldn’t there be limits to the issues people can decide upon? Isn’t there a way to protect people against themselves?

Here is what this Sunday’s votes will be all about. The first initiative, called “Ecopop” (from ecology and population), is simply aimed at protecting the natural environment. The proposal is that net immigration should be limited to 0.2 percent of the current population per year, in order to prevent an ecological collapse. Switzerland is already too crowded, the soil suffers from sealing, and infrastructure is breaking down: These side-effects of the liberalized immigration law (Switzerland, without being a member of the EU, joined the Schengen treaty in 2004) are indeed an objective reality and visible to everybody. Every year, Switzerland currently has a net influx of 80,000 people, which amounts to roughly 1 percent of the given population. Railway stations are no good for claustrophobic people; it is impossible to park a car; and there is no highway without traffic jams. You won’t be fed in a restaurant without a reservation, and don’t be surprised at real estate prices that even the wealthy Swiss can no longer afford. This may sound like daily life in London – but the rural Swiss are not used to crowds and don’t intend to get used to them. And, with a third of their population being migrants, they don’t like the idea at all of allowing in ever more “strangers”. The “original” Swiss might someday be a minority in their own country.

The second initiative concerns the Swiss National Bank’s (SNB) gold reserves. The idea is here that the SNB should hold at least 20 percent of the assets in gold (currently less than 8 percent); that sales of gold are not allowed; and that all gold reserves must be kept within the country. The background of this initiative is rather emotional: it is the general discontent with the banking sector, even though the national bank has a different role to play. Illegal transactions, manipulations, excessive salaries and dramatic law suits with the US (and corresponding fines) have tarnished the image of the once famous Swiss banking “industry”. However, if this initiative is accepted, it will become more and more costly for the SNB to fight against the strong upward pressure on the Swiss franc, a collateral damage of the crisis in the euro zone. This intervention, introduced in 2011, is vital for the country’s export-oriented business, but also for private households who depend on affordable import goods.

The third initiative aims to end the special flat-tax treatment of wealthy foreigners. Non-citizens who live, but don’t work in Switzerland, can be taxed on the basis of their estimated expenses instead of their income and fortune. Some cantons do make use of this possibility, particularly in the French-speaking part of the country; others have dropped it. In a pragmatic sense, the advantage is that the millionaires thus attracted fill the public wallet in other ways (spending, donations, etc.). As such however, the unequal treatment – discrimination in favour of the rich – is indeed problematic. Yet there is another relevant aspect to this: if the initiative is accepted, the cantons will lose one more instrument of tax competition. That would be a blow to federalism, another Swiss tradition.

This latter initiative will unfold its negative effects only in the long run, the second much sooner, and the first, Ecopop, quite immediately. The problem with Ecopop is economic as well as political. The Swiss economy, specialized not only in cheese and watches, as the cliché runs, but more importantly in pharmaceuticals, chemistry, high-tech industry and banking, sorely needs brains from abroad. If companies will not be able to recruit from the global labour market any more, they will be certain to lose their advantage. The first thing they will have to do is put a brake on further investments. “Suicidal”, “deadly”, “irresponsible” – this is how CEOs from Roche, ABB and Banque Lombard Odier & Co view the initiative. Public administration is no less worried, since the foreigners add a badly needed contribution to the public pension system.

And what is the mood within the government? “I’m scared”, admits the minister in charge of the economy, Johann Schneider-Ammann with a shiver. Still not recovered from the first blow – the February 9, 2014 vote on limiting “mass immigration” through fixed contingents – the ministers desperately struggle at squaring the circle. That first decision was enough to force Switzerland to leave the Schengen treaty, which endangers other bilateral agreements with the EU as well. What if tort comes to injury this Sunday?

The problem is fundamental: With their system of direct democracy, the sovereign (the people) can take a decision breaking international law at any time. Placing public sovereignty first at all cost, it comes to no surprise that many Swiss consider “international law” a dirty word. But is full autonomy possible at all in an integrated world? In today’s globalized economy? Can the Swiss afford to mess up their economic and political relationship with the rest of the world, at the whim of disoriented voters who listen more and more to populist voices such as the xenophobic party SVP? Hardly so.

Critical comments therefore range from a full rejection of the traditional system to at least a number of softer adjustments. On the background of the present voting marathon that the citizens must shoulder at all levels of government, it seems urgent to at least reduce the number of initiatives and to increase the prerequisites. In the 1960s, seven federal initiatives were up for vote. In the past decade, the number was 36 (not to count the numerous cantonal and local initiatives). When federal initiatives were first introduced in 1848, signatures from more than 9 percent of the electorate were needed to launch a public vote. Today, the absolute number is unchanged (100,000), but due to the population increase, the rate has shrunk to less than 2 percent. That turns initiatives into an all too easy tool for pressure groups, helping them to at least slow down the political process. Sometimes the mere threat of an initiative suffices to prevent useful and necessary government action.

Usually, the Swiss decide in an admirably prudent way. Let’s hope they get it right this Sunday.

Karen Horn is an independent author and teaches the History of Economic Thought at various universities. She also serves as the President of the Friedrich A. von Hayek Gesellschaft (Berlin). She is the author of "Roads to Wisdom - Conversations with Ten Nobel Laureates".