12 February 2015

Switzerland scrambling to break free from the EU’s headlock


Can a small country remain economically and politically independent from its neighbours? How useful is it to even try and defend one’s own different ways? Is it at all possible to ward off unwanted spill-ins? Is sovereignty only a dream? More than ever, these questions haunt the Swiss regarding their relationship with the rest of Europe. Two major issues are currently on the table: immigration and monetary policy. One year ago, the Swiss people voted to limit mass immigration, and not yet a month ago, the Swiss National Bank (SNB) decided to sever the franc from the euro. Both political actions can be interpreted as attempts to protect or restore Swiss sovereignty.

The Swiss government had submitted an application for accession to the EU in 1992 but was stopped short by a popular vote at the end of the same year. The Helvetic republic has thus stayed out of the EU, the European Economic Area and the Euro-zone. In order to participate in the common market nevertheless, bilateral treaties have been negotiated by which Switzerland adopts most of the relevant European law. These treaties concern the free movement of people, air and road traffic, agriculture, technical trade barriers, public procurement and science (“bilaterals I”) as well as security, asylum and the absence of border controls (Schengen treaty), cooperation in fraud pursuits as well as the environment, media, education, elderly care, statistics and services (“bilaterals II”). From early on, critics however complained that this bilateral approach amounted to an illegitimate de facto EU accession through the back door.

It is on this background that the Swiss People’s Party, the right-wing SVP, the largest party in parliament, launched an initiative against mass immigration on February 9, 2014. The claim was that the Swiss government needed to regain control over the influx of foreigners, given that those drive wages down and housing prices up, that infrastructure was close to a breakdown and criminality on the rise. True enough, the share of foreigners in Switzerland has grown from 5.9 percent in 1950 to 23.8 percent in 2014 (or 35 percent, if one counts not only people holding foreign passports, but everyone with a “migration background”, including first and second generation). Forecasters see an even speedier increase in the future. The initiative, which the Swiss people adopted by a tiny majority, came with an obligation for government not only to determine yearly upper limits and contingents but also to change the corresponding Swiss-EU treaty on the free movement of people within three years. That however is more easily said than done. The “bilaterals I” underlie a so-called “guillotine clause”, which means that if Switzerland choses to end one of the treaties, they will all cease to apply – and that would cause enormous damage to the country’s economy.

The situation was further complicated by the fact that the Swiss government lost almost a year because a second initiative called “Ecopop” (see CapX, November 28, 2014), even stricter than the first, was underway. Ecopop however was rejected by a vast majority on November 30, 2014, so that the road to negotiations with Brussels is now clear. But the EU Commission proves non-cooperative. While the Swiss rack their brains on how to opt out of the treaty without officially doing so, i.e. how to respect the binding popular vote without breaking international law, the EU Commission just says no: There won’t be any room for a new protective clause or any other trick. As a result, politicians like Eveline Widmer-Schlumpf, the Swiss finance minister, at least “privately” now seriously consider the possibility of calling the people to the urns once more, presenting them with an acute choice between limits to immigration and the maintenance of the bilaterals. While the result of such a vote would seem pretty clear (in favor of the bilaterals), experts view it as much less certain that the annihilation of one popular vote by another would be constitutional.

This uneasy situation makes many Swiss feel small and powerless. They sense that their much-cherished sovereignty is but a sham. When the president of the EU commission, Jean-Claude Juncker, after difficult first consultations with the Swiss president Simonetta Sommaruga, placed a little kiss on her cheek, the right-wing media raged about what seemed to them a distasteful transgression. Markus Somm, editor-in-chief of the Basler Zeitung, known for his authorized biography of Christoph Blocher, the SVP ultra, dropped the word of “sexual harassment”; Roger Köppel, editor-in-chief of the weekly “Weltwoche”, interpreted the event as symbolic of the unhealthy power relations between Switzerland and the EU, where an all too shy Helvetia puts up with the role of an obedient “victim of rape”. Like other observers, they openly envy Greece for her new finance minister Yanis Varoufakis, who kicked out the “Troika” without advance warning and made Jeroen Dijsselbloem, head of the Euro group, look like a fool: “Wow. What a man”, writes Somm full of admiration for the David fighting Goliath. It apparently doesn’t matter to the allegedly business-friendly Swiss right-wing EU critics that the Greek government now consists of a bunch of Marxists who don’t respect contracts and plan not to pay back their country’s debt, as long as they disavow Brussels.

The recent drastic appreciation of the Swiss franc contributes to this sentiment of victimization. On January 15, after having announced negative interest rates just a month before, the SNB discontinued the franc-euro peg introduced in 2011. The peg at 1.20 (francs per euro) had been meant as a temporary help to the national businesses. It was then also based on the hope that the euro crisis would come to an end, which would have reduced the capital inflow to the safe haven of Switzerland. But this did not happen. When it became clear that the ECB in Frankfurt would launch another bazooka, promising to flood the market with ever more liquidity, the SNB realized that it would be too costly to lean against the ensuing wave of franc purchases. The market reaction came close to an earthquake. The franc rose to parity in next to no time. People living close to the border were excited, they now shop until they drop in neighboring Germany, France and Italy – within the limits of tariff protection, of course. Business however was in a state of shock. The appreciation means an enormous loss of competitiveness in the world market – for centuries, the economy of this small country poor in natural resources and without a helpful topography has been thriving on foreign trade. Exports have contributed no less than 31.7 percent of GDP in 2013.

When the franc appreciated drastically in the early Seventies, GDP dropped by almost 8 percent between 1972 and 1974, and employment was reduced by 10 percent. Growth only returned five years later. While economic research institutes now also expect the Swiss economy to fall into recession, it should be less severe than in the Seventies, if the appreciation doesn’t accelerate. Coincidentally, a recession might reduce the demand for foreign labour – which would take some pressure out of the immigration issue. But whose fault is this anyhow? The EU’s, of course. Apart from the unions and the left-wing parties, almost nobody in Switzerland puts the blame on the SNB who surprised everybody by taking the decision to float the currency again. It is generally understood that the peg was unsustainable. The real problem is one against which Switzerland can do nothing: the instability of the eurozone, the dangerous quantitative easing strategy of the ECB and the general uncertainty also in the political realm, where the EU struggles to find a consistent and consequent attitude toward belligerent Russia. In such a difficult environment, mobile financial capital seeks safe havens and finds one in the economically healthy and politically neutral country of Switzerland.

Life would be easier for the Swiss if their country wasn’t so attractive, but they seem determined to turn the burden into a benefit. In the past, industry has always had to operate under the pressure of appreciation, and the impossibility to rest on their laurels has made the companies – from machinery to pharmaceuticals – only more creative and innovative. Government now does help by temporarily subsidizing firms so that they can keep their personnel even if they must cut down production, but beyond this, no economic stimulus is planned. Industry will have to mobilize productivity reserves and to restructure production in such a way that they benefit from the cheaper imports. While the large international corporations will manage, the small and medium-sized enterprises are facing a challenge that might be too big for them. The situation is even more problematic for tourism, where input substitution will not work so easily. However, it hasn’t taken the ski resorts long to react. Some offer special packages at lower rates, others promise a “currency rebate”, and the village of Grächen in Valais guarantees a home-made rate of 1.35 francs to one euro – prices (and margins) have visibly come under pressure. As Switzerland has always been an expensive destination with a sometimes problematic value-for-money relation, these efforts are as necessary as they are promising.

Prices can be seen tumbling down in the retail business as well. The big supermarket chains such as Migros and Coop are already drastically reducing their prices where they can, squeezing their profit margins. But effective competition might also come into being through the legislative door. Consumer protection groups and businessmen are currently planning to launch a popular initiative that would enable government to fight distorted import prices. After all, the high price level in Switzerland isn’t entirely homemade: many import prices are artificially held at a high level by the exporting European firms. For example, a shampoo producer from Germany currently sells the shampoo to a Swiss retail chain at a higher price than in Germany, prohibiting any parallel imports, and thus reaps a windfall profit. Apparently, the competition agency doesn’t yet have the means to combat these policies. Already in 2004, the government in Berne had commissioned a study which showed that Swiss companies would save 65 billion francs every year if they could buy inputs at EU prices, and according to the consumer protection foundation consumers could save 15 billion francs.

Switzerland has definitely been shaken out of its complacency. Like it or not, the Swiss now wake up to the fact that they need to do something about the systematic risk that popular votes contradict existing international law. This problem will come up more and more often in the future. The Swiss are also currently learning the bitter lesson that economic integration makes it impossible to disconnect oneself fully from the partners, including when these run erroneous policies that harm themselves and others. In the imperfect modern interconnected world, sovereignty doesn’t mean that there are no factual constraints. But the Swiss will adapt intelligently, as they always have throughout history, knowing how to turn a challenging new situation into an advantage.

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”.