The European Union Studies Center

 

Switzerland and the European Union

Speech by Ambassador Raymond Loretan

Consul General of Switzerland in New York

November 22, 2004

Introduction

·       Switzerland is European (specify: contribution Balkan, OSCE, transit etc…)

·       But, as most people know, Switzerland is not a member of the European Union. It is an island in the midst of Europe, totally surrounded by EU member countries. However, Switzerland’s economy is deeply interlinked with the economies of its EU neighbors: the EU consumes 60% of Switzerland’s exports, and provides 80% of Switzerland’s imports. The picture is much the same when it comes to Foreign Direct Investments. And when you look at the number of foreign nationals living in Switzerland (1’485’000 people, 20.3% of the whole population), close to 60% of them are EU citizens (840’00). In addition, Switzerland with its mountain passes is an important transit gate hosting much of the Union’s north-south transport flows[1]. In a way, we are even more integrated that some Member states.

·       Why, you might ask while looking at this picture, why then is Switzerland not a member of the Union? The reasons are numerous, and we can certainly speculate about them. We can speculate with even more delight as to when Switzerland will join the European Union. But that is not what I would like to do today. I would rather look into the fact that Switzerland is currently not an EU member, and discuss what that means for the country and its citizens, in terms of advantages and disadvantages. It might, however, prove useful for an overall understanding to briefly touch upon the questions of Why? and How long? - and to briefly present the Swiss Government’s policy towards the Union.

Why is Switzerland not member of the EU ?

So let me start with this: the reasons for Switzerland’s abstention can be organized into two sets of arguments.

·       Political reasons

·       The first one is political: the Swiss people have a historical and deeply rooted desire for independence and self-determination, which is reflected in our system of direct democracy. You might know that in Switzerland, like in some of the states here in the US, people are highly and  directly involved in the political decision making process - not only by electing parliamentarian representatives, but also by voting in referendums on concrete political issues. The Swiss vote four to five times a year on questions such as the construction of highways, taxes on gasoline or the creation of a pool of Swiss peacekeeping soldiers. By the way, Switzerland is the only country in the world in which accession to the United Nations was subject to a popular vote. In the same way, accession to the EU will need a referendum. By joining the Union, many Swiss fear specifically that this referendum power they enjoy will be weakened or even lost.

·       In the same line of thought, many Swiss fear they will need to give up their tried and tested policy of neutrality when joining the European Union. Neutrality is a concept, which is deeply rooted in the Swiss identity. Many Swiss citizens are convinced that neutrality saved them from the turmoil of the two World Wars. It is true, in today’s EU, Switzerland could pursue its neutral position. EU member states such as Austria, Finland, Sweden and Ireland are neutral too. The European Constitutional Treaty as it stands now is compatible with Swiss neutrality[2].  However, in the long run, it might well be that the Union Member States will be invited to integrate into a European defense alliance, provided that it is approved by the unanimous decision of all Member States[3]. In such a case, the European Constitutional treaty mentions at the same time that "the policy of the Union (…) shall not prejudice the specific character of the security and defence policy of certain Member States." Without using the word "neutrality" expressly, this clause is a clear reference to the concept of neutrality, which could be eventually preserved.

·       Economic reasons

·       The second set of reasons why Switzerland is not part of the EU is in the field of economics. At present, many Swiss simply do not see any economic advantages which might justify membership. And even economists take controversial stands. The main issues at stake are: the low Swiss interest rates (being a EU-member, Switzerland would lose its independent monetary policy), the comparably low level of taxation, the comparably low Value Added Tax, the low unemployment rate and our banking secrecy, one of the key assets of the Swiss financial market.

·       In addition, just as neutrality is an emotional issue politically, in the economic context another issue preoccupies public opinion in Switzerland, namely the national currency, the Swiss Franc. You know, Ladies and Gentlemen, that national currencies are often the subject of affection. Just think of the reaction of the Germans when the Mark disappeared. Much like the British, the Swiss are proud of their strong and stable currency. The Single Monetary Union is part of the “Acquis”, member states are thus obliged to take on the Euro. The fear that sooner or later they will have to embrace the Euro once Switzerland is a member of the Union - this fear is definitely not working in favor of accession. And, by the way, it is not that offbeat: unified national economies do not make much sense in the long run without a unified currency. The loss of the Swiss currency is something that at present a majority of Swiss people might find hard to accept.

When will Switzerland join the EU ?

·       Our second question was:  when will Switzerland join? The answer is both simple and most complicated at the same time. The simple answer is: as soon as a majority of the Swiss people and the cantons consider it advantageous, and vote in favor of accession. The complicated answer, however, relates to the hearts and minds of the Swiss voters and how they see the Union as it exists today. Romano Prodi, before leaving the Presidency of the European Commission, said in an interview with a Swiss newspaper: “I am not surprised that a wealthy country such as Switzerland is struggling with the accession to the EU. Switzerland has certainly a lot to win, but also a lot to loose.”[4] This analysis shows precisely the ambiguous situation of the Swiss: intellectually, a lot of them understand that, in the long term, it will be difficult for Switzerland to abstain. Emotionally however, they feel that they will have to give up, at least partially, some of the traditional habits and customs that are particularly dear to them. They feel that the fundamental values they believe in will be affected. Values such as independence in decision making, self-determination and subsidiarity.

·       Let me thus predict that Switzerland will join the European Union as soon as the Swiss feel that there is more to win than to loose.  That is, when they feel there is not too much to loose politically in terms of direct democracy and self-determination, and when they feel that they are on the winning side with respect to national security and economic welfare. This certainly depends heavily on the future development of the EU, in terms of its enlargement and institutional deepening, in terms of the weight small countries are given, and in terms of its democratization process.  But Switzerland’s accession also depends highly upon the alternative possibilities it might have as a non-member.

The Swiss Government’s policy towards the EU

·       The Swiss Government has to shape its European policy accordingly. In this sense, it tried a soft approach in the early 1990s  by taking a leading position in the negotiations of the so called European Economic Area, a treaty allowing free movement of goods, services, capital and workforce between the markets of the Union and participating countries. However, this approach was rejected by the Swiss people in a memorable referendum in 1992 by a majority of 50.3 % of the people and of 16 cantons against 7.

·       Subsequently, Switzerland and the EU together selected a number of fields of common economic interest, in which bilateral market access was negotiated. These fields, in which so called “sectorial” agreements were concluded, are: land and air transport, free movement of persons, the handling of public procurements, technical barriers to trade, trade in agricultural products in which the WTO agreements have not been particularly extensive, and the area of research, meaning the recognition of diplomas and the exchange of scientists. The relations between Switzerland and the EU were recently further deepened by the conclusion of additional agreements reaching out to cooperation in the fields of  taxes, particular with regard to taxation of savings , and as a request of the Swiss side, the accession to the Schengen/ Dublin  system of increased cooperation in justice, police, asylum and migration. This second round of agreements is still to be ratified by both Switzerland and the EU.

·       On the domestic side, knowing that at present a referendum on EU accession would fail, the Swiss Government is currently concentrating on completing and implementing the “sectorial” treaties I have just mentioned.  For the long term, however, the government’s goal is accession. In order to increase the chances for a successful referendum, the detailed impact of accession on Switzerland’s political system, in particular its system of direct democracy needs to be studied and clarified. Only if the population can be told in which fields exactly direct democracy will be affected and what in terms of referenda will still be possible, only once this is clear, a sustained political debate make sense and can be started.

Advantages not being a member

·       Well, Ladies and Gentlemen, for the time being, Switzerland is not an EU member and we have to accept this. Not being a member has of course its advantages too - and we certainly make use of them. Switzerland, for example, can afford a much more liberal tax regime than its EU neighbors. Also, it does not have to comply with the minimum EU VAT (value added tax) rate of 15%. Nor does it have to adhere to the minimum EU limits on working hours. This and many other advantages make Switzerland a pretty attractive business location for American companies establishing themselves on the European continent. Over 650 American firms are now active in Switzerland, and many have decided to locate their European headquarters on Swiss soil, amongst them giants like Procter&Gamble, PhilipMorris/Altria and Hewlett Packard.[5]

·       Why is this so? According to a recent private survey[6], one of the main reasons why these companies have chosen Switzerland is the fact that it is not a member of the European Union. But this answer is too simple. Let me answer more fully by using Allinghi as an example. Allinghi, as some of you might recall, is the name of the Swiss sailing team, that, in the spring of 2003, was the first ever European team to win the American Cup in the 152-year history of the race.  At that time, some people were surprised to see a landlocked country become a sailing champion. Funny enough, Swiss sailing stars seem to ascend at the same speed that the Swiss skiing stars descend from the sky of glory.

Joking aside, Ladies and Gentlemen, Allinghi’s victory parallels the attractiveness of Switzerland as a business location outside of the European Union.  And this attractiveness is based on three key elements:

1.    Brain: the structure of the Allinghi’s yacht hull was calculated and its composite material was developed by the Federal Institute of Technology in Lausanne, one of several first-class universities and research institutions in Switzerland.

2.    Capital: Allinghi’s owner, Ernesto Bertarelli, is the CEO of Serono, the biggest European biotech company, headquartered in Geneva.

3.    A sound business environment: Serono, like other international firms, appreciates Switzerland’s political stability and its investor- and business-friendly government which has kept tax rates among the lowest in industrialized nations.

Thus, Alinghi seems to me to be a wonderful success story built upon advantages that would become relatively less explicit with an accession to the EU. The advantages that Switzerland can offer as a non-member are the following:

·       a highly educated, well trained and above all flexible work force,

·       an efficient capital market, a stable currency and a competitive international banking system,

·       a business friendly legal and tax framework as well as a first-rate infrastructure and excellent living standards. By the way, in Mercer Human Resource’s 2003 survey on worldwide living conditions, Switzerland’s economic hub, Zurich, owned the first place-ranking overall, closely followed by Geneva in second place.

·       Let me extend a bit on the financial market: Switzerland is well known throughout the world for its stable political and economic environment and its banks and their top-notch services. Part of the Swiss banks’ attractiveness is also due to the Swiss legislation on customer privacy. It attracts money from all over the world into Switzerland’s financial market. The European Union and in particular some of its more important member states[7] have repeatedly expressed concern that the Swiss privacy policy encourages tax evasion. This might indeed be the case with countries that have a particularly high rate of taxation on interest, as capital naturally flows to where the return on an investment is optimized. On the other hand, we must not forget that Switzerland is actively contributing to international efforts to fight tax fraud. To date we have concluded 69 double taxation agreements. And with the agreement on taxation of savings, Switzerland is contributing to the effort of the EU to appropriately tax savings income. This being said, one must know that privacy of the individual, also in financial matters, is of high importance to the Swiss and deeply rooted in their hearts and minds. Swiss people have, in comparison with other Europeans and much like the Americans, a particularly liberal interpretation of the role of Government - hence, they believe that the Government should not interfere with issues that citizens consider to be their private matters.

In the framework of the second round of “sectorial” negotiations with the EU that I mentioned earlier, the taxation of savings issue was one of the most heatedly debated subjects. The Union tried to obtain an automatic exchange of information on interest earnings of EU nationals in Switzerland. This measure would, however, fundamentally hurt Swiss privacy principles and was unacceptable. Switzerland, on the other hand, proposed a withholding tax[8] on interest for capital deposits of EU nationals; respective revenues[9] are to be handed over to the Union. This solution was ultimately accepted. It allows Switzerland to preserve its liberal approach towards customer privacy in the banking field while providing us with an effective way of cooperation in the struggle against fiscal crime.

Indeed, and this has to clearly stated, the high degree of financial privacy offered by Swiss legislation gives no protection whatsoever to capital of criminal or terrorist origin. The right to privacy can be legally suspended when proceedings are under way in connection with virtually all types of serious crimes, including money laundering, organized crime and terrorist activities.

Disadvantages not being a member

Not being a member of the EU, Ladies and Gentlemen, also has certain disadvantages for Switzerland. However, they are currently assessed by a majority of the Swiss as less predominant than the advantages.

·       Let me first of all point to the obvious: a non-member is of course neither included nor consulted in the European Union’s decision making process. I talked earlier about the close economic ties between Switzerland and its neighboring EU member states. I also talked about the fact that Switzerland is embedded into the EU’s policies when it comes to security matters, be it in regards to military threats, cross-border criminality or migration. In all these fields, given our country’s geographical position and its highly export oriented economy, Switzerland is naturally interlinked with its neighbor, the European Union. Thus, we often have to deal with decisions that are made by the Union, legislation that is formulated in Brussels and policy positions that are established among EU member states. And very often, such decisions and positions have implications on us. We might have to react by implementing some of the EU’s policies ourselves should we still want to - for example - export goods produced in Switzerland to our main market, which is the European Union. In this sense, being a non-member surrounded by the EU sometimes brings Switzerland to embrace certain rules and regulations over which we have no say. Therefore, for the sake of independence, we sometimes have to embrace certain EU-decisions in Switzerland.

·       Another disadvantage for Switzerland is the difference in size between the two partners: The EU is composed of 25 countries with, all together, 450 million inhabitants, whereas Switzerland is a single small country of 7 million, geographically surrounded by the bigger partner. This leads, sometimes, to pressures that the Swiss have to deal with. To give you a few examples:

·       Zurich airport is situated a few dozen miles away from the German border and thus had, until recently, flight corridors for approaching aircraft over German territory.  After pressure from the German government, the airport had to rearrange these corridors unfavorably such that planes now approach the airport mostly over Swiss territory. It is rather likely that, if Switzerland had been an EU member, a more accommodating solution could have been found.

·       Austria, after joining the Union in 1997, immediately sharpened its border controls at its crossings with Switzerland, thus creating long waiting lines and upset travelers who, till then, were only inspected randomly.

·       Or, the EU, earlier this year suddenly decided to charge customs duties on goods of EU origin and being re-exported by Switzerland to the EU, declaring that the free trade agreement between Switzerland and the EU does not cover these particular types of goods. This new custom-system was in the end never introduced since Switzerland and the EU found a solution to avoid this issue.   

This shows you the relative vulnerability of Switzerland as a non-Union member in the midst of Europe. Such pressures from our neighbors might become more frequent as the Union expands and integrates further.

Enlargement of the EU

In this context, it might be interesting to say a few words on the EU’s recent enlargement and its impact on Switzerland. Is a bigger Union an advantage or a disadvantage for us? How does our set of ”sectorial” agreements apply to the new member states?  These are questions, which are currently being debated back home, and questions that EU-critical political forces believe that the Swiss people should address in the form of a referendum, especially those involving the free movement of persons.

·       Let me first point out the opportunities that are available to Switzerland as a result of the EU’s enlargement: The opportunities are primarily economic. Through the agreements with the Union, additional markets in Central and Eastern Europe have opened up to goods and services from Switzerland. In addition, the new EU member countries have become an interesting source of qualified workers, and, at the same time, these countries have become attractive investment locations for Swiss manufacturers with labor intensive production lines.

·       On the downside, some circles in Switzerland fear a migration from Eastern Europe made possible by our agreement with the Union regarding free movement of persons. There is the fear, particularly among trade unions, that a low salary work force will heavily penetrate the Swiss labor market and abuse the relatively well-developed Swiss social security system. Whereas the government is setting up measures to contain these possible negative effects, certain political groups wish to submit the extension of the free-movement-of-persons-agreement to a popular referendum.  Should the population vote against the extension, our whole system of “sectorial
“ treaties would be endangered, as these treaties were concluded on an all or nothing basis.

Conclusion

As you can see, Ladies and Gentlemen, so far, a majority of the Swiss people considers EU abstention to be more advantageous than EU accession. The decision as whether to join or not is ultimately a matter of balancing pros and cons in the light of Swiss national interests. The question is: are Swiss national interests better served within the Union or outside of it?  Specifically, does Switzerland have more self-determination and freedom of action from within the Union or outside of it? Is Swiss identity better preserved within the Union or outside it? These questions have to be studied and assessed in light of both the future development of the Union and Switzerland’s possible alternatives. The Swiss Government’s long-term goal is accession. However, in the short and medium term, the government intends to implement and embrace the current bilateral approach. In parallel, the positive and negative impacts of Swiss accession need to be assessed regularly, particularly with regard to direct democracy. And, in what is probably the biggest challenge, the domestic political environment needs to be largely EU-positive before accession negotiations can begin.

Ladies and Gentlemen, as you might know, the Swiss tend to be pragmatic and careful. They usually take a lot of time to think things over, and they have, all in all, had good experiences with this approach in the past. It took us more than fifty years to join the United Nations, and we will certainly need appropriate time to decide on our European integration. We are fully aware of the fact that the EU is developing, both in size and institution. The Swiss will observe these developments and decide, when time comes, whether they are better off within the European Union or outside of it.

Let me conclude on a personal note: in accordance with the strategic goal of the Swiss government to eventually join the European Union, and despite the difficulties, obstacles and reservations, I am confident that a majority of the Swiss people will come to the conclusion that Switzerland is their Homeland – but Europe is their future!

Thank you very much for your attention.