Diversity and competition in Switzerland: an example for Europe?

1. Diversity and competition in Switzerland: an example for Europe? Faculty of Law, Comenius University 12 June 2008 Victoria CURZON PRICE University of Geneva

2. « Unity in Diversity » • EU has yet to resolve the question of « how much unity? » versus « how much diversity? » The Lisbon Treaty still states as its aim an « ever closer union among the peoples of Europe » while respecting their « cultural and linguistic diversity ». But it has dropped the Constitutional Treaty’s slogan of « unity in diversity »…

3. Aims of the Lisbon Treaty • Relevant aims of the Lisbon Treaty as far as this question is concerned: • « Improved ability to act in areas of major priority for today’s Union » (EU website) • Extending qualified majority voting to new areas • Correcting the EU’s « democratic deficit »

4. Subsidiarity (Art 5) « Under the principle of subsidiarity, in areas which do not fall within its exclusive competence, the Union shall act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level. » • Trouble is: this division of labour is decided upon by the EU!

5. « improved ability to act » Areas: Freedom, security and justice Energy Public health Civil protection Climate change Services of general interest Research Space Territorial cohesion Commercial policy Humanitarian aid Sport Tourism Administrataive cooperation Source: « The Treaty at a glance », EU website

6. Harmonisation versus Competition The EU has always aimed at the highest level of harmonization possible (given political constraints) and has resisted institutional competition Ex: agricultural policy, product and process regulation, work and safety regulation, environment, VAT, taxation of savings, corporate tax base etc. Why? • (a) « positive integration » builds Europe • (b) to create conditions of fair trade (create a « level playing field ») • (c) fear of a « race to the bottom »

7. Why the « level playing field » is not the right analogy • The game of exchange is NOT a game of soccer! • There is no end to this game! • BOTH players win, and the more different they are, the greater the mutual gain • We are all different, but can all gain from trade because we all possess a comparative advantage in one area or another • Institutional competition is like any other sort of competition: it is dynamic, encourages innovation and reveals voter/consumer preferences. It is naturally democratic. It does not result in a « race to the bottom ».

8. Take Switzerland as an example: • It is a voluntary Confederation of 26 sovereign states, embracing 2 cultural, 4 linguistic and 2 religious identities • But it is a « common market » since 1848 • It combines political and economic unity with exceptional institutional and cultural diversity • It has never attempted to « harmonize » to anything like the same extent of the EU • … and yet it is a peaceful and prosperous society – disaster has not struck. Why not?

9. Institutional competition • Swiss federalism allows each small group to remain sovereign, resulting in extreme diversity • This diversity has led to an exceptional level of institutional competition between Cantons • Result (inter alia): public administration is « lean and mean », public expenditure is contained, taxes are low… (but far from zero…) • Institutional competition produces diversity, innovation and efficiency, not uniformity, and certainly not « a race to the bottom »

10. Example: Tax competition between Cantons: Recent developments • 2004: Schaffhouse introduces degressive tax rates on personal incomes above CHF 500’000 • 2005: Obwald follows on personal incomes above CHF 300’000 • 2006: Appenzel follows on personal incomes above CHF 1.5 million • 2007: Federal Court rules that degressive tax systems are unconstitutional • 2007-08: Schaffhouse, Obwald & Appenzel apply a low flat tax…

11. Result Other Cantons have responded in different ways, cutting high marginal tax rates, abolishing death duties etc. Tax revenues have risen… In 2004, 24 high income earners settled in Schaffhouse Today 30’000 high income EU citizens per annum come to live in Switzerland… No wonder the EU is getting upset!

12. attacks on Swiss tax system • 1998: « harmful tax competition » • 2000-04: savings directive & banking secrecy • 2007 : « state aids of a fiscal nature » • 2008: German secret services track down errant tax payers with money in Liechtenstein (= indirect attack on Switzerland) • 2008 US arrests former UBS employee

13. The Swiss view of all this • In the ideal vision of the democratic state, elected representatives make collective decisions which reflect the general will, and it is the duty of every able-bodied citizen to contribute to public works according to the law of the land. • In reality, collective decisions are the result of lobbying & logrolling, the State wastes taxpayers’ money, and constantly rising taxes are an abuse of power. • If the government thus breaks the social contract, it cannot expect the public to maintain their side of the bargain. • Hence the growing underground economy in most modern states (see Freidrich Schneider: « Shadow Economies and Corruption all over the World: What do we really know »)

14. In a nutshell… • The Swiss consider that their « social contract » with their public authorities has not been violated • This is one reason why Switzerland remains outside the EU: • Democracy in Switzerland is based on DIRECT DEMOCRACY (popular initiatives, followed by referenda), with sovereignty vested in the Cantons • Swiss voters would never vote to change this system • Therefore neither the Swiss Federal Government nor the Cantons can hope to assign decision-making authority to the European Union, even should they wish to. • And it is even questionable whether the Federal Government can negotiate much in tax matters with the European Union: they could very easily face a referendum if the EU were to drive too hard a bargain.

15. To return to the European Union • Subsidiarity is a fine principle, but it is crucial to know who decideswhat should be done at local, regional, national and, possibly, at supranational level. • In the EU this division of labour is decided upon at supranational level • In Switzerland, it is decided upon at infranational level, with citizens exercizing their right to vote at Cantonal level • Result: EU faces a crisis of legitimacy, to which the only answer is to return to member states all matters which they can manage for themselves • … while Switzerland continues quietly on its road to social harmony and prosperity

16. Conclusion Switzerland shows that • the EU’s democratic deficit could be resolved by returning many « core » competencies to democratically elected Member State governments, • and that such a move would put Europe on a fantastically dynamic road to institutional innovation, competition and diversity.