Change is in the air for island of prosperity

Some Swiss fear the consequences of February's vote against mass immigration Keystone

Plans to restrict immigration are raising broader questions about Switzerland’s relationship with the rest of the world - and exposing the complications of the arm’s-length relationship with the EU that eurosceptics crave.

In late February, two weeks after Switzerland voted to limit the number of immigrants it accepts from the EU, the country’s flag made an unexpected appearance in the European parliament in Strasbourg. As politicians debated the Swiss poll, Mario Borghezio, a far-right Italian delegate, barrelled his way on to the chamber’s floor, brandished the distinctive red and white standard, and launched into a tirade against the EU, shouting, “Svizzera libera! Freedom for the people!”

He was not alone. Philip Claeys, a member of the nationalist Flemish party Vlaams Belang, cautioned when he took the floor: “If such a referendum were held in Flanders, France, the Netherlands or Germany, you would get exactly the same result. But that message will probably be delivered on May 25.”

On that day, when EU voters elect a new parliament, eurosceptic groups across the continent are expected to make gains, fuelled by popular angst over issues ranging from immigration to persistently high unemployment.

Among those wanting to redraw the relationship between the EU and its member states, Switzerland is often held up as a model of how a European country can remain outside the EU yet still have a thriving economy. In a continent struggling with joblessness and debt, Switzerland is an island of prosperity. Income per head is the sixth highest in the world. Unemployment is barely 3%.

Public debt is just 35.4% of national output. And the quality of life in the land of lakes and mountains is high: Zurich, Geneva and Bern regularly feature near the top of lists of the world’s most liveable cities.

Yet in many ways, the same February vote that provoked such enthusiasm among Europe’s eurosceptics also highlighted the complications of the semi-detached relationship that Switzerland has developed with the EU, at a time when globalisation links national economies more closely than ever.

These complications raise questions about whether the country is a viable model for other states seeking to pull back from the EU.

The bilateral way

In the early 1990s, the Swiss government had planned to join the European Economic Area, a group of countries that participate in the EU’s single market without being members of the EU itself. But after Swiss voters rejected the idea in a referendum in 1992, the government was forced to come up with another way of managing relations with the EU.

The result was a series of agreements that give Switzerland access to parts of the common market in exchange for adopting laws deemed equivalent to those in the EU itself. A package of seven agreements, known as bilateral I, was signed in 1999. In the intervening years, the number has swelled to about 120.

The accords were always a fragile compromise – the lowest common denominator acceptable to both sides, as diplomats put it. In order to make sure neither side cancelled the ones it disliked, a so-called “guillotine clause” was introduced into the first package of agreements. If either side fails to fulfil one of the accords, the other party can cancel all seven.

This is precisely why the Swiss immigration vote has thrown the country’s relationship with the EU into such disarray. Because its decision to introduce immigration quotas conflicts with the accord that gives Swiss and EU citizens the right to work and live in each other’s territories, the bloc could cancel the other components of the first bilateral package. Some EU politicians have gone further, even suggesting that Switzerland’s access to the single market could be brought into question.

For a country that sends 56% of its exports to the EU, this would be a disaster. Swiss business has reacted with concern. A survey by Deloitte of 111 Swiss companies, conducted in the weeks following the vote, found that 88% expected negative consequences for Switzerland.

Even so soon after the vote, 17% said they would postpone investments in Switzerland, while 40% said they would wait until it was clear how the initiative would be implemented before responding. “I hope wisdom will prevail,” says Paul Bulcke, chief executive of Nestlé. “But if that does not happen and we can’t find the labour, then we will have to respond. That is logical.”

Such uncertainty underscores the complications of the Swiss-EU relationship, says Alexis Lautenberg, Switzerland’s ambassador to the bloc from 1993 to 1999. “When you look at the difficulty that one vote can cause for the whole construction of Swiss-EU relations, it doesn’t give the impression of a perfect model for others to copy,” he says.

Patrick Emmenegger, a professor at the University of St Gallen, agrees. “A solution as complex as the Swiss one would never work for bigger economies, such as the UK,” he says.

Changing times

The immigration vote and the uncertainty that has followed come as several other elements of the economic model that has made Switzerland so successful over the past 60 years are in a state of flux.

After years of pressure, Switzerland is moving to reform the generous corporate tax regime that helped it attract giants from Google to Glencore. The once impregnable bank secrecy laws that attracted foreign capital are beginning to crumble. And some cantons have ditched the special tax regime for rich foreigners that has drawn the likes of Viktor Vekselberg, owner of the Renova Group, and racing driver Michael Schumacher.

Furthermore, the Swiss public voted last year on whether to limit the pay of top executives to 12 times that of the lowest earner in an organisation. It will vote later this year on a minimum wage of CHF4,000 ($4,500) a month – high enough to give most finance directors palpitations. Another vote that would impose even stricter immigration curbs is also on the cards.

The initiative to cap executive pay was rejected and the outcome of the votes on the minimum wage and the tougher immigration curbs is still unclear. But in conjunction with February’s immigration vote and the coming changes to tax legislation, the cumulative effect is to cast a shadow over another of the country’s many economic virtues: the predictability and stability of its legal and business framework.

“There is no doubt that the recipe for success that has served Switzerland for the past 60 years is coming to an end,” said Stéphane Garelli of Lausanne’s IMD business school. “We are looking for the next recipe.”

Pascal Gentinetta, an economic adviser and former chief executive of the business lobby Economiesuisse, is more circumspect, but also voices concerns. “I wouldn’t say these pressures represent a turning point. In a system of direct democracy, they are a normal challenge,” he said.

“But if you look at the measures likely to be up for debate over the next five years, we have an agenda that, from the perspective of business, will be characterised almost solely by defensive battles.”

“What is striking is the absence of any offensive business-friendly projects over the same period,” he added. “If you look at the last 15 years, we had two positive reforms of the corporate tax code, we sorted out the public finances, we liberalised markets such as telecoms, we had free trade deals with a lot of countries. At the moment, there is no sign of anything similar, and that is what worries me.”

Immigration quotas: High numbers stoke negative sentiment

In the run-up to Switzerland’s vote on whether to introduce blanket quotas on immigration, immigrants were blamed by the “Yes” campaign for a litany of ills, ranging from overfilled trains and classrooms to overpriced houses, falling wages and higher levels of crime.

Some of the claims were overstated: the increase in house prices is fuelled by rock-bottom interest rates as well as immigration; and there is little evidence that foreign arrivals are pushing up crime.

Nonetheless, even foreigners living in Switzerland say they have noticed the impact of a growing population. “It is true that the trains are fuller than they used to be,” says one German who has been in Switzerland for more than a decade.

The increase in net immigration since Switzerland introduced full freedom of movement with 17 EU states in 2007 is striking.

Between 2000 and 2006, on average, 44,201 more people arrived in Switzerland than left each year, according to data from the Swiss statistics office. But in 2007 the figure leapt to 83,167, and in 2008 it hit 103,363.

Since 2011 the figure has slowed again, falling to 57,957 that year and 51,190 in 2012, but has still averaged 73,946 – or almost 1% of the population – a year since 2007, almost three times the rate in the UK, for example.

This, in turn, has helped push Switzerland’s non-Swiss population to 23%. Direct comparisons are complicated by the fact that Switzerland’s naturalisation laws are much tougher than in many other countries, but this is still a high figure by international standards. The average in EU member states is just 4%, according to Eurostat data.

Yet – as in other countries – Swiss concern about the impact of immigration is more pronounced in areas less directly exposed to it.

The rural canton of Uri, which has comparatively few foreigners, voted in favour of quotas.

By contrast, the metropolises of Zurich and Geneva, which both have foreign populations of more than 30% – and soaring house prices and full trains to boot – voted against them.

Towing the line

The reasons for this shift are both domestic and external. As in many countries, public attitudes towards business have hardened since the financial crisis. Johann Schneider-Ammann, Switzerland’s economics minister, put the immigration vote down to a “break in trust” between Swiss citizens and the business elite caused by years of corporate excess.

Mr Lautenberg takes a similar line, arguing that February’s immigration vote should not only be seen as a reaction to the growing number of immigrants, but also in the context of votes showing popular frustration that not everyone is playing by the rules at a time of sustained growth.

The first vote came in 2009, when the canton of Zurich unexpectedly scrapped its special tax regime for wealthy foreigners. The most recent was the acceptance last year of the Minder initiative, which imposed tough corporate governance rules on Swiss companies, including a ban on golden hellos and golden goodbyes.

In each case, Mr Lautenberg argues, the Swiss public felt that rules were not being implemented with sufficient rigour. For example, the tax privileges for rich foreigners are granted on the basis that they do not conduct business in Switzerland, but there was a widespread perception this rule was being ignored. The Minder initiative was accepted after several scandals over executives receiving pay cheques completely out of kilter with their company’s performance.

“The feeling in the population is that the authorities, whether at the cantonal or national level, have not been sufficiently careful in their management of such questions,” he said.

For other observers such as Michael Hermann, from the Sotomo research institute, the shift in sentiment is the recurrence of a strain of growth-scepticism deeply anchored in the Swiss psyche that has surfaced in previous boom periods such as the 1960s and 1970s. “It’s almost a fear of one’s own success,” he said. “The fear that Switzerland is so successful and so good at attracting people and companies from all over the world to come here that what is archetypally Swiss risks being eroded.”

The changes to the Swiss business landscape are also being driven by external forces. The financial crisis has left governments around the world strapped for cash – and these, in turn, have put pressure on jurisdictions they believe allow their citizens and corporations to minimise their tax obligations.

Switzerland’s bank secrecy rules and corporate tax regime have both been hit by this trend. And although Switzerland is politically independent of the EU, it is telling that in both cases pressure from the Alpine state’s biggest trading partner has played a role in forcing the Swiss to change tack.

How Switzerland and the EU will resolve their latest conflict over immigration remains unclear. The Swiss government plans to issue draft proposals by the end of June. However, it faces an uphill task to balance the public’s demand for quotas with the EU’s insistence that the freedom of movement is non-negotiable.

Some experts point to a grand bargain, combining the immigration dispute with wider questions over the institutional framework governing Swiss-EU relations. But any such deal would have to go before the Swiss people, adding an element of uncertainty to the outcome.

For now, some business leaders are optimistic that Switzerland will find a way out. “I think we will manage,” said Sergio Ermotti, chief executive of UBS. “[The process] may be bumpy, but that’s what our population wants.”

It is not just Swiss business holding its breath. With any concessions by the EU likely to provoke demands for similar treatment from eurosceptics in member states, the negotiations will be closely watched beyond the Switzerland’s borders.

Prof Emmenegger warns: “The stakes are high.”

Copyright The Financial Times Limited 2014