Diversity and competition in Switzerland: an example for Europe? Faculty of Law, Comenius University 12 June 2008 Victoria CURZON PRICE University of Geneva В« Unity in Diversity В» вЂў EU has yet to resolve the question of В« how much unity? В» versus В« how much diversity? В» The Lisbon Treaty still states as its aim an В« ever closer union among the peoples of Europe В» while respecting their В« cultural and linguistic diversity В». But it has dropped the Constitutional TreatyвЂ™s slogan of В« unity in diversity В»вЂ¦ Aims of the Lisbon Treaty вЂў Relevant aims of the Lisbon Treaty as far as this question is concerned: вЂў В« Improved ability to act in areas of major priority for todayвЂ™s Union В» (EU website) вЂў Extending qualified majority voting to new areas вЂў Correcting the EUвЂ™s В« democratic deficit В» Subsidiarity (Art 5) В« 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. В» вЂў Trouble is: this division of labour is decided upon by the EU! В« improved ability to act В» Areas: Freedom, security and justice Energy Public health Civil protection Climate change Services of general interest Territorial cohesion Commercial policy Humanitarian aid Sport Tourism Administrataive cooperation Research Space Source: В« The Treaty at a glance В», EU website 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? вЂў (a) В« positive integration В» builds Europe вЂў (b) to create conditions of fair trade (create a В« level playing field В») вЂў (c) fear of a В« race to the bottom В» Why the В« level playing field В» is not the right analogy вЂў The game of exchange is NOT a game of soccer! вЂў There is no end to this game! вЂў BOTH players win, and the more different they are, the greater the mutual gain вЂў We are all different, but can all gain from trade because we all possess a comparative advantage in one area or another вЂў 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 В« race to the bottom В». Take Switzerland as an example: вЂў It is a voluntary Confederation of 26 sovereign states, embracing 2 cultural, 4 linguistic and 2 religious identities вЂў But it is a В« common market В» since 1848 вЂў It combines political and economic unity with exceptional institutional and cultural diversity вЂў It has never attempted to В« harmonize В» to anything like the same extent of the EU вЂў вЂ¦ and yet it is a peaceful and prosperous society вЂ“ disaster has not struck. Why not? Institutional competition вЂў Swiss federalism allows each small group to remain sovereign, resulting in extreme diversity вЂў This diversity has led to an exceptional level of institutional competition between Cantons вЂў Result (inter alia): public administration is В« lean and mean В», public expenditure is contained, taxes are lowвЂ¦ (but far from zeroвЂ¦) вЂў Institutional competition produces diversity, innovation and efficiency, not uniformity, and certainly not В« a race to the bottom В» Example: Tax competition between Cantons: Recent developments вЂў 2004: Schaffhouse introduces degressive tax rates on personal incomes above CHF 500вЂ™000 вЂў 2005: Obwald follows on personal incomes above CHF 300вЂ™000 вЂў 2006: Appenzel follows on personal incomes above CHF 1.5 million вЂў 2007: Federal Court rules that degressive tax systems are unconstitutional вЂў 2007-08: Schaffhouse, Obwald & Appenzel apply a low flat taxвЂ¦ Result Other Cantons have responded in different ways, cutting high marginal tax rates, abolishing death duties etc. Tax revenues have risenвЂ¦ In 2004, 24 high income earners settled in Schaffhouse Today 30вЂ™000 high income EU citizens per annum come to live in SwitzerlandвЂ¦ No wonder the EU is getting upset! attacks on Swiss tax system вЂў 1998: В« harmful tax competition В» вЂў 2000-04: savings directive & banking secrecy вЂў 2007 : В« state aids of a fiscal nature В» вЂў 2008: German secret services track down errant tax payers with money in Liechtenstein (= indirect attack on Switzerland) вЂў 2008 US arrests former UBS employee The Swiss view of all this вЂў 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. вЂў In reality, collective decisions are the result of lobbying & logrolling, the State wastes taxpayersвЂ™ money, and constantly rising taxes are an abuse of power. вЂў If the government thus breaks the social contract, it cannot expect the public to maintain their side of the bargain. вЂў Hence the growing underground economy in most modern states (see Freidrich Schneider: В« Shadow Economies and Corruption all over the World: What do we really know В») In a nutshellвЂ¦ вЂў The Swiss consider that their В« social contract В» with their public authorities has not been violated вЂў This is one reason why Switzerland remains outside the EU: вЂў Democracy in Switzerland is based on DIRECT DEMOCRACY (popular initiatives, followed by referenda), with sovereignty vested in the Cantons вЂў Swiss voters would never vote to change this system вЂў 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. вЂў 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. To return to the European Union вЂў Subsidiarity is a fine principle, but it is crucial to know who decides what should be done at local, regional, national and, possibly, at supranational level. вЂў In the EU this division of labour is decided upon at supranational level вЂў In Switzerland, it is decided upon at infranational level, with citizens exercizing their right to vote at Cantonal level вЂў 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 вЂў вЂ¦ while Switzerland continues quietly on its road to social harmony and prosperity Conclusion Switzerland shows that вЂў the EUвЂ™s democratic deficit could be resolved by returning many В« core В» competencies to democratically elected Member State governments, вЂў and that such a move would put Europe on a fantastically dynamic road to institutional innovation, competition and diversity.