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Diversity and competition in Switzerland: an example for Europe?

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Diversity and competition in
Switzerland: an example for
Faculty of Law, Comenius University
12 June 2008
University of Geneva
В« Unity in Diversity В»
• EU has yet to resolve the question of « 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 Treaty’s
slogan of « unity in diversity »…
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 »
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»
• Trouble is: this division of labour is decided upon
by the EU!
В« improved ability to act В»
Freedom, security and justice
Public health
Civil protection
Climate change
Services of general interest
Territorial cohesion
Commercial policy
Humanitarian aid
Administrataive cooperation
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?
• (a) « positive integration » builds Europe
• (b) to create conditions of fair trade (create a « level
playing field В»)
• (c) fear of a « race to the bottom »
Why the В« level playing field В» 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 В« race
to the bottom В».
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?
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 В« a race
to the bottom В»
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…
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
Today 30’000 high income EU citizens per annum
come to live in Switzerland… No wonder the EU
is getting upset!
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
• 2008 US arrests former UBS employee
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: В« Shadow Economies and Corruption all
over the World: What do we really know В»)
In a nutshell…
The Swiss consider that their В« social contract В» 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.
To return to the European Union
• 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.
• In the EU this division of labour is decided upon at supranational
• 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
• … while Switzerland continues quietly on its road to social harmony
and prosperity
Switzerland shows that
• the EU’s democratic deficit could be resolved by
returning many В« core В» competencies to
democratically elected Member State
• and that such a move would put Europe on a
fantastically dynamic road to institutional
innovation, competition and diversity.
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