The End of Switzerland


A few days ago, John Quiggin wrote the following:

Not only major institutions but whole national economies are up for grabs now. The national bankruptcy of Iceland seems likely to followed by something similar for Switzerland. As Citi itself points out, UBS and Credit Suisse are bigger, relative to the Swiss economy, than Kaupthing was for Iceland. Felix Salmon (also predicting doom for Citi, has been all over this).

Given a failure and rescue, Switzerland would probably have to follow Iceland in a rush application to join the EU (which might have its hands full rescuing some of its own members). It’s a safe bet that the end of secret bank accounts, “wealth management” through tax minimisation and the like would be part of the price. The UK isn’t quite as vulnerable, but seems likely to be forced into the eurozone before long (for a contrary view, see Martin Wolf) And this will be accompanied by a big structural shift away from the dominance of these economies by the financial sector.

Fortunately, this blogger has recently been on a trip whose whole purpose was to inform him about the views of the Swiss political and business elite. And I have to say that they all struck me as remarkably sanguine on this point. I have no idea how to assess the solidly of UBS’s risk exposure and everything else. But on the rest, I can say that I had no understanding pre-trip of the weirdness of Switzerland’s relationship with the EU.

But basically, Switzerland isn’t in the EU. Not on the Euro, not a member. But there is free trade between Switzerland and EU states. And also free movement of people, à la the Schengen Agreement. This sets Switzerland up nicely to serve as a kind of “Delaware of Europe” — suggesting itself as a nice tax haven for wealthy European individuals, and also as an appealing location for the European Headquarters for an Asian or American firm. Zurich or Geneva becomes as good a place as any from which to conduct EU-wide business operations, but without the burden of paying the high taxes to support European welfare states.

It’s nice work if you can get it, but obviously a lot of EU officials wish Switzerland couldn’t get it, and have been pressuring Switzerland to participate in some “tax harmonization” vis-a-vis the rest of the Union. They don’t, however, really have a great deal in the way of levers at their disposal with which to make this happen. But if UBS and/or Credit Suisse were to need serious rescuing, then, as Quiggin observes, the situation would change a great deal. Meanwhile, EU entry for Switzerland would put a great deal of additional pressure on the country’s already fraying tradition of government by a four party grand coalition.