

                             SWITZERLAND AND EUROPE

                    1991 was Switzerland's 700th birthday, but there
               was no grand, flag-waving celebration.  Throughout the
               year, cities and villages celebrated in their own way,
               with alpine yodeling and wrestling fests, fireworks
               over Lake Zurich, and ballet in Lausanne.
                    This country -- made up of 26 highly independent
               cantons, embracing four languages -- is simply too
               diverse to host a big, nationalistic bash such as the
               United States put on in 1976, the Swiss explain.
                    Seven hundred years ago, if legend is to be
               believed, three brawny peasants met on a pretty meadow
               called the Rutli at the foot of the steep climb to the
               St. Gotthard pass, then as now the most direct route
               from the upper Rhine to Venice and the silk routes
               leading east. The perpetual alliance they swore is
               usually considered the nucleus of the Swiss
               Confederation.
                    The three men in the meadow 700 years ago were
               tribal chieftains of what later became the cantons of
               Schwyz, Uri and Unterwalden. They signed a treaty for
               mutual protection in the crisis of succession after the
               death of the Habsburg ruler Rudolf I. The Habsburgs'
               ancestral castle was not far away, and the men of the
               forest cantons worried that some more remote king might
               be less amenable to leaving them alone to collect
               bridge-tolls and provide guided mule trains.
                    Twenty years later the neighbors in Lucerne were
               invited to join the loose confederation. Its influence
               spread, sometimes by persuasion and often by conquest,
               only after a resounding defeat by the French at
               Marignano in Lombardy in 1515 did the mountaineers
               decide to eschew foreign military adventures. That
               neither kept them from fighting among themselves for a
               few centuries more nor, since the country was
               desperately poor in natural resources, from hiring
               themselves out as mercenaries for others. The last
               survivors of that practice are the Vatican's Swiss
               Guards.
                    But expansion has its limits.  In December, 1992,
               the Swiss electorate voted against affiliation with the
               European Community.
                    What should we make of the Swiss vote?  Here is
               the richest country in Europe (and on some measures the
               richest in the world), in the middle of the world's
               largest trading bloc, saying it can stand back from
               closer union.  On the face of it, it looks as though
               the Swiss have made a serious and uncharacteristic
               error, at least in economic terms.  While the vote will
               not lead to any economic catastrophe, conventional
               wisdom suggests that it will clip something off future
               growth.  Swiss firms live by their exports and, to some
               extent at least, they will find it harder to export
               across the border.  They may be forced to push some
               production over to subsidiaries within the European
               Community.  Perhaps some investment that would have
               gone to Switzerland will go elsewhere.
                    It was fear that the brilliant Swiss economy would
               be damaged that encouraged the political leaders to
               press for membership of the European Economic Area.  Is
               this a case of ordinary voters allowing their hearts to
               rule their heads against the advice of the
               establishment?
                    The conventional view was that the decision would
               hinder future economic growth.  It reckoned that as far
               as the stock market was concerned a combination of
               higher trade costs and lower gross domestic product
               growth would more than offset any advantages from non-
               membership such as lower interest rates and freedom
               from EC competition policy.  By this theory the
               economic effects of a "no" vote would justify a
               permanent fall in Swiss share prices.
                    This was an intriguing exercise, but of course a
               move in the stock market of between 5 and 10 per cent
               is not that much, given the scale of the swings that
               take place in securities prices every week. The
               implication for growth is perhaps more worrying.  A
               major investment banking firm, Goldman Sachs,
               immediately published a crisis report reckoning that
               the diversion of investment following  the "no" vote,
               and labor migration (skilled people leaving) might
               together chip 0.6 per cent off annual growth over 10
               years.  That would be quite a lot, if it were to
               happen.
                    But will it?  There is a counter argument to be
               made, which is that staying outside the EEA might
               actually enhance Switzerland's economic performance. It
               runs like this.
                    Switzerland happens to be in an extremely strong
               structural position. It has great strength in
               industries that look like being  winners for the next
               decade or more. These include financial   services (the
               three big banks and the Geneva-based fund management
               industry), pharmaceuticals (the three big chemical
               companies), food  (Nestle, Suchard), and up-market
               tourism (St. Moritz, Klosters and Verbier).
                    These are all areas of the world economy in which
               Japan and the newly industrialized countries cannot
               actively compete, and where the price of the product is
               not being constantly shaved by some new technological
               advance.  By contrast, Switzerland is not  strong in
               cars, aircraft, electronic consumer durables, computers
               -- all areas where European industry is, or is about to
               be, threatened by the Far East.
                    In that sense it is better protected than most of
               the EC. Switzerland does have important industries in
               areas like machine tools, which are more open to
               international competition and might suffer if the
               economy were distanced from the rest of Europe, but
               much of its strength is in areas where it is quite well
               protected.
                    Indeed in some of these areas, being outside the
               EC is a positive advantage.  Take financial services,
               which accounts for 30 per cent of the value of the
               securities on the Swiss stock market. Swiss banks trade
               on their safety and their discretion. It was
               fascinating to see that foreign money actually flowed
               into Swiss securities following the vote.  Switzerland
               was perceived as being a safer place to put cash if it
               remained outside the EEA,  presumably for fear that at
               some future date the EC bureaucrats  would get their
               fingers on those numbered bank accounts.
                    In most of the other areas noted above, EEA
               membership is not really an issue.  In pharmaceuticals
               there might be some modest disadvantage from staying
               outside, but the market is such an international
               "brain-based" one that it is hard to see any serious
               damage. Food products?  Well, Nestle generates roughly
               97 per cent of its turnover outside Switzerland, and is
               not really dependent on exports across the Swiss
               national boundary into the rest of Europe. Tourism?
               Membership of the EEA is not an issue.
                    So while there might be some modest disadvantage
               to Switzerland, the Swiss winners would be fine.  Some
               sectors, in  particular financial services, would do
               better by staying outside. The effect might therefore
               be merely to push the country even further towards its
               specialties. But since these are good growth areas that
               does not matter. One could even construct an argument
               that Switzerland will benefit by keeping apart from the
               rest of Europe.

