Switzerland and the EC After the Rejection of the European Economic Area

Introduction

The Swiss are known for their tolerance, their self-reliance and their discipline. Recently, however, they have shown uncharacteristic emotion debating whether they should join the European Economic Area, or the EEA as it's known. On December 6th, they rejected the Maastricht Treaty by a narrow majority of 50.3 per cent. But, of course, they're not alone in having done so and the whole move towards a united Europe is currently somewhat up in the air.

Mr. Walter Frehner has been a banker his whole professional life, in Switzerland and abroad. He has been with Swiss Bank Corporation since 1958 and was appointed chairman this spring. In keeping with the bank's culture, Mr. Frehner holds an expansive outlook. And so he willingly placed himself in the midst of the fray by advocating that Switzerland sign the treaty to join the EEA.

He believes the Swiss would have gained substantially in the long run from the free movement of goods, services and people. This added freedom, he believes, would have allowed them to take advantage of a borderless Europe while still maintaining their characteristic autonomy.

Mr. Frehner is not satisfied with a Switzerland that consists only of hotels, banks and holding companies. Instead he's partial to the old saying: "Dissatisfaction is the basis of progress. When we become satisfied we become obsolete."

Ladies and gentlemen, please join me in welcoming Walter Frehner who will comment on how he sees Europe and Switzerland evolving both politically and economically in the medium term.

Walter Frehner

it may be a peculiar way of regarding a landlocked country, but the Swiss have come to see Switzerland very frequently as an "island." For decades our country has indeed been "outstanding" like an island, in terms of wealth, political stability, low inflation, low interest rates and a strong currency.

Last year we decided to become an island in yet another sense: on December 6th, 1992, in a nationwide referendum, the Swiss population turned down membership of the European Economic Area. As a result, we are now the only European country--even the neighbouring tiny principality of Liechtenstein will join--that will not participate in the European single market.

For many years, the notion of Switzerland being an island had a distinctly favourable undertone. Now it has picked up a negative flavour: Switzerland as an isolationist country. This is the subject of my address today, ladies and gentlemen: Switzerland's rejection of the European Economic Area and how Swiss politics has since reacted to avoid the threat of political and economic isolation.

Of course, if the Swiss really were so unique, there would be little foreigners could learn from our experiences. Clearly, every citizen tends to regard his or her home country as singular. However, on closer reflection we find that the challenges we meet at home differ not all that much from those we meet abroad.

The similarities between Switzerland and Canada, for example, may not be obvious at first sight, but nevertheless are numerous. Both countries depend culturally, politically and economically on large neighbours. Canada on the USA, Switzerland on the EC. Both countries are very prosperous--in terms of per-capita income, they come second only to the United States.

But while the level of prosperity is high, there is widespread concern about a growing lack of economic dynamism both in Canada and in Switzerland in comparison to other nations. In short, we are afraid of losing our lead. Notwithstanding the enormous difference in geographic dimensions, both countries can be termed relatively small economies, crucially dependent on excellent access to international markets.

This is why leading politicians and businessmen in both countries keep urging the removal of the barriers to their most important trading partners, the United States for Canada, the EC for Switzerland. Hence their support for participation in NAFTA and in the European Economic Area, respectively. The European Economic Area, which for convenience I shall refer to as the EEA, is designed, in short, to extend the EC's single market to the area of all EC and EFTA member states.

Tariffs had, in principle, been long removed in European trade, within the trade blocs EC and EFTA themselves, as well as between the EC and the EFTA member states on the basis of free trade treaties. The EEA will go further and remove all non-tariff barriers to trade in goods and services. To achieve this, the EFTA countries had to adopt the relevant EC directives and the principle of mutual recognition of rules and regulations that governs the EC's single market.

Trade in agricultural products is, however, exempt from the EEA Treaty, also EFTA members do not need to take over EC tax law and can retain autonomy in their trade policy vis-a-vis third nations.

As you know, the Swiss electorate turned down the EEA. Canadians cannot themselves neglect the possibility that NAFTA, too, could fail--either because ratification in the USA, or in Canada, is not forthcoming. Therefore, the way we have reacted in Swiss politics after the rejection of the EEA may hold some potentially interesting pointers for Canada.

Why did Switzerland say No? There were various reasons. The principal political reason was a fear of losing our national identity by yielding parts of sovereignty to an "anonymous giant" in the shape of the EC. More specific was the fear of further immigration, in a country in which the proportion of foreigners is already very high--19 per cent of the resident population.

The issue of increased immigration is linked to the economic concerns of the broader population: the fear of increased competition, of pressure on wages and even of losing one's job. These are core problems in all matters of international economic integration.

The evidence may overwhelmingly suggest that furthering world trade will always result in stronger economic growth, but an expansion in trade inevitably also leads to structural change. The overall impact of trade liberalization is undoubtedly positive for virtually any country. In Switzerland, the EEA was estimated to bring about a long-term impulse of between four per cent and eight per cent in additional Gross Domestic Product.

However, there are always bound to be winners and losers in any process of economic integration. In times of recession and rapidly rising unemployment, the individual voter naturally tends to weigh the perceived economic risks more heavily than the opportunities. Recession provides a stony soil for international integration policies, a phenomenon we are not only witnessing in Switzerland, but in all of Europe.

The pro-European enthusiasm of leading politicians and businessmen was not shared by the wider public. Yet the rejection of the EEA Treaty in Switzerland was by no means overwhelming--50.3 per cent No votes against 49.7 per cent Yes.

If we remember the narrow outcomes of last year's Danish and French referendums on the Maastricht Treaty, the voting behaviour of the Swiss appears to be very European indeed. As in other European countries, the European issue split the Swiss nation. Cities and industrial regions accepted; rural regions strongly rejected the Treaty.

Unfortunately, the nation was also split along the language frontier: francophone Switzerland came out in favour with a strong majority, whereas the Swiss Germans rejected the Treaty. Although the nation is by no means falling apart, this rift has definitely hurt and Switzerland will have to devote care not to deepen the split further.

Even if the rejection of the EEA Treaty was so narrow, a simple repeat vote, as in Denmark, is not an option for Switzerland, at least not for the time being. We have to contend with the constitutional barrier that the referendum not only needs the consent of the majority of the population but also of the Cantons--16 out of 23 of which rejected the Treaty.

Participation in the EEA, which would have signalled a great leap forward in our external relations, thus appears barred by our constitutional system for the time being. Switzerland will, therefore, now have to resort to reforms in domestic policy in order to improve the conditions for our position in the world economy.

But what can changes in domestic policy achieve in a matter that essentially concerns our external relations? First of all we must remember the ultimate benefit of free trade: it increases competition, and competition, be it international or domestic, tends to interfere with entrenched habits and snug economic arrangements which provide guaranteed benefits to those that do not necessarily deserve them.

It is interesting to note that a report on the economic consequences of Swiss integration into the European market saw the main benefits arising from induced reforms such as public procurement policies, decartelization and the reform of the Swiss immigration law. These are purely domestic policy issues in the sense that laws or practices can be changed autonomously, without the need for any international agreements.

Quite swiftly after the referendum on the EEA the Federal Council, our government, began work on a scheme to strengthen the economy, the so-called Revitalization Program, which contains reforms in the areas I just mentioned. Public procurement practices, for example, are a particularly thorny issue in a country where the Cantons, and even communities, at times follow very restrictive rules for public orders and purchases.

The Confederation is quite prepared to open its procurement to foreign bidding, but the position of many Cantons is ambiguous. Other inter-Cantonal restrictions on the free movement, especially of labour and services, have also persisted, for example in the recognition of diplomas.

In a wider sense, the issue really is that a true internal market does not yet exist within Switzerland itself. Similar restrictions on trade exist between the Canadian provinces. On the eve of the birth of NAFTA, the first thing to ensure is also a true Canadian internal market, an additional parallel between our two countries.

Switzerland has gained a reputation as the most cartelized economy in the Western world. The EEA, per se, would not have forced change in our anti-trust law, it merely ruled out discrimination against competitors from EEA countries on the Swiss market. This means that cartelist practices would have been even more difficult to sustain than they already are today.

Here a word in defence of Switzerland's undeserved reputation as a country of cartels: first of all, Switzerland is an export-oriented economy. Therefore, the bulk of our industry cannot protect itself by cartelist arrangements simply because it is exposed to competitive forces that originate from outside Swiss jurisdiction. Cartels in Switzerland have always been restricted to the purely non-trading sectors of our economy.

However, as every student of economics knows, cartels are by nature unstable. This has, for example, been the experience in Swiss banking. Competition was officially prescribed for Swiss banks in 1990 by a verdict of the Federal Cartel Commission, but in fact competition had become very intense years before, particularly as the rapid change in the financial markets had the effect of undermining many formal arrangements.

The pressure from renegade competitors has led to the phasing out of many other arrangements, for example in the beer and cement industries as well as in an increasing part of the distributive trades. The Revitalization Program will bring about a more restrictive anti-trust law in Switzerland, but notwithstanding, the heyday of cartels in Switzerland is long over.

An area where we feel an urgent need for change is the Swiss foreign labour law. Through a complex set of rules and practices it has, for decades, favoured the immigration of unskilled labour, which is an anachronism in high-wage Switzerland. The shortage of labour was very acute in all areas during the boom years at the end of the 80s.

In general, the situation has been reversed, with growing unemployment, but for a number of professions the shortages remain chronic. Switzerland and the Swiss labour market are simply too narrow for the adequate recruitment of specialists. The free movement of labour is one of the so-called "four liberties" in the European single market and is hence part of the EEA Treaty. As this implied the removal of all restrictions on the immigration from EEA countries into Switzerland, even tighter restrictions on non-European immigration would have been inevitable.

Although the EEA has been turned down, the intention to change our foreign labour law will be upheld. Our non-participation in the EEA would even allow for less discrimination between working permits for citizens of European and of other OECD countries.

Switzerland has always been a significant location for overseas corporations and North Americans, in particular, have repeatedly complained about the difficulties of relocating top personnel to Switzerland. Also, from the viewpoint of my institution with its worldwide--not only European--activities, the ability to move staff members on a reciprocal basis is essential. Personally, I would therefore very much welcome a more pragmatic approach to immigration in Switzerland.

The thrust of changes in domestic politics is very important for our economy. Such reforms can, however, never ensure the benefit which an international treaty such as the EEA provides: namely the discrimination-free access to foreign markets so indispensable for the prosperity of a small economy like Switzerland's. Domestic policy can never replace external policy.

I do not rule out that one day, in a future not too far removed, the Swiss will vote again on the EEA, even on full EC membership. But for the time being this is not an option. We will have to resort to bilateral negotiations with the EC in order to achieve step-by-step improvements in our relations with the Community. We can be well satisfied with our achievements in the past. For the record, Switzerland is the country with the densest network of Treaties with the EC, the most important being the 1972 Free Trade Agreement, the most recent, the Insurance Treaty.

However, the leeway for further negotiations with the EC is not large. The EEA was a well-balanced framework of benefits and concessions for all contracting states. The EC has always been very anxious to avoid entry to the internal market "through the back door." Immediately after the EEA vote the federal government began to explore possible areas for bilateral negotiations with the EC. It soon became evident that the Community's readiness to open talks is strictly limited.

The implementation of the EEA itself will be delayed, to some extent a result of non-ratification by Switzerland. Furthermore, the Community appears to be in a state of general crisis with its decision-making capacity severely constrained. This gives us some respite in Switzerland.

On the other hand, the EC has indicated that it would only contemplate its further relations with Switzerland on the basis of a firmly implemented EEA In other words, there will be little movement in Swiss-EC relations in the near future. Optimum access to the markets of the EEA is indispensable for our economy--65 per cent of our exports flow into this area.

Yet Switzerland has always had a tradition of trade links throughout the world, much stronger than most other European countries of similar size. The setback to our European integration policy is an opportunity to strengthen our worldwide economic links. Free trade treaties are now being signed with most Eastern European states, the last will be completed by mid-1993. Their markets are of little significance for Swiss external trade today, but the economic potential of at least some of these countries is large.

Even more important for Switzerland will be the progress of the GATT negotiations. Our traditional position on agricultural policy would have been the major obstacle on our own side against an extension of the GATT Treaty. Historically, the degree of protection for the Swiss farming sector has been among the highest worldwide.

However, we are now changing our agricultural policy towards direct compensation of our farmers. We will thus be able to remove our trade barriers without threatening the economic existence of Swiss agriculture. Such an approach would conform to the latest GATT proposals and, therefore, Switzerland strongly supports the swift finalization of the GATT negotiations. Canada, though belonging to the Cairns group, is pursuing a similar approach to support parts of its farming community. Indeed, in many areas of the GATT negotiations the Canadian and Swiss position has been identical. Concerning trade in financial services in particular, our negotiators even worked together very closely.

Generally speaking, Switzerland and Canada are faced with the same challenge on the international level. We are not bound in a framework in which we have yielded the right of negotiations with third countries, as the EC members have. Neither are we satisfied with focusing our economic relations on one region of the world only, be it Europe or North America. Therefore as long as we have the freedom to speak with our own voice and to shape our worldwide economic relations we should make the most of this liberty.

This leaves me to conclude that a main difference between our countries is that we Swiss have decided, negatively, on the European Economic Area, whereas the fate of NAFTA is still in the balance. With a general election looming, Canadians must be aware of how easily an international treaty like the EEA or NAFTA can fall prey to vote-winning populism.

I personally felt the rejection of the EEA as a big setback for Switzerland. Certainly, I do not believe the outcome of the vote was the last word on Swiss relations with the EC. We must, therefore, continue to fight for popular support for a policy of European as well as international integration.

For the time being, though, Switzerland is "going it alone." This is regrettable, but not wholly disadvantageous. We are now embarking on a policy--the Revitalisation Program--to improve our economic conditions autonomously.

Though the pace of political change is slow in my country--far too tedious for my liking--at least the need for reform is now widely accepted, even among those parties and groupings that were against the EEA.

Like Canada, we are not (yet) absorbed in a common market. We have not yet surrendered substantial parts of our jurisdiction into the hands of a supranational body. This means we cannot rely on impulses from "above" to the extent many EC members have done with their single-market program.

In other words, we shall have to struggle through on our own. But this may have one further advantage: it may help us maintain the level of alertness we need to create the right conditions for assuring our long-term place in the world's top-tier group of prosperous nations.

The appreciation of the meeting was expressed by Maureen Sabia, Chairman, Export Development Corporation, and a Past Director, The Empire Club of Canada.