Diversity and competition in Switzerland: an example for Europe? Faculty of Law, Comenius University 12 June 2008 Victoria CURZON PRICE University of Geneva

« Unity in Diversity » EU has yet to resolve the question of « how much unity? » versus « how much diversity? » The Lisbon Treaty still states as its aim an « ever closer union among the peoples of Europe » while respecting their « cultural and linguistic diversity ». 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) 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. Trouble is: this is decided upon by the EU!

« improved ability to act » Areas: Freedom, security and justice Energy Public health Civil protection Climate change Services of general interest Research Space Territorial cohesion Commercial policy Humanitarian aid Sport Tourism Administrataive cooperation Source: « The Treaty at a glance », 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, environment, VAT, taxation of savings, corporate tax base etc. Why? (a) « positive integration » builds Europe (b) to create conditions of fair trade (a « level playing field ») (c) fear of a « race to the bottom »

Why the « level playing field » is not the right analogy The game of exchange is NOT a game of soccer! 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 preferences. It does not result in a « race to the bottom ».

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 diversity … and yet it is a peaceful and prosperous society

Institutional competition Switzerland’s political diversity has led to an exceptional level of institutional competition, in particular tax competition between Cantons Result: public expenditure is contained, taxes are low… (but far from zero…) Tax competition produces diversity, not uniformity, and certainly not « a race to the bottom »

Recent developments: 2004: Schaffhouse introducers degressive tax rates on personal incomes above CHF 500’ : Obwald follows on personal incomes above CHF 300’ : Appenzel follows on personal incomes above CHF 1.5 million 2007: Federal Court rules that degressive tax systems are unconstitutional : Schaffhouse, Obwald & Appenzel now apply a low flat tax…

Result: 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 Schaffhouse, today 30’000 high income EU citizens per annum come to live in Switzerland… No wonder the EU is getting upset!

EU attacks on Swiss tax system 1998: « harmful tax competition » : 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 Switzerland)

In a nutshell… This is why Switzerland remains outside the EU: Democracy in Switzerland is based on DIRECT DEMOCRACY (popular initiatives, followed by referenda) 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 EU level. In the EU this is decided upon at the highest possible level In Switzerland, at the lowest – citizens exercizing their right to vote Result: EU faces a crisis of legitimacy, to which the only answer is to return to member states all matters which they can manage, even if this means growing diversity and institutional competition

Conclusion Switzerland shows that the EU’s democratic deficit could be resolved by returning many « core » competencies to democratically elected Member State governments, and that such a move would put Europe on a fantastically dynamic road to institutional innovation, competition and diversity.