

                        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.



