An alleged tax haven, neutrality, Swiss banking and chocolate are the first words you hear in the press about Switzerland. Although Switzerland has few natural resources of its own, the state's most valuable exports are gems and precious metals ($98.2 billion (2020-2021), followed by pharmaceuticals and machinery.
Switzerland has the second highest GDP per capita in the world ($86,850 in 2020, according to IMF statistics). In addition, Switzerland's economic freedom score is 84.2, making its economy the second freest globally in the 2022 Index. This article will shed some light on the reasons why Switzerland is so prosperous.
The year 1848 was a decisive turning point in Swiss history, with the adoption of the Federal Constitution of 1848. This constitution enabled Switzerland to achieve a certain degree of internal political stability and to free itself from the war phenomena unparalleled in Europe. As a result, the Swiss focused much of their attention and efforts on the development of industry, agriculture, communications and the financial sector.
In 1847, the first railroad between Zurich and Baden was inaugurated. Railroads in Switzerland were built through competition between private entrepreneurs rather than according to any central plan. The result was an extensive network of small and medium-sized lines that were barely coordinated, but covered more than 600 miles (1,000 km) of track in 1860 and twice as much in 1876. In 1898, the Swiss voted to nationalize the main lines, and in 1902, the Swiss Federal Railways was created.
To compete with the opening of the transalpine rail links of Mount Cenis and the Brenner Pass, the Swiss negotiated the construction of the Gotthard Tunnel with Italian and German interests. After 10 years of excavation, the tunnel was opened in 1882. This construction allowed the cantons of Uri and Ticino to be connected by rail and inaugurated a direct line between Zurich and Milan.
During these decades, Alfred Escher founded one of Switzerland's largest and most successful banks, the Kreditanstalt (today's Credit Suisse), in 1856 to finance the construction of the railroad. In the 1850s, six other large commercial banks were also established. This would allow Kreditanstals to raise capital for the railroads from private investors and without foreign influence. At the same time, this new financial institution provided investments to other private and state-owned ventures, evolving into a major source of financing for the Swiss economy.
However, in 1956-57, Switzerland clashed with Prussia over Neuchâtel, and war seemed inevitable; but eventually, the Prussian emperor renounced his hereditary rights to the former principality and, despite some minor incidents (the conflict over the Savoy territories with Napoleon III in 1860 and a confrontation with German Chancellor Otto von Bismarck in 1889). Consequently, Swiss politicians began to consider armed but cautious neutrality as the appropriate role for a small, limited country.
This early economic development caused unrest among different social groups and all sought greater popular participation in government. This democratic movement was especially strong in Zurich, where in 1869 it succeeded in imposing direct election of the government and popular referendum for all parliamentary bills.
In 1874, an alliance between the new democratic party and the dominant radical-liberal groups succeeded in passing a revised federal constitution. The 1874 constitution introduced a substantial innovation: direct democracy became possible through the referendum and was strengthened in 1891. At the same time, the Factory Act of 1877 was passed nationally, where the federal government became involved in social welfare.
In addition, in 1874, sovereignty over education was granted to each canton or demicanton. Primary education is free and compulsory between the ages of 7 and 16. The only institutions of higher education maintained by the confederation itself are the Federal Polytechnic Schools of Lausanne and Zurich founded in 1853 and 1855, respectively.
Switzerland managed to maintain its neutrality in WWI, where the country's persistent balance of payments deficit was reversed for the first time. The metallurgical, chemical, wood and watchmaking industries supplied goods to both warring sides, while farmers benefited from increased demand and prices.
After World War I, Switzerland joined the Geneva-based League of Nations, which granted it the special status of "differentiated neutrality", excluding Switzerland from participation in collective military measures. In addition, after the war, social tensions broke out and, in November 1918, a national strike broke out.
Image 1: The bank employees' strike in Zurich at the end of September 1918. Source: https://blog.nationalmuseum.ch/fr/2018/11/greve-generale-1918/
The federal government mobilized a large number of troops. The strike coincided with a worldwide flu epidemic that caused many deaths among those mobilized, but some of the strikers' demands were realized. These included the 48-hour work week, improved benefits for the unemployed and the reform of the voting system, with the replacement of majority voting by proportional representation in 1919. Since the end of the 19th century, the Farmers' Association, representing a clientele particularly affected by the structural crisis and in favor of protectionism, was already the most successful of the various pressure groups that increasingly influenced federal policy.
The crisis of 1929 reduced Swiss exports and many banks became insolvent, while the machine-building industry held its own, especially since at this time the Swiss railways were largely electrified and needed new machines.
In 1930, the Bank for International Settlements was founded in Basel to handle Germany's war reparations. Since then it has become a center for monetary policy research, and also functions as a central bank for other central banks.
In addition, in 1934, banking secrecy was codified with the passage of the Federal Banks and Savings Banks Act.
This legislation protected the assets of persons persecuted by the Nazi authorities and was used by individuals and institutions seeking to evade taxes illegally, hide assets or generally commit financial crimes.
The internal crisis reached its peak in 1936, when many workers, especially in the construction industry, were laid off, and the central bank devalued the Swiss franc by 30%.
As the Axis countries became increasingly aggressive and the Western powers barely reacted, the federal government sought good foreign relations with its totalitarian neighbors. After the political union of Austria by Germany in 1938, Switzerland returned to absolute neutrality.
During World War II, Switzerland initially mobilized 450,000 soldiers and 200,000 auxiliaries and throughout the war mobilized 850,000 people out of a total population of 4,000,000. The federal government compensated workers for lost wages and, despite economic difficulties, was able to keep inflation at a tolerable level throughout the war.
Switzerland signed several bitterly negotiated trade treaties with Germany. The Germans supplied raw materials (coal, iron and seeds for a country that produced only 60% of the food it needed) in exchange for considerable Swiss financial credits and military and strategic material produced by private companies, such as aluminum, machine tools and watches. For example, anti-aircraft defense constituted an important part of Switzerland's exports to Germany.
Despite ties with Germany, the Swiss generally rejected these regimes and their racist ideology as a mortal danger to their democracy and their linguistically and religiously diverse population. In addition, a strict immigration policy was maintained, to avoid fear of social unrest within the Swiss state itself.
Switzerland also maintained economic relations with the Western Allies during the war; for example, it purchased a considerable amount of gold from the United States and Great Britain. The Allies then used Swiss francs to pay for intelligence services in Switzerland and for the good offices that the neutral country could provide through the Red Cross to prisoners of war.
After World War II, in 1946 to be precise, the Western Allies, led by the United States, forced Switzerland to compensate the plundered central banks of Western Europe, demanding the payment of some 250 million Swiss francs. Because Switzerland would not have received any special recognition of its neutrality, the Federal Council decided not to join the United Nations (UN), which nevertheless occupied offices in Geneva.
The Cold War allowed Switzerland to become a respectable member of the international community once again. Neutrality allowed it to play a mediating role between the two antagonistic camps, but, as a capitalist democracy with a strong citizen army, it was a tacit member of the non-communist world and one of its main supporters.
In 1948, compulsory social security insurance was introduced at the federal level. This insurance is financed by contributions from workers and their employers, as well as small contributions from the cantons and the confederation, and provides pensions and retirement benefits for the elderly.
In 1959, the so-called Zauberformel ("magic formula") was established. This formula remained in place until 2003, allowed the government to circumvent partisan rivalries to distribute Switzerland's growing wealth and build a strong social welfare state. For a long period after World War II, the undamaged Swiss economy experienced very little unemployment, growing at about 5% per year in the 1950s and 1960s.
At the same time, Switzerland avoided multilateral ties that could affect its sovereignty and, for example, did not join the European Economic Community. Instead, it was a founding member of the European Free Trade Association (EFTA) in 1960. During this period, foreign policy was practically reduced to the negotiation of bilateral trade agreements.
The strength of the Swiss economy attracted many immigrants, first from Italy and Spain and after 1980 from Yugoslavia and Turkey. However, during the 1970s many foreign workers, especially those in construction and watchmaking, were forced to leave as a result of the restructuring and rationalization of the sector.
In the 1990s, Switzerland was one of the richest and most prosperous countries in the world, and neutrality remains the country's official doctrine, but with sometimes divergent results. Since 1848 and the creation of the federal state, the cantons have opposed further centralization of public tasks and defended the principle of subsidiarity. This principle was enshrined in the Federal Constitution of the Swiss Confederation when it was last revised in 1999.
In particular, Article 3 states that: "The cantons are sovereign, except insofar as their sovereignty is limited by the Federal Constitution. They exercise all rights not vested in the Confederation". Concretely, the cantons benefit from broad political, financial and fiscal autonomy.
On the one hand, in 1992 Swiss voters narrowly rejected accession to a European Economic Area comprising the EU and EFTA. However, Switzerland has maintained strong bilateral economic ties with the EU, its largest trading partner. Moreover, Switzerland sided with the UN against Iraq's invasion of Kuwait during the Persian Gulf War (1990-91). In a subsequent referendum in 2002, a very slight majority approved UN membership.
In addition, at the end of the 20th century, growing doubts arose about Switzerland's past and future. Of particular concern for Switzerland was an international debate in the 1990s about "dormant accounts" assets left by Jews in Swiss banks during the Nazi era. As a result, a settlement was reached between two large commercial banks and the Jewish claimants in which the banks agreed to pay the international Jewish organizations two billion Swiss francs.
In 2008, Switzerland joined the Schengen Agreement, a European convention that reduces international border controls between member countries. At the same time, Switzerland calmly weathered the economic crisis that shook the eurozone in the 2010s.
In 2010, Switzerland signed FACTA. This U.S.-passed law requires Swiss banks to disclose U.S. customer information (non-identifying) annually to the IRS.
In 2015, Switzerland signed "Rubik's Agreements" with Germany, Austria and the UK, which allow Swiss bank account holders to maintain anonymity by paying pre-determined back taxes.
Switzerland's relationship with the EU was further complicated in February 2014. Swiss voters approved a referendum imposing immigration quotas, and the terms of the 2014 referendum were significantly watered down in December 2016, so as not to jeopardize bilateral trade agreements with the EU.
During the ongoing Russian war in Ukraine, Switzerland took an unprecedented step. on February 28, 2022, the Swiss Federal Council made the decision to adopt the EU-imposed sanctions packages on February 23 and 25, 2022. Recently, Switzerland banned the import of coal, timber, cement, seafood and vodka, considered important sources of revenue for Russia.
Switzerland has had one of the most successful national histories in Europe, it faces unique problems in an era of peace and prosperity. However, an aging population and increased instability on the international chessboard are key challenges that will determine the future of the Swiss state.
Suggested reading:
Forbes, S., 2018. Switzerland Is A Great Economic Success. Why Don't More Countries Follow Its Example?. [online] Forbes. Available at: https://www.forbes.com/sites/steveforbes/2018/12/18/switzerland-is-a-great-economic-success-why-dont-more-countries-follow-its-example/
Komentarze