International shield

If you look at a map of the European Union (with national borders erased) the continental country that stands out most clearly is the one that isn’t there: Switzerland. Together with its tiny neighbour Liechtenstein, the Swiss Confederation is the hole at the heart of Europe, its borders near-perfectly defined by surrounding EU territory.

This cartographical paradox symbolises a deeper mystery – the strange disconnect between the EU and the country that comes closest to what the EU wants to be. It’s obvious why the Swiss don’t want to join the EU: a long history of neutrality plus the fact that they’re doing very well on their own, thank you. What is puzzling, however, is why the EU hasn’t done more to model itself on a multi-linguistic federal state that has clearly stood the test of time.

It’s a point that comes to mind when reading a recent Charles Blankart post for the Institute of Economic Affairs. Blankart’s subject is the Swiss ability to combine decentralised decision-making with a reputation for sound public finances.

The cantons of Switzerland, like the nations of the Eurozone, are each entitled to make their own decisions on spending, taxation and borrowing. Also as with the Eurozone, there is a single currency and a central bank. But very much unlike the Eurozone, disaster has not ensued.

Blankart notes that the component parts of both polities are bound, at least in theory, by fiscal rules. So why have these worked in one case, but not the other? The answer is that Switzerland also sticks to a no-bailout rule:

“When the cantons of Bern, Solothurn, Geneva, Waadt, Appenzell Ausserrhoden and Glarus ran into severe financial difficulties due to the losses of their cantonal banks in the 1990s, they were left to their own devices.”

Lenders – and, by extension, would-be borrowers – are fully exposed to the consequences of their decisions, thereby creating a culture of caution and responsibility:

“Fiscal discipline in Switzerland is not explained by balanced budget rules as such, but by a credible no-bailout policy. Balanced budget rules are merely a response to this no-bailout policy. The fact that cantons will not be bailed out encourages them to have fiscal rules to stop the build-up of debt. This sends a signal to capital markets and allows them to borrow on more favourable terms.”

The credibility of the rule is founded on the consistency with which it is observed:

“The no-bailout principle in Switzerland could be called a ‘dynamically developing credence capital good’. This means that the belief that the policy will be followed grows through its application over time, and debases itself when it is disregarded. Each application of the no-bailout rule strengthens the expectation that it will continue to be applied in the future.”

Contrast Swiss consistency with the unprincipled manoeuvrings of the Eurozone:

“Debt brakes have no value for their own. They are only helpful if they are linked to a credible no bailout position. In the euro area the no-bailout clause of the Lisbon Treaty has gone. Therefore, debt brakes have been hollowed out.”

Of course, the Eurozone differs from Switzerland in that it is not a nation-state. This limits the extent to which the former could ever re-model itself on the latter – not least in terms of democratic accountability.

However, there are lessons here for an increasingly federal United Kingdom. As we make further progress towards devolution and localisation, the opportunities and risks of fiscal decentralisation will have to be addressed.

The Swiss example shows that autonomy can be a driving force for responsibility – with local centres of power competing to prove themselves the safest bet. As Charles Blankart reports, “out of 26 cantons, seven have an AAA rating and fifteen an AA rating.”

Clearly, it is Switzerland, not the Eurozone, that provides a model for the British cantons of the future.

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