Hail Helvetia

THE euro crisis has recreated a rift between a Germanic north and a Latin south that decades of integration tried to efface. Economists and political scientists puzzle over its persistence. Some point to patterns of industrialisation, of literacy or even of Catholic and Protestant attitudes to sin and redemption. Whatever the roots, the euro has made it worse.

Belgium offers a worrying glimpse of what the euro zone might yet become: a dysfunctional, over-bureaucratic polity with bewildering layers of government, infused with a poisonous resentment between a dependent French-speaking south and a subsidising Flemish north. But there is a more hopeful model: Switzerland, which for all its linguistic and religious splits, combines prosperity with contentment and a dose of direct democracy. An index of the best places to be born in 2013, compiled by our sister company, the Economist Intelligence Unit, put the Alpine confederation comfortably first.

The European Union has often looked to America, a continental federation, for inspiration. But it could usefully study how the Swiss bring together Catholics and Protestants and German-, French-, Italian- and Romansh-speakers. The usual stereotype breaks down: rich French-speaking cantons like Geneva and Vaud pay for poorer German ones such as Uri. There is something for every taste: Scandinavian standards of living, German fiscal rigour, French-style “solidarity” transfers, Luxembourg-like love of bank secrecy, Irish tax competition and a British cussedness about the EU. Switzerland is neither in the EU, nor in the looser European Economic Area. It has a web of bilateral deals with Brussels—though these may yet be torn apart by the Swiss referendum in February that rejected the free movement of workers.

Above all, Switzerland has a successful currency union without the euro zone’s onerous central edicts on everything from deficits to labour policy, pensions and investment. Although the Alpine cantons started to bind together in medieval days, they developed a single market only in the 19th century—starting, like the EU, with goods and spreading imperfectly to services. A single currency replaced multiple cantonal ones from 1850.

What lessons does Switzerland offer? A strong doctrine of subsidiarity, whereby tasks should be done at the lowest possible level of government. Cantons have ceded powers to the confederation piecemeal (its right to raise taxes must be reviewed periodically), but have also devolved them to communes. All three levels of government have taxation powers and provisions for issues to be decided by referendum. German economists also point to Switzerland’s mechanisms to control public spending and enforce a no-bail-out rule. The big difference, though, is that cantons have drafted their own balanced-budget rules and voters have forced similar ones on the confederation. The euro zone imposed too much austerity on troubled countries, but Switzerland has shown that running surpluses and paying back debt in good times creates more scope to respond in a crisis. The thrifty burghers even voted down plans to bid for the winter Olympics.

So is Keynesian stimulus banned? Not entirely. Balanced-budget rules vary. Some allow for downturns or exclude investment from the numbers. The confederation can approve exceptional spending, such as when it saved UBS, a big bank. Switzerland’s “banking union”, to use the EU term, is narrower than the euro zone’s (it covers just three “systemically important” banks) yet it is clear that the confederation ultimately guarantees the system. There is no such euro-zone backstop. At the height of the financial crisis in 2008 stimulus was also entrusted to the Swiss National Bank, which cut interest rates more than the European Central Bank. It has fewer qualms about buying debt or, indeed, large amounts of foreign assets to hold down the Swiss franc.

The deeper difference is that Switzerland is a federation that calls itself a confederation, whereas the euro pretends to be a federal currency but actually preserves 18 sets of national economic and fiscal policies. Swiss monetary union came after centuries of political unity; the euro unwisely tried the reverse course.

All for one and one for all

Imbalances between Swiss cantons and shocks that hit some more than others are absorbed by the economy as a whole: by an integrated financial system, by workers moving to where the jobs are, by countrywide provision of welfare and public goods (eg, roads) and by transfers from rich to poor cantons. The confederal budget is smallish, at 11% of GDP, but that is far larger than the EU’s, which is less than 1% of GDP. The EU could learn from the Swiss “equalisation fund” (about 0.8% of GDP), which creates a transparent system of transfers from richer to poorer regions. By reckoning the payments annually according to the tax base (rather than how cantons tax and spend) and by providing lump sums instead of semi-hidden subsidies, the system preserves cantons’ freedom of action and also encourages tax competition.

None of this is to idealise Switzerland. Its politics is full of arguments about money. Sometimes referendums play up social divisions, or stoke anti-foreigner populism. What is feasible in a small country may not be across a continent: for instance, neutrality is not an option for most EU countries. But Switzerland offers useful pointers for the euro zone. Restoring market discipline through a no-bail-out rule, stronger fiscal federalism, a deeper single market and a more rational EU budget could create a system that requires less bossy interference by Brussels. Establishing clearly defined tasks for every level of government, each with its own resources, would help make the system more accountable. Direct democracy can transcend identity politics. “A bigger Switzerland” is a term of insult among EU watchers. But the euro zone might do better if it were a little more Helvetic.

^{Economist.com/blogs/charlemagne}