Switzerland's EU Problem

Switzerland is trapped in an abusive relationship with the European Union, which is devouring its financial markets and institutions
Switzerland is trapped in an abusive relationship with the European Union, which is devouring its financial markets and institutions

Zug is a dreary place. The undistinguished office and apartment buildings that clutter the landscape are the legacy of the deal struck between Marc Rich and the burghers of Zug that turned the village into the global center of commodities trading. Glencore Xstrata still has its headquarters there, surrounded now by hedge fund managers and private bankers too. They reckon a daily commute to Zurich is a small price to pay for the lower rates of taxation levied in the adjacent Canton.

But if Zug emerged from nowhere in just 40 years, its no-questions-asked approach to the moneyed classes is a throwback to a 20th century Switzerland fast being bullied out of existence by the European Union (EU) and the U.S. Finanzplatz Schweiz was built on private banking, of which the numbered bank account was the emblem. That is gone. Switzerland now has double taxation treaties with 93 countries. In 2009, the government even negotiated a deal with the U.S. covering tax-shy American clients of a single bank.

Four years earlier, the Swiss government agreed that EU citizens with Swiss bank accounts must either allow the bank to notify their tax authority of the interest earned or agree to 35% of it being shared between the Swiss tax authority and their own. The fact that a withholding tax preserves bank secrecy cannot hide the reality that Switzerland ceded sovereignty to the EU. Such concessions by a country built on Kantönligeist are a measure of the increasingly unequal relationship Switzerland has with the EU.

It is unlikely to be rebalanced. Of the countries that surround Switzerland, only Liechtenstein is not a member-state of the EU. The EU has for decades traded access to its markets for steady attrition of the privileges of the people and companies that choose to live, domicile, work, trade and bank in Switzerland. Some 100 bilateral agreements are now in place between Switzerland and the EU, by which Switzerland takes on aspects of EU law in exchange for access to EU markets.

Though the Swiss have approved every substantial bilateral agreement by referendum—it remains to be seen if their February vote in favor of immigration quotas strains relations with the EU to the point of renegotiation—it is invariably approval under duress. After all, four out of five francs the Swiss earn abroad come from the EU. Switzerland even pays to play its part in the programs and agencies that accompany bilateral agreements.

Sovereignty-for-access is an increasingly Faustian bargain, which Switzerland cannot resist. When the EU locked Switzerland out of some EU financial markets at the turn of the century, the Swiss got the message. They have since then adopted virtually every EU regulation of the financial markets in order to preserve the access of its banks and insurers to EU markets.

The Collective Investment Schemes Act (CISA) and Collective Investment Schemes Ordinance (CISO), for example, is no more than a Swiss version of the Alternative Investment Fund Managers Directive (AIFMD). Clients of the Swiss private banks that wish to invest in alternative funds managed from abroad—and Switzerland is still the most important Continental source of capital for the hedge fund industry—cannot do so without the investment being intermediated by either a Swiss bank or some other “representative” answerable to the Swiss regulator.

Similarly, Finanzmarktinfrastrukturgesetz (FinfraG) is the Swiss adaptation of the European Market Infrastructure Regulation (EMIR) that obliges users of exchange-traded and OTC derivatives to clear them with central counterparty clearing houses (CCPs) and report their terms to trade repositories that pass the information on to regulators. Needless to say, four of out five derivative transactions in Switzerland have an EU-based counterparty.

Even the slight deviations in these measures from their EU equivalents read less as expressions of sovereignty than concessions to Swiss amour propre. Like the victims of any abusive relationship, the Swiss surrender to a mix of threat and promise. Constant adaptation to laws made elsewhere is unleavened by influence over their composition or guarantee that markets will remain open or be completely open in the first place.

A country which grants equal status to the laws of another cannot claim to be a sovereign state. No wonder the global center of private banking is no longer Switzerland, but Singapore. Or that Finanzplatz Schweiz is shrinking. Swiss National Bank statistics show that, since the crisis, the number of banks in Switzerland has shrunk from 321 to 297, and 3,000 bankers have disappeared from their payrolls.