Click Here for the Switzerland Jurisdiction Home Page Switzerland, Secrecy and the EU, Jeremy Hetherington-Gore Seldom can a country have been simultaneously as successful and yet as stressed as Switzerland. On the one hand it has a strong currency, a thriving economy, and is home to some improbably large percentage of the world's private wealth. On the other hand, the world's multilateral organisations, including the EU, the UN, the OECD and the FSF are increasingly trying to use the promise of closer ties and the benefits of globalisation as levers to break down Switzerland's fabled banking secrecy, the rock on which its financial success is built.

What is a poor country to do? Surrounded by the EU since Austria joined, and now even more thoroughly surrounded after enlargement, Switzerland has no choice but to develop commercial, transport and human links with its neighbours - hence the two sets of bilateral accords reached between Switzerland and the EU, which have dealt with some of the more urgent economic issues raised by the country's increasing integration with the single market. But the EU, sadly for Switzerland, is not just an economic body.

(Oh, for those far-off days when EFTA surrounded a small core of European Economic Community members and Maastricht was an obscure village somewhere in Holland that antique dealers went to when they had nothing better to do.)

No, the EU has Ambitions to be all the things that Switzerland has spent 1,000 years learning not to be, like aggressive, interventionist, global and generally bloody-minded. And like most proselytising bullies, it can't leave well alone.

What has brought things to a head for Switzerland has been the EU's controversial determination to impose a uniform withholding tax on savings. This was originally just one measure included in a package of tax harmonisation measures, sneaked into the EU's agenda by the Brussels 'Europe Is A Superpower' gang in the guise of a single-market measure.

Other parts of the package were relatively innocuous, but the withholding tax proposal amounted to an attack on the fiscal settlement under which Europe and its offshore satellites have prospered for decades: 'us big countries will tax the masses but rich people who can afford good lawyers will be allowed to hide their money away from the tax collector'.

This may not be a worthy or even a moral precept, but it represented a workable compromise between the left-wing 'tax-and-spend' majority that has governed Europe since the Second World War, and the bourgeousie that makes the money in the first place.

Switzerland of course is the non-pareil icon of the bourgeousie's side of the settlement, and a country that prefers nothing to happen, except for the steady clunk of gold bar being piled on gold bar.

Now, it seems that in the last few years everything possible has happened to Switzerland, and most of it bad. The withholding tax proposal initially ran up against the immovable wall of the UK and Luxembourg's Eurobond industry, and led to the strange sight of a Labour Chancellor of the Exchequer calling on the Gnomes of Zurich to pull him out of the mire in which his tribal, egalitarian instincts had landed him.

But Gordon Brown's request to the Swiss to relieve his dilemma either by accepting information-sharing or refusing it on his behalf simply called down a torrent of abuse on the heads of the Swiss, which enormously complicated the resolution of the savings tax issue without in the least helping Mr Brown to resolve the dichotomy of his own nature.

The French Parliament, Chris Patten, Goran Persson and the US Congress are just a few of the voices that were raised against the Swiss in 2001 and 2002 as the affair continued on its messy path.

But the Swiss would have none of it, and in many public statements they have made it clear that they didn't accept the agenda being foisted on them by the EU, its politicians, and other global bodies.

After 76.7% of voters rejected the idea of beginning negotiations to join the EU in a March 2001 referendum, Christoph Blocher, Switzerland's most powerful politician, said the outcome of the vote showed that "we do not want to join the EU in its current form" and called the EU an "intellectually misguided construction" which would have a "desolate end".

Mr Blocher, a billionaire businessman and Switzerland's leading nationalist politician, who has spearheaded the campaign against Switzerland's membership of the EU over the last decade, scored a triumph in the referendum vote. He wasn't so successful however in the following year when he vainly tried to fight a referendum on Switzerland's membership of the UN. Switzerland did not want to join the UN, he says, because it would infringe his country's neutrality and he does not want the Security Council "telling us what to do". The populace disagreed with him on that issue.

Much Swiss anger was caused in 2002 by Chris Patten's hint that the EU's willingness to ratify the first set of bilateral agreements was dependent on the Swiss making progress towards a resolution of the EU's information-exchange demands.

Senior economist at Credit Suisse, Fritz Stahel, explained that the Swiss view the bilaterals as an economic issue whereas the issue of joining the EU clashes with Switzerland's traditional political identity. He said: 'The bilaterals are a useful step-by-step approach to economic integration. But the question of joining the EU is a political one which raises issues of protecting Switzerland’s direct democracy, neutrality and federal system, and Swiss voters aren’t ready to take this step yet.'

Jean-Francois Mercier from Citibank told the Swiss media: 'This initiative was stillborn, odds now appear stacked against Switzerland joining the EU - and the euro - during this decade.'

The general opinion of the banking industry is that the EU referendum was called too close to agreement on the first set of bilateral accords. It was likely a case of too much contact with the EU and too soon, given Switzerland's phobia of large multilateral organisations.

Marcel Ospel, head of UBS, Switzerland's largest bank, said the bilateral agreements should be ratified with a 'wait and see' clause to see how they well they work before Switzerland enters into more talks with the EU, saying: 'They should now be ratified [by the EU’s member states] and then these agreements need to be implemented. This process should not be disturbed. We have to be pragmatic.'

In fact, it took 18 months for all fifteen EU member states to ratify the seven agreements, and by the time the process was complete, a second set of accords ('Bilaterals II') were already on the table.

In a dramatic display of its lack of understanding of Swiss sensibilities, or you might say in a typical display of super-power arrogance, the EU had responded to the vote against joining the EU by promptly indicating that it is willing to enter into negotiations with Switzerland concerning more bilateral agreements. Immediately after the vote, a letter was sent to the Swiss government by Sweden's Prime Minister, Göran Persson, urging Switzerland to discuss the Schengen Agreement which deals with the free movement of people in the EU and the Dublin Convention on asylum seekers and immigration.

Switzerland's President, Moritz Leuenberger, described the letter as a 'breakthrough' in setting up talks on on new bilateral agreements to complement the first seven agreements, which govern mainly trade issues. But Mr Leuenberger was still smarting from February's letter from the EU's foreign affairs commissioner, Chris Patten, which hinted that Switzerland would have to concede on the issues of customs fraud, savings taxation and banking secrecy before the EU agreed to negotiations on new bilateral agreements.

Although the EU declared the Savings Tax Directive a done deal at the beginning of 2003, at least as regards its own members, the reality at the end of the year regarding negotiations between Brussels and Switzerland was that while the EU was trying to make passage of 'Bilaterals II' dependent on a dilution of Swiss banking secrecy, the Swiss were refusing even to begin the process of legislating for the Savings Tax Directive while 'Bilaterals II' remained unsigned.

The ever-helpful eurosceptic Swiss People's Party (SVP) put forward a proposal in December to incorporate the concept of banking secrecy into the country's constitution, which was approved by majority in the Swiss House of Representatives. Similar proposals put forward by four Swiss cantons were accepted by the Senate. Separate parliamentary commissions would next examine the different proposals, but any final decision on whether to enshrine banking secrecy in the constitution would require a national referendum.

The SVP, which had become the largest party in the House after winning 27% of the votes in 2003 elections, had timed its move so as to cause the greatest possible embarrassment to the government as it attempted 'Bilaterals II' with the EU. Experts in Switzerland said that the votes didn't have much practical significance, although they could annoy Brussels and slow down the bilaterals process. The Swiss Bankers Association welcomed the move.

By February, 2004, the EU was ratcheting up the pressure, with public statements by EU ministers urging Switzerland to change its position. But Swiss Finance Minister, Hans-Rudolf Merz was sticking to his guns on the issue of separate negotiations regarding security cooperation and tax fraud (part of 'Bilaterals II'). Switzerland had insisted from an early stage that they wanted an opt-out in the area of judicial cooperation, and was continuing to hold its ground on the issue of the Savings Tax Directive, insisting that compromise was reached on the judicial issue before it signs up to the measure.

“For the moment, it would be absolutely wrong to sign the agreement on savings tax,” stated Merz. However, EU ministers appeared equally adamant that they would not accept the linking together of the two issues as a condition of Swiss participation. “It’s a clear, common position,” remarked Germany's finance minister, Hans Eichel. “We won’t accept linkage between questions that aren’t related.”

In March the Swiss government was able to take heart from the Swiss Bankers Association Survey 2004, which showed that an overwhelming majority of the population remained in favour of retaining banking confidentiality. 88% ofrespondents believed that protecting the confidentiality of financial data vis-a-vis third parties is correct. Specifically asked about bank client confidentiality, 76% said they are in favour of maintaining it. In addition, 68% (2003: 59%) believed it probable that bank client confidentiality would still exist in its present form in five years’ time, leading the survey to conclude that bank client confidentiality enjoys strong support amongst the Swiss.

Although April saw a move to resolve a separate dispute between the EU and Switzerland over the taxation of re-exports - in Switzerland's favour - hostilities over the Savings Tax continued, with Finance Minister Hans-Rudolf Merz announcing: "Surrendering banking customers' secrecy is out of the question to us," following a meeting with his German counterpart, Hans Eichel. Merz added that the Swiss banking system already contained measures which help to prevent fraud.

Finally in May a compromise was reached over the 'Bilaterals II' requirement for information exchange and judicial cooperation over crime, with Switzerland agreeing to provide legal assistance under the terms of the Schengen agreement in cases relating to indirect taxes such as customs, VAT, and alcohol and tobacco levies, but - crucially - being exempted from providing such assistance in cases of direct taxation.

This was enough for the Swiss to be able to accept the Savings Tax Directive, but Brussels had to put off the implementation date of the Directive until July, 2005, to allow time for the Swiss parliamentary process to grind out the necessary legislation. Switzerland's chief international tax negotiator, Robert Waldburger had warned that: "From the Swiss point of view, it's impossible that the January 1 2005 date will work. If everything goes really well, parliamentary approval in Switzerland will take 12 to 14 months."

At the end of October, 2004, The European Commission announced that Switzerland had signed nine bilateral agreements with the EU at a ceremony in Luxembourg attended by Swiss President Joseph Deiss and Foreign Minister Micheline Calmy-Rey. Banking secrecy remains, but Switzerland will give more thorough international administrative co-operation in future in cases of tax fraud.

The agreements concerned: the taxation of savings; co-operation in the fight against fraud; the association of Switzerland to the Schengen acquis; participation of Switzerland in the “Dublin” and “Eurodac” regulations; trade in processed agricultural products; Swiss participation in the European Environment Agency and European Environment Information & Observation Network (EIONET); statistical co-operation; Swiss participation in the Media plus and Media training programs; and the avoidance of double taxation for pensioners of the Community institutions.

In November, 2004, the Swiss government indicated that a referendum on the Savings Tax Agreement was unlikely, and that the legislative process needed to approve the adoption of the Directive and the Bilaterals II agreements was proceeding smoothly.

In comments made after a regular meeting of finance ministers from countries in the European Free Trade Area, Dutch Finance Minister Gerrit Zalm revealed: “The Swiss minister made us happy by informing us that everything was well underway with the savings (tax) agreement.”

The possibility that the Swiss government might have been obliged to put the treaties to a referendum had cast doubt over the implementation of the directive. However, Swiss Finance Minister Hans-Rudolf Merz, who was also present at the EFTA meeting, assured ministers that this would not be the case. “He did not expect a referendum in Switzerland on this issue, so that was a very comfortable communication from his part," Zalm revealed.