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Nothing forced Switzerland into an embrace with the EU

Kitty Miv, Editor
17 October, 2013

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

Let's suppose that one (you, that is, or me) was offered to be Prime Minister of a European country (and for this purpose we won't count Russia as being European in the light of President Putin's recent behaviour) - which one would you choose? Obviously it won't be Ukraine, because you'll end up in prison, or Italy, because you'll hardly be in the job long enough to get to know your chauffeur. I would probably choose somewhere civilized like Denmark, although the climate is not very nice, or perhaps Malta, where the climate is indeed very nice. But third on the list of countries I wouldn't choose must surely be Switzerland, where the thankless job of leading the country involves a battle on at least three fronts, your external enemies being the USA and the European Union, and your internal enemy being the opposition Swiss People's Party (SVP). Switzerland gets a garland this week for keeping its cool in the face of provocations from all three of these enemies. The most dangerous of them is of course the USA, since there clearly was a considerable amount of doubtful behaviour on the part of Swiss banks in regard to the overseas assets of US citizens, and they are highly vulnerable to judicial action of various types. Actually the USA has been rather measured in its behaviour, while Switzerland has been quite responsive in return. Both countries have been rather grown-up, in fact, and it needn't have been that way.

I'm not sure however that I would call the behaviour of the EU "grown-up" in relation to Switzerland. The over-muscled bureaucrats in Brussels use Switzerland as a kind of punch-bag, perhaps to demonstrate their probity to other EU interests. So all the more credit to Switzerland for staying calm. They think they haven't got a choice, actually, or at least that's their excuse for supping with the devil, but the truth is otherwise. Nothing forced Switzerland into an embrace with the EU, despite its geographical situation: Taiwan exists in the shadow of its Mainland oppressor, and by being clever and brave is succeeding in having independent existence. Switzerland could have turned a hard face towards the EU from the beginning, but it has chosen otherwise. Right or wrong? Hard to say, but at least you have to admire its persistent complaisance.

So that brings us to the enemy inside. Hard to say whether the SVP is right-wing or nationalistic or perverse or just plain ornery. For sure it is difficult for the Government to handle. Crackpot is a good adjective for it, looking from the outside. But Switzerland is a wide church, and the Government just sighs to itself and keeps a fixed smile on its face as the SVP comes with one hare-brained initiative after another, all of which fall at the first or second or third fence. And by design there are plenty of fences in Switzerland's constitution.

For the European countries which used to make some or all of their living from being "low-tax," which does of course include Switzerland, the EU has always been the elephant in the room, and if Switzerland may by now regret having been ambivalent towards the EU, some other countries which threw in their lot more whole-heartedly with the EU have met with unexpected outcomes. In the case of Cyprus, the initial EU-induced boom has turned to ashes in its mouth; but Malta seems to have gotten everything right, and is carefully building itself into a diversified financial services and e-commerce centre. Its latest wheeze is to create a secondary stock market designed to attract smaller, more entrepreneurial companies; technically it will be known as a Multilateral Trading Facility under the country's investment legislation. Jersey and Guernsey have shown what can be achieved by a tax-efficient boutique-oriented listing exchange: the Channel Islands Stock Exchange (CISX) has operated very successfully in the shadow of London's exchanges, and Malta, with access to "passporting" (i.e. a licensed Maltese financial services provider is able to offer its services across the EU), should be able to do the same.

Actually it is inexplicable that Cyprus has played a nominally winning hand so badly. Perhaps it would have been asking too much for it to resist the flood of suspect money that came rushing at it from Russia in the 1990s, but that had been digested by the time Cyprus joined the EU (along with Malta) in 2004. The damage was then done by a property boom in which the entrenched and moderately corrupt ruling class enriched itself with no regard to sustainability or the rule of law. While they were playing at being property moguls, sowing the seeds of an eventual banking collapse, the public sector grew out of control and opportunities for well-founded economic growth went a-begging. There is almost no e-commerce development in Cyprus - why not? The stock market more or less collapsed early in the century because of a speculative boom, and has never recovered; instead, it merged with the Greek stock exchange in a slow-motion suicide which has yet to be resolved. By 2008, when the writing was on the wall for Cyprus's banking and property boom, and sensible people understood what lay ahead, the country saddled itself with a five-year term of maladministration under a Communist President, who has done 20 years' worth of damage to a situation which, though bleak, could have been saved by urgent reforms. Now it's too late. Cyprus has such natural advantages that it will bounce back, but it will not be soon.

Malta's nearest other EU member country is of course Italy, and the two are sharing in the awful task of dealing with the unstoppable waves of migrants and refugees arriving from North African and Middle Eastern countries. Both complain that the EU is leaving them dangling, without budgetary or other assistance. Italy's Premier Enrico Letta has responded humanely and effectively to the challenge, but his bigger preoccupation must surely be the budget he is due to present this week. The political shenanigans brought on by Silvio Berlusconi, his nominal partner in government, in recent weeks, have strengthened him and weakened Berlusconi, who is due to begin a year of community service this week. They can give him a broom to sweep the street outside his palace, but what will they do with his team of 20 bodyguards? There should be some good television footage in that. The Berlusconi circus aside, Letta's task seems insuperable. Due to Berlusconi, the property tax has had to be abandoned for this year, leaving a EUR5bn hole in the budget; yet Letta says, and rightly, that he must reduce taxes on businesses and on labour, with a budget target of another EUR5bn. He says blithely that the money will come from savings in public expenditure and privatizations; but he is left-wing, and it seems inconceivable that his own rank and file, let alone the Unions, will permit anything of the kind. Italian politicians have been talking about these remedies for a quarter of a century, and it never happens. There have been a few fake privatizations, for instance of Telecom Italia and Alitalia, but in reality both remain as loss-making state monopolies. So Letta can bluster, but the reality will be that Italy's already high debt (133 percent of GDP) will get higher. I have speculated before on how long the markets will stand for it; surely the tipping point is at hand? Meaning that Italy will have to throw up its hands and invite the Troika to take on the unholy mess. There is no imaginable political force in Italy that is capable of the job. They should call in the professionals, and the sooner the better.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 74th) two or three countries are given encomiums and two or three are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as - 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is on + 1, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to - 1, and another one in week six, dropping to - 2; finally in week 13 it got something right, so it went back up to - 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, though.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

If Malta is the tortoise . . .

Switzerland plugs on

And Kitty's Execrations:

Cyprus is the hare

Italy in the last chance saloon




Tags: Euro

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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