Sorry for the radio silence these last 10 days. I was in Switzerland for work (and some fun). It was my first time there for an extended period and proved to be one of the more interesting experiences I’ve had abroad. I am by no means an expert on Switzerland, but here are some thoughts from an outsider’s perspective. I think you might find them interesting.
What the European Monetary Union Seeks to Become?
What makes Switzerland so interesting (for an economics nerd like me) is its centrality to Europe combined with its relative neutrality to the European Union. Switzerland maintains its own currency (the Swiss Franc) and monetary sovereignty with a Central Bank that it controls. Switzerland is a Federation of 26 state-like entities called Cantons with local governments within the Cantons. It is, in very simple terms, kind of like a miniature version of the USA with a federal government and 26 states that are independent but united. Unlike the USA, however, it is a true democracy in that the people can vote for policy changes with simple majorities.¹
I’ve compared the EU (and the EMU more specifically) to a version of the USA. The USA works specifically because of its fiscal and political unity. The EMU doesn’t work well because it has loose political unity and weak monetary unity. Switzerland is basically a very small USA. They have political and monetary unity. So, in a sense, the EMU seeks to become more like the USA, but Switzerland is arguably the better example as they’ve already integrated several different cultures (the 4 regions of Switzerland have strong cultural and lingual influences from the surrounding regions) within a politically and monetarily unified country.
So, in an interesting way, Switzerland’s rejection of the EU project is especially harsh as they’re a pretty good example for what the EU would like to be.
Switzerland’s Decentralized Economy.
Decentralization is definitely a buzzword around all of Switzerland. Everyone I talked to was very proud of the fact that Switzerland is decentralized from the rest of the EU. And you see this all over the place – they even accept Bitcoin as a form of payment all over the place!
Now, to an American they don’t seem very decentralized at all. They have “cooperative” supermarkets and universal healthcare, for instance. And there’s a popular monetary reform initiative that would centralize bank deposit creation with the Swiss National Bank (this, by the way, is not a good idea as banks are a highly decentralized way of creating money in an elastic monetary world).² But relative to the rest of Europe Switzerland is a relatively decentralized system.
They attribute this primarily to the decentralization of the political process through a combination of federal, cantonal and local politics. Each of the three levels exerts high levels of control, for instance, with the federal level only controlling 30% of the aggregate budget.³
Monetary Sovereignty – at a Cost?
Switzerland has maintained their currency and maintains an arm’s length from being too involved in the EU. Although they are involved in the UN, OECD and WTO they are highly reluctant to become too integrated in the rest of Europe. It makes for an interesting case study given the fact that they are smack dab in the middle of Europe and surrounded by EU and EMU members. It would be like Colorado being an independent country. In a world where globalization is inevitable as technology and mobility increases Switzerland feels like a country trying to fight a massive macro trend. So far they seem to be doing an okay job of it, but I wonder if it can persist.
Now, this isn’t occurring without a cost. Although Switzerland has maintained their political and monetary sovereignty their economy does not appear much more robust than the rest of Europe. Median incomes in Switzerland are high (with no minimum wage!) and unemployment is extremely low. But the stability of the political and monetary union in Switzerland means the Franc is a stable reserve currency. And so this sovereignty has a price.
This appears to be coming at a cost as the Swiss economy is dependent on trade with the rest of Europe, but has been battling a strengthening currency. The result – 7 years of stagnant GDP. The Swiss are a fairly good indicator of what might happen to a country like Germany were they to leave the EMU – their currency would jump and their economy would actually be hurt. In a weird way, the biggest beneficiary of the EMU project is the country that many think has the most to gain from leaving….
Switzerland is a paradox of sorts with a relatively centralized government and a society that tends to value a more decentralized capitalist mentality.
As I travelled throughout Switzerland I considered whether I could live there.4 It is, after all, such an idyllic place. The people are wonderful, the landscapes are beautiful and the quality of life seems to be very high. If I had to describe how the country operates, I think it would be “we take care of our own”. It’s a nice sentiment and one that explains much of the angst in Europe where many countries feel like they aren’t taking care of their own. Switzerland has maintained its political and cultural identity while many other countries battle with the problems that inevitably come with globalization and immigration. So seeing things from the Swiss side gives you a more well-rounded view of much of the populism occurring throughout the world today.
But the country also seems to be a bit of a teapot in a tempest with this quaint economy necessarily interconnected to what is a much bigger and less stable situation with the rest of the EU. There’s a bit of a feeling of having your cake and eating it too at work within Switzerland. For instance, they don’t want to be beholden to EU labor mobility laws, but they are necessarily benefiting from the free movement of goods and services across borders. There is a cost to be borne with such positions and I suspect that the currency will become increasingly problematic for the Swiss. Then again, given their high living standards and desire to maintain neutral positions within Europe perhaps this is a cost they’re willing to accept?
² – I know, I know. People hate banks and bankers. But banks are just competitive entities that compete to create loans for the rest of us. Loans are how money is created. So we compete to prove we are worthy of obtaining money at a reasonable cost (interest) and banks compete to give us that money by expanding their balance sheets and taking the risk of extending credit. Although imperfect, this elastic form of money creation is highly market based and decentralized relative to state based money systems.
³ – Federalism: The Case of Switzerland, Wolf Linder, University of Bern
4 – No, I will not be leaving California any time soon although the fat kid in me is tempted by the possibility of more accessible fondue….
NB – I should add that while Switzerland is an idyllic place, it is probably a fallacy of composition to assume that it can be replicated on any grand scale. After all, this is a country of 8 million people (the size of the state of Virginia) with geographical issues that make the country more remote than many of its neighbors. So they can better control for immigration and labor mobility issues than most other larger countries can. Ie, they actually can have their cake and eat it too to some degree given their unusual location and relative small size.
NB 2 – One thing I was fascinated with was the relative lack of obesity in Switzerland. I say this because I was basically gorging myself with cheese, chocolate and wine for much of the trip. Miraculously, I only put on a few pounds. Then again, I was walking 5-10 miles a day and according to the locals the foods are strictly regulated so you’re consuming mostly natural foods (as opposed to processed garbage). Crazy how that works, huh? Eat real food and walk around a good bit and you won’t get fat. I’ll make a note of that….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.