Executive Summary

Wealthy country with stable democracy. Flexible labor market, high life satisfaction
In the current review period, governance in Switzerland has shown considerable continuity with SGI 2017. By implication, the country’s strengths and shortcomings have remained unchanged. These strengths include the stability and quality of democracy, the efficient rule of law, an excellent system of public education and research, and a competent system of public transportation. The country has a high level of GDP per capita (one of the highest in the OECD) and accumulated wealth, and the natural environment remains ecologically sound. Social and economic policies are pragmatic, solution-oriented and heterodox. The Swiss government can be commended for maintaining a highly competitive economy, sustainable fiscal position, comparatively sustainable and generous welfare state, and moderate and stagnant income inequality. The flexible labor market has maintained full employment and high employment rates for both men and women. These policies have resulted in an absence of deep social divisions and marginalization (at least among Swiss citizens). As a result, citizens report a high level of life satisfaction and positive opinion of the national political system compared to neighboring countries.
Notwithstanding these successes, the shortcomings and challenges that existed a year ago persist, with some amplified to an extreme degree (see also “Key Challenges”):
Relationship with EU is vital open question. Large party’s projects put EU relations at risk
(1) Most dramatic in this regard are the developments in relations with the European Union. With 54% of exports going to the European Union and 72% of imports coming from the European Union (2016), as well as a strong inflow of highly qualified labor from the European Union, Switzerland is far more dependent on the European Union than the European Union is on Switzerland. The relationship is based on bilateral treaties, many of which are conditional on each other. If one of the major treaties were to be terminated, other important treaties would automatically become null and void. In 2014, the Swiss electorate voted for a constitutional amendment establishing a cap on immigration. Such a cap is not compatible with bilateral treaties between Switzerland and the European Union. While many Swiss citizens and politicians expected the European Union to adapt existing treaties to the new constitutional amendment, the European Union rejected a renegotiation of existing treaties. As a result, implementing the amendment against the will of the European Union would have entailed enormous economic risks. Most Swiss politicians have shown themselves unwilling to take such a risk, instead embarking on a strategy of, in effect, not implementing the amendment. In this context the Swiss People’s Party (already the strongest party in the country) is pursuing three projects which may further strain the relationship with the European Union. First, the party strongly opposes an institutional framework agreement between Switzerland and the European Union. Such an agreement would allow for a smooth revision of existing treaties and court-based adjudication of conflicts between the two trade partners. Second, the party has also submitted a new proposal for a constitutional amendment (the “self-determination initiative”), which will be decided upon in a popular vote between 2018 and 2020. If this proposal wins approval, international law and treaties would become subordinate to Swiss law. Third, in September 2017, the party announced that it would collect signatures for a new popular initiative, which is necessary to call a public vote. This initiative aims to force the government to terminate the current bilateral treaty on the free movement of labor between Switzerland and the European Union, which would automatically lead to the termination of other basic bilateral treaties.
Politics increasingly polarized
(2) Closely connected to the issue of Europeanization (and globalization) is the polarization of Swiss politics, and the concomitant weakening of the system of consensus democracy and social partnership. This applies not only to institutional and behavioral indicators of consensus democracy, but also to deep-seated cultural patterns and indispensable elements of the elite socialization of the past, such as the willingness to compromise and interact respectfully with political opponents. The political system of Switzerland is converging toward the continental pattern of non-majoritarian politics.
Shortcomings in direct-democracy system
(3) As in previous years, the system of direct democracy succeeds in giving citizens the feeling they have a say in government policies. This system is one of the major reasons why Swiss citizens are far more satisfied with the way democracy works in their country than their European neighbors. However, the system of direct democracy also demonstrates serious shortcomings. Among them is the likelihood that voters approve constitutional amendments which cannot be implemented for legal or economic grounds. A recent example is the initiative capping immigration, illustrating the tension between the myth of the people’s unconstrained sovereignty and the reality of a semi-sovereign political order where international law and economic interdependence severely limit democratic politics.
Pension system faces reform challenges
(4) Although the welfare state is sustainable and generous, the pension system must cope with demographic challenges. While increasing the age of retirement beyond 65 is not feasible given the constraints imposed by direct democracy, there are possibilities for reforming the three-pillar pension system (basic pension, occupational pension and tax-deductible savings for retirement). A major reform was rejected in a popular vote in September 2017. Under considerable time pressure, politicians must work on a new adaptation of the pension system to demographic challenges.
Energy policies a source
of contention
(5) Another major political conflict relates to environmental and energy policies. In the aftermath of the catastrophe in Fukushima, the Swiss government opted for an exit from nuclear power. It has been difficult, however, to implement that decision. In its new energy strategy, the government opted for a long-term “soft” exit which allows all nuclear power stations to remain in operation for their lifespan. No new nuclear power stations will be licensed to operate, however. Following a left-green initiative that demanded a quicker and harsher exit from nuclear energy failed in a popular vote in November 2016, the government’s strategy was approved in May 2017.
Tax deals for foreign
firms draw criticism
(6) In the past, Swiss cantons have offered generous tax deals to foreign firms. This has provoked criticism from the OECD and European Union, leading to a reform proposal. Switzerland wants to keep these foreign companies in the country, since they make a substantial contribution to the public revenues of local and canton authorities. To achieve this, the government proposed to lower taxes for domestic firms in line with the effective tax rates enjoyed by foreign companies, thereby obviating the preferential tax treatment of foreign firms. As a consequence, general tax income would decrease. This is against the wishes of the political left, which generally would like to see a higher level of taxation, in particular on capital. In a popular vote in February 2017, the public rejected this reform. There were two major reasons for this rejection. First, a large share of citizens found the proposal too complex and given their uncertainty opted against it. Second, another share of voters found the proposal excessively biased in favor of “the rich” and large enterprises. Currently, the Ministry of Finance is developing a new reform proposal which is less generous toward large enterprises and contains compensation payments (increased child allowances) in order to win support from left-wing voters.
KEK-CDC, 2014: Erwerbsbeteiligung von anerkannten Flüchtlingen und vorläufig Aufgenommenen auf dem Schweizer Arbeitsmarkt. Studie im Auftrag des Bundesamtes für Migration, available at https://www.sem.admin.ch/content/dam/data/sem/integration/berichte/va-flue/res-studie-erwerbsbet-va-flue-d.pdf
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