Executive Summary

Wealthy country with stable democracy
In the current assessment period, governance in Switzerland has sustained considerable continuity with recent SGI assessments. By implication, the country’s strengths and shortcomings have fundamentally remained unchanged. These strengths include a stable and robust democracy, the efficient rule of law, an excellent system of public education and research, and a competent system of public transportation. The country has high levels 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.
Flexible labor market,
high life satisfaction
The flexible labor market has maintained full employment, with high employment rates for both men and women. Youth and long-term unemployment remain very low. These outcomes have resulted in an absence of deep social divisions and marginalization (among Swiss citizens). As a result, citizens report a high level of life satisfaction and more positive opinion of their national political system compared to neighboring countries.
Notwithstanding these successes, shortcomings and challenges have persisted (see also “Key Challenges”):
Relationship with EU is vital open question; deadlock on issue of institutions
(1) Most dramatic in this regard are developments in the relationship with the European Union. With 53% of exports going to and 71% of imports coming from the EU (2017) as well as a strong inflow of highly qualified labor from the EU, Switzerland is far more dependent on the EU than the EU is on Switzerland. This relationship is based on bilateral treaties, many of which are conditional on each other. If a major treaty was 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 EU. Implementing the amendment against the will of the EU would have entailed enormous economic risks. Most Swiss politicians have shown themselves unwilling to take such a risk, instead embarking on a strategy of “implementation light”: in effect, not implementing the amendment literally. Politicians weighed responsiveness and responsibility and favored the economically responsible option. Surveys show that most respondents are willing to accept this outcome. Notwithstanding, relations with the EU remain highly problematic. Since 2008, the EU has requested an institutional framework agreement. Such an agreement would allow for a smooth revision of existing treaties and court-based adjudication of conflicts between the two trade partners. In these negotiations, the Swiss government has been politically unable to make the necessary concessions for an agreement and the EU has been unwilling to substantively alter its demands. At the time of writing, the situation has escalated, with the EU threatening sanctions if no draft agreement is reached by the end of 2018. In contrast, on 25 November 2018 voters rejected a proposal for a constitutional amendment giving Swiss law superiority over international treaties. This amendment would have endangered relations with the EU. Likewise, a proposal to terminate the bilateral treaty on free movement of persons appears doomed to fail.
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 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 that 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. The system of direct democracy, however, also demonstrates serious shortcomings. Among them is the likelihood that voters approve constitutional amendments which cannot be implemented on legal or economic grounds.
Tax deals for foreign
firms at risk
(4) In the past, Swiss cantons have offered generous tax deals to foreign firms who are located in Switzerland but do most of their business abroad. This has provoked criticism from the OECD and EU. A reform proposal aimed to address these criticisms while also retaining these foreign companies within the country, since they contribute substantially to the public revenues of local and canton authorities. 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 was opposed by the political left and, in a popular vote in February 2017, voters rejected the reform proposal. If Switzerland fails to implement a solution acceptable to the EU by spring 2019, sanctions can be expected. Given these constraints, a trade-off between social and tax policies has been designed (see below).
Pension system
reforms underway
(5) 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 unachievable given the constraints imposed by direct democracy, there were possibilities for reforming the three-pillar pension system (basic pension, occupational pension and tax-deductible savings for retirement). However, a major reform was rejected in a popular vote in September 2017. In consequence, legislators drafted a policy package that combines tax – requested by the EU (see above) – and pension reforms that are much less encompassing than the previous reform. In this case, favorable conditions for foreign firms supported by center-right parties have been exchanged politically for social policies supported by center-left politicians. The politics of compromise, including heterodox policies and extreme pragmatism, have prevailed. However, it remains far from clear whether this reform package will survive a referendum expected for summer 2019.
Farming interests weild significant influence
(6) In 2018, Switzerland again felt the power of vested agricultural interests when the government attempted to liberalize agriculture. This reform package largely failed, demonstrating yet again the power of politically well-organized (though economically and demographically marginal) farmers who lack a political and organizational “natural enemy” as compared, for example, to trade unions that are constrained by employers’ organizations.
Economic interests
can be overcome
(7) Notwithstanding, the power of vested economic interests remains limited, as demonstrated by a summer 2018 conflict. The arms industry pressed the government to facilitate arms exports to countries with internal violent conflicts. Pragmatically, the government argued that Switzerland needs a strong arms industry for the Swiss military and thus a diverse market for the industry. While the first chamber of the parliament did not oppose this ethically problematic argument, the other house and civil society opposed the effort and the project failed.
Likely rejection of ‘Kündigungsinitiative’: https://www.gfsbern.ch/de-ch/Detail/wirtschaft-steht-hinter-weiterentwicklung-des-bilateralen-weg
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