Is Switzerland A Role Model For Democracy?
June 16, 2011 by Daniel Zurbrügg
The world economy is in a very fragile state, despite the fact that world gross domestic product is growing at a rate of about 4.3 percent this year. Most of the growth comes from emerging markets like China, Brazil and India.
While these emerging nations have a lot of economic potential for the coming decades, most of them will have to deal with their own specific problems in the years ahead. What differentiates these nations from the West is they typically have much lower levels of debt; most of them have accumulated large savings surpluses. This is in sharp contrast to the West, especially Europe and the United States, where governments have accumulated large deficits by chronic overspending on social security, all sorts of subsidies and/or military and defense costs.
This is a very dangerous trend that can’t go on forever. Actually, I think we are witnessing the turning point right now and that coming years will bring huge changes to these economies. This will most likely result in a severe devaluation of their currencies and socioeconomic tensions. Remember, the euro and the U.S. dollar make up almost 80 percent of the world’s currency reserves, a percentage that will have to drop significantly in coming years.
In a world of ideal economics, these nations would address their problems by making structural adjustments to their economies, making investments that tend to increase true economic value and cutting spending on things that don’t make sense and only destroy value. However, this might be wishful thinking. One does not need to be a genius to see that the sovereign debt problem will, at least partially, be solved by a forced currency devaluation, meaning that the central banks, such as the Federal Reserve in the U.S. and the European Central bank in Europe, will continue their very expansionary monetary policies.
Despite the many advantages of democracy, there is tendency for politicians to overpromise, overspend and underdeliver in the long term. This results in huge deficits that must eventually be paid, either through higher taxes or significantly devaluing currency. In a democracy, governments eventually become too big and too powerful and spend too much money. Therefore, more and more people become directly or indirectly dependent on the government. That’s when a nation becomes a welfare state. The larger and more centralized a government becomes, the higher the risk that it will lead to a real disaster in the long run.
It is absolutely crucial that a democratic system maintain self-correcting mechanisms by keeping government size and control at reasonable levels. However, people must also be realistic about what they can expect from a government.
This is a long-term trend that can be observed in many Western countries with far-reaching consequences for people. From an investment-management point of view, currency diversification should be the key focus in coming years. It will be an almost ideal environment for precious metals and hard currencies.
In a previous article, I compared the performance of various foreign currencies against each other and against the two major currencies, the U.S. dollar and the euro. Many people say they do not understand currency markets. Keep it simple and look at foreign currencies like stock prices. The prices of currencies measure the performance of countries, just as the prices of stocks measure the performance of companies.
Looking at currency markets, especially their short-term volatility, people tend to forget about the main forces driving currencies. The chart below shows how the most common foreign currencies have performed in recent years. The best and most stable currency in the world has been the Swiss franc.
With a lot of money-printing going on in the world, it is not a surprise that the Swiss franc has kept outperforming all major currencies. The Swiss franc is, in my opinion, the strongest of all currencies. The chart below shows how much the U.S. dollar lost against the Swiss franc in the past 40 years.
In order to understand why the Swiss franc is such a strong currency, many factors need to be considered and understood.
Typically known for its famous chocolate, cheese and for being one of the world’s largest banking centers, Switzerland has much more to offer. Switzerland is a small country with a size of only 16,000 square miles. That’s only about one-quarter the size of Florida. With a population of about 8 million, it is also among the least-populated countries in Europe.
Despite being located in the heart of Europe, Switzerland is one of the very few European countries that have not become a member of the European Union. Because of that, the Swiss franc — not the euro — is Switzerland’s currency. Also, the Swiss National Bank is completely independent.
In order to understand why Switzerland has never joined the European Union, one needs to understand the culture and mentality of its people. Switzerland consists of 26 individual states called “cantons.” All of these cantons have a relatively high degree of independence, as do the smaller communities within each canton.
The roots of the country go back to 1291, when most of today’s territory was controlled by the Habsburg dynasty. Many people suffered under the Habsburg regime, since they didn’t have many rights and had to pay high taxes, usually in the form of agriculture goods, to their rulers. In 1291, three cantons started the Old Swiss Confederacy and began to fight for the freedom of its people and an end to the dark days of tyranny. More and more cantons joined the Confederacy.
In 1815, Switzerland’s independence was recognized by most other European countries. While the need for some centralized government was understood, Swiss people have always remained critical toward large, centralized governments. Democracy in the Swiss understanding means citizens and communities should act responsibly and take care of their own affairs.
Switzerland has also remained neutral during the world wars and kept a very large army for most of the past century. Today, about 100,000 soldiers serve in the army, which is still large, given the relatively small size of the country. The Swiss army is not and has never been a professional army; it is mandatory for Swiss men to join the army and serve the country.
I remember my days in the army. I was only 20 years old, and at that time I didn’t really like it or understand the sense of it. Only later did I start to realize what a great school of life my time in the army was, and how much it taught me about freedom and responsibility.
The events of recent years, especially the events in Europe, such as the war in former Yugoslavia or the increasing tensions among European countries, have made me realize things are a lot less stable than we would like. I think the strong sense for neutrality and freedom has remained one of the reasons Switzerland has always been so stable.
Another important factor is the kind of democratic system we have. The Swiss Parliament consists of two chambers, the Council of States and the National Council. The Federal Council, the “Bundesrat,” consists of seven members, each elected for a term of four years. What is unique about this direct democracy is that people can challenge any decision or law with a referendum — all it takes is for 100,000 people to sign such a referendum. This is a very important corrective mechanism in a democracy.
Switzerland was able to stay out of the two world wars by remaining independent. Despite the relatively large size of the Swiss army at that time, it would have been difficult to stop an enemy in case of an attack, especially from Nazi Germany. However, the Germans knew they would need to pay a very high price if they attacked Switzerland. Switzerland’s army was and is well-trained to fight and defend the country — especially in the mountains, which have hundreds of bunker systems, some so large that they look like little villages inside of mountains.
The fact that Switzerland’s infrastructure wasn’t destroyed in any of the world wars also meant the country had a competitive advantage during the rebuilding period after the war. Many large corporations established their international headquarters in Switzerland, and many have stayed here ever since. Today, the main advantages for corporations are the almost-perfect geographical location, a business-friendly tax system and the high level of internationalization in the economy. The tax system for corporations and residents is attractive no matter its level of profit or income. The European Union has called Switzerland’s low tax rates unfair, since taxes are much lower than in the European Union. How can a tax system, which encourages competition and ensures efficient use of taxpayers’ money be unfair?
This conflict with the European Union shows the fundamentally different approach Switzerland has taken. It is a country in which each canton and each community has a high degree of fiscal responsibility. It’s where people make the government, not vice versa.
I think many countries, especially large Western nations, can learn a lot from the Swiss system of democracy. Many Western nations are finding themselves in a difficult position today. The chronic overspending and wasting of tax money has resulted in a very heavy debt burden, which has become almost unbearable. Governments should always work in the best interest of their people and act diligently and responsibly when spending tax money. Governments should be lean and efficient, working for their people and not against them.
While it is in the best interest of any nation to have a social-security system that provides help to people who really need it, overextending welfare will give the wrong incentive to people who should never depend on a government to help them.
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