How small is too small?

Yesterday the citizens of San Marino voted on becoming an EU member state. But is that even possible? 

As Brussels braces itself for the inevitable disappointment of a referendum on EU accession in Iceland, when or if that ever takes place, it will come as little comfort that another non-EU European country rejected EU membership yesterday.

The Republic of San Marino, the tiny microstate of 33,000 people situated within Northern Italy, held a referendum yesterday on whether to apply for EU membership. The proposition failed because not enough people turned out to vote. Though a narrow majority of people who voted approved the measure (50.3% versus 49.7%), a referendum needs 32% of eligible voters to vote yes in order for the measure to pass. The 'yes' vote amounted to just 20%.

Unlike an eventual Iceland referendum, the San Marino referendum was not a response any actual offer of EU membership.  The question of whether to start accession negotiations with Brussels was put to voters after a group of citizens collected the required number of signatures. No matter how the referendum turned out it was non-binding. It would be up to the San Marino government whether to actually request accession negotiations, and it would be up to EU member states whether to accept that request.

Switzerland buries its head in the sand

Switzerland's foreign minister was in Brussels yesterday for some awkward discussions with EU leaders, and despite the beaming smiles following her meetings it was clear that by this point Brussels and Bern are operating on two different wavelengths.

The visit was arranged following a serious souring in relations between Switzerland and the EU after a resolution from EU foreign ministers in December warned that the relationship between the two had become incoherent and unwieldy. While Switzerland is not a member of the EU, it is a sort of "pseudo-member" and is allowed to participate in the EU single market thanks to a series of bilateral agreements. These 120 agreements were negotiated in two rounds in 1999 and 2004. In exchange for allowing Switzerland the benefits of access to the common market, the EU expects certain things in return - such as the right for any EU citizen to live and work in Switzerland (and vice versa). But in return, the EU position is that if Switzerland violates any of these accords, all 120 of them will be torn up.

So far this arrangement has suited the Swiss just fine - probably because most Swiss citizens are unaware of the extent of the accords and think their country remains completely independent and separate from the EU. But Brussels has grown frustrated with the unwieldy and complicated arrangement, and now they are saying Switzerland needs to move over to a more defined relationship as exists in the other pseudo-EU countries - Norway, Iceland and Liechtenstein.

Switzerland Opens the Bank Floodgates

Europe may be continuing to wage its battle against Switzerland and Liechtenstein over banking secrecy, but after a Swiss government decision yesterday it looks like it may have been the US that has delivered the knock-out blow to the Alpine tax haven system. Switzerland's uunprecedented decision to let UBS turn over their clients' banking details to the US could open the floodgates for governments demanding previously secret bank details, causing the whole system of secret bank accounts to come crashing down like an avalanche.

Since 1934 Switzerland has relied on a pledge of secrecy to fill the coffers of its massive banking system. According to the Swiss Banking Association, 27 percent of all privately held offshore assets are located in Switzerland. The result has been that the country's economy is heavily reliant on the banking industry, with two of the world's largest financial institutions, Credit Suisse and UBS, being the pride of the country. The US Internal Revenue Service had filed criminal charges against UBS, accusing it of helping Americans avoid paying US tax by opening Swiss bank accounts and demanding that it hand over client data. Under Swiss law UBS wasn't allowed to turn over those records, so UBS petititioned the government to allow it to do so, saying that if they didn't their very existence would be at risk. Yesterday the Swiss Financial Market Supervisory Authority said it would allow the release, throwing Swiss market analysts into a panic. Many are saying the government's decision was unnecessary and premature, and could put the whole Swiss banking system at risk.

But the pressure on Switzerland to reform its banking secrecy laws has been steadily mounting for the past several years. Germany in particular has been aggressively pursuing the issue, leading the efforts to force Liechtenstein's hand by stalling its Schengen Zone membership until it makes concessions on the issues. Last year the German finance minister even made the argument that Switzerland should be put on a blacklist of tax havens. The EU has also been looking to end what it views as a no-longer-acceptable tax island within its borders. This month the EC introduced a proposal to end anonymity for bank accounts within the EU. But since such secrecy is already illegal in most EU countries anyway, many analysts think the proposal is actually being made with the intention of extending the legislation to Switzerland and Liechtenstein, which both have bilateral treaties with the EU locking them in to many decisions made in Brussels.

But although Europe's been gunning for the tax havens for some time, it looks like it is the IRS that's delivered the knock-out punch. The Swiss government was at pains today to insist that the ruling is an isolated case and will have no bearing on such negotiations with the rest of Europe. But it's undeniable that the decision is likely to encourage the EU and individual countries to pursue similar criminal action against Swiss banks in order to force their hand. And now that the precedent has been set, it will be hard for the Swiss government to block those requests in the future. As the economic crisis continues to worsen, governments will be keen to grab additional revenue wherever they can. Some of that may now come from unpaid taxes sitting in Swiss banks.

No Passport in Liechtenstein

I'm back in Switzerland after my holidays in New York, and yesterday I decided to take a drive over to the border with Liechtenstein to see if they had set anything up as a result of the Schengen discrepency. As I expected, there is no new passport check along the section of the Rhine seperating the tiny principality from Switzerland, but interestingly, I didn't see any sign of the reported surveilance systems that they've now set up either.

Switzerland joined the Schengen zone, which allows passport-free travel between European countries, last month. However Liechtenstein has not yet joined, because the EU is trying to strong-arm it into cracking down on tax cheats before it will allow the principality in. Liechtenstein, which has had an open border with Switzerland since 1923, is now wedged between two Schengen countries and in theory, Switzerland must now set up border checks with Liechtenstein for the first time. This could be a big headache because for all intents and purposes Liechtenstein is pretty much part of Switzerland. It uses the Swiss franc, relies on Switzerland's military for defense, and many people live in one country and work in the other. Aside from a few small signs at the border, there is little differentiating the principality from its neighbor.

The border guard corps in Eastern Switzerland has said it is setting up a series of surveilance cameras along the bridges in order to comply with Schengen rules, and in theory if any cars look suspicious they have border guards ready to investigate. However I didn't see any sign of such cameras when I was there, and considering I was walking around taking pictures you'd think if anyone was watching they might have come to ask me what I was doing! Perhaps they haven't set them up yet. Interestingly, I've heard that this surveilance system is going to cost several million francs, just to be dismantled once Liechtenstein does eventually join. Liechtenstein has even had to issue Schengen visas free of charge to foreign nationals living there, who would now in theory be legally trapped within the 160 square kilometre country. I guess Brussels has proven that it can make life difficult for the tax havens when it wants to.

I had never been to Liechtenstein before, it's a pretty weird place. It is true that from the prince's palace you can see almost the entire inhabited area of the country. It's really just a small strip of land on one side of the Rhine in a valley. It was a Saturday afternoon and Vaduz, the capital, was completely deserted. It was just me and some Eastern Europeans who seemed to also be there for the novelty factor, taking pictures of every Liechtenstein flag in sight.

On the way back I came across a reminder of another ongoing issue with Switzerland's entry into the Schengen Zone. Switzerland's bilateral agreements with the EU requires that all EU nationals be allowed free movement in and out of the country, but Switzerland is going to vote on whether the two newest entrants, Romania and Bulgaria, will be afforded the same access. That vote will be February 8th, and in St. Gallen I came across this billboard from the FDP urging people to vote yes to giving Romanians and Bulgarians the same rights as other EU citizens. The billboard points out that a no vote, being advocated by the conservative SVP party, would send a hostile signal to Switzerland's neighbors and lead to further isolationism. It shows two people with SVP signs destroying a rail bridge to the rest of Europe. It reminds of the Swiss of the infamous "guillotine clause," which says that if Switzerland renegs on any treaty its already signed with the EU, all of the bilateral treaties will be rendered invalid, effectively completely cutting off the country from its neighbors.

Tonight I noticed that the SVP has put up a contrary billboard right outside my dad's house urging people to vote no (photo below), with their usual motif of dark nefarious foreigners greedily eyeing Switzerland's riches.

Honestly the idea that people would be making decisions on these important issues based on some childish cartoons seems pretty absurd to me, but it's typical of this country's obsession with referendi. Neither of these cartoons clearly conveys what's really at stake with this vote. The SVP ad seems to be suggesting that this is some kind of additional right that the Swiss people can choose to give to their neighbors to the east, when in reality a no vote would be reneging on a treaty that Switzerland has already signed. The EU has made very clear that Switzerland cannot pick and choose which parts its bilateral agreements it's going to obey as if it was some sort of dipomatic buffet. On Saturday Switzerland's EU ambassador Michael Reiterer told the newspaper Tribune de Geneve that if the Swiss refuse to extend the free movement clause to the new entrants it will invalidate the country's entry into the Schengen Zone and the whole agreement will be torn up.

I'll be watching with interest to see what happens in that referendum. After stopping in Leichtenstein I drove over the border with Austria and as expected I found the border check dismantled. If the Swiss vote no in February 8th, those checkpoints may have to be hastily reassembled. And contrary to Reiterer's optimism, I'm not so certain the referendum will pass. A few years ago the referendum to join Schengen did not pass by a large margin, and the recent success of the SVP may reflect the fact that public attitudes on immigration may have continued to harden since then. In the mean time I'll be interested to hear from people here whether they understand what reprocutions a no vote could have.

Happy 'Switzerland Joins Schengen' Day!

After so much anticipation, I rose early this morning at dawn to creep down to the fireplace and see if I had received a visit from Schengen Clause. I gasped with joy to find it was true, he'd come! The border check with Germany had disappeared!

Ok I can't really see the German border from my dad's house in Zurich (although I can see the border with the next Canton), but I did eagerly check the news this morning to see if it had indeed come to pass. I have no idea why, but the moment which countries open their borders with other countries really excites me.

At midnight CET this morning Switzerland joined the Schengen Zone, the 25-member European block that allows passport-free travel between the member states. Switzerland is not technically in the EU, but it has a series of bilateral treaties with the EU which make it in many ways a "virtual member," bound to follow EU regulation although it has no representation in the EU parliament.

Tax cheat focus continues

Following recent moves by Germany to force Liechtenstein to crack down on tax cheats, the European Union is going a step further, effectively declaring battle today with Liechtenstein, Monaco, Andorra and Switzerland in their ‘war on super-rich tax cheats.’

The EU's council of economics and finance ministers, or Ecofin, is meeting in Brussels today to hammer out a strategy to force Europe’s tax havens into submission. They plan to do so by strengthening the EU’s 2005 savings tax directive, through which the ‘tax haven nations’ have easily been able to find loopholes.

What they’re going after is the increasingly common practice of very wealthy citizens of European countries domiciling themselves in small nations outside the EU with loose tax laws. Germany has recently gone hard after the practice, led by finance minister Peer Steinbruck, who says the tax cheats cost Germany approximately €30 billion in lost revenue.

Liechtenstein licked?

An interesting story is developing over Switzerland's impending entry into a border-free Europe. It looks like its tiny neighbor Liechtenstein may see its status as a tax haven challenged as a result of the change.

Switzerland is not part of the European Union, but the treaty which has dismantled the internal borders of continental Europe actually has nothing to do with the EU. It is a separate treaty called the Schengen Treaty (named after the town in which it was signed) and membership in the so-called "Schengen Zone" is separate from membership in the EU.

Switzerland is set to enter the zone in November, so after then there will be two large non-EU nations in the zone (Switzerland and Norway) and two large EU nations not in the zone (the UK and Ireland). There will also be no border between Switzerland and its neighbors. Good thing my brother and I got this picture at the France-Switzerland-Germany border while we could!