Comment: Switzerland could show us another path

What should we make of the Swiss vote? Here is the richest country in Europe (and on some measures the richest in the world), in the middle of the world's largest trading bloc, saying it can stand back from closer union.

On the face of it, it looks as though the Swiss have made a serious and uncharacteristic error, at least in economic terms. While the vote will not lead to any economic catastrophe, conventional wisdom suggests that it will clip something off future growth. Swiss firms live by their exports and, to some extent at least, they will find it harder to export across the border. At the margin they will be forced to push some production over to subsidiaries within the European Free Trade Association and the European Community. At the margin some investment that would have gone to Switzerland will go elsewhere.

It was fear that the brilliant Swiss economy would be damaged that encouraged the political leaders to press for membership of the European Economic Area. Is this a case of ordinary voters allowing their hearts to rule their heads against the advice of the establishment?

The conventional view that the decision would hinder future economic growth was well described by Goldman Sachs, the investment bank, in a recent paper. It reckoned that as far as the stock market was concerned a combination of higher trade costs and lower gross domestic product growth would more than offset any advantages from non- membership such as lower interest rates and freedom from EC competition policy. The economic effects of a 'no' vote would justify a permanent 2-3 per cent fall in share prices, while sentiment effects could further depress the market by 3-5 per cent.

CUTTING GROWTH

This was an intriguing exercise, but of course a move in the stock market of between 5 and 10 per cent is not that much, given the scale of the swings that take place in securities prices every week. The implication for growth is perhaps more worrying. Goldman reckoned that the diversion of investment following a 'no' vote, and labour migration (skilled people leaving) might together chip 0.6 per cent off annual growth over 10 years. That would be quite a lot, if it were to happen.

But will it? There is a counter argument to be made, which is that staying outside the EEA might actually enhance Switzerland's economic performance. It runs like this.

Switzerland, perhaps more by luck than judgement, happens to be in an extremely strong structural position. It has great strength in industries that look like being winners for the next decade or more. These include financial services (the three big banks and the Geneva-based fund management industry), pharmaceuticals (the three big chemical companies), food (Nestle, Suchard), and up-market tourism (St Moritz, Klosters and Verbier).

These are all areas of the world economy in which Japan and the newly industrialised countries cannot actively compete, and where the price of the product is not being constantly shaved by some new technological advance. By contrast, Switzerland is not strong in cars, aircraft, electronic consumer durables, computers - all areas where European industry is, or is about to be, threatened by the Far East.

In that sense it is better protected than most of the EC. Switzerland does have important industries in areas like machine tools, which are more open to international competition and might suffer if the economy were distanced from the rest of Europe, but much of its strength is in areas where it is quite well protected.

Indeed in some of these areas, being outside the EC is a positive advantage. Take financial services, which accounts for 30 per cent of the value of the securities on the Swiss stock market. Swiss banks trade on their safety and their discretion. It was fascinating yesterday to see that foreign money actually flowed into Swiss securities following the vote. Switzerland was perceived as being a safer place to put cash if it remained outside the EEA, presumably for fear that at some future date the EC bureaucrats would get their fingers on those numbered bank accounts. The fears might be irrational, but in the world of offshore money they count for everything.

LITTLE DAMAGE

In most of the other areas noted above, EEA membership is not really an issue. In pharmaceuticals there might be some modest disadvantage from staying outside, but the market is such an international 'brain-based' one that it is hard to see any serious damage. Food products? Well, Nestle generates roughly 97 per cent of its turnover outside Switzerland, and is not really dependent on exports across the Swiss national boundary into the rest of Europe. Tourism? Membership of the EEA is not an issue.

So while there might be some modest disadvantage to Switzerland, the Swiss winners would be fine. Some sectors, in particular financial services, would do better by staying outside. The effect might therefore be merely to push the country even further towards its specialities. But since these are good growth areas that does not matter. You could even construct an argument that Switzerland will benefit by keeping apart from the rest of Europe.

If this proves correct - and we will have some feel for it within four or five years - then there are important implications for countries like Britain and Denmark. Britain shares many of the structural features of the Swiss economy, for it, too, is strong in financial services, pharmaceuticals, food and tourism.

These sectors are not large enough to pull the rest of the economy along, with the result that Britain is not as rich as Switzerland. But if the Swiss can demonstrate that it is possible to remain a highly successful economy outside the EEA, then they would be charting an alternative path for Britain and Denmark.

The significance of the Swiss vote is not just political, it is also economic - a group of very rich Europeans saying that they do not need closer ties with the rest of the European economy. That may be wrong.

The conventional view in Britain is that we have to put up with the dreadful Brussels bureaucracy because we need access to the EC markets. If Switzerland can show us an alternative path, then many in Britain would say: 'Let's try that too.'