2  BIS central bankers’ speeches  How should Switzerland deal with these extreme conditions, overcome the difficulties and maintain its current high living standard? To answer this question, I will now step back for a moment from current events, and highlight some of the factors that, historically, have been instrumental in allowing Swiss businesses to seize opportunities abroad and cope with an ever-changing environment. 3. A tradition of political independence  However, let me first briefly turn to our tradition of independence. Although mostly favouring a free-trade approach in its economic relationships with the outside world, Switzerland has traditionally been very reluctant to relinquish political sovereignty. In particular, federalism, direct democracy and citizen involvement are seen by the Swiss population as crucial elements of their identity. They are considered key factors to ensure the cohesion of a country made up of different linguistic and cultural groups. External neutrality helped Switzerland to escape the tragedies which devastated the European continent during the last century, while maintaining internal cohesion. Hence, the two world wars fostered Switzerland’s attachment to its political autonomy. But autonomy does not mean isolation, or neglect of what happens abroad. Switzerland’s political neutrality has often put it in a good position to mediate during conflicts and provide active solidarity. Our country has made very active use of this comparative advantage. The most well-known example is the Swiss engagement in the International Committee of the Red Cross (ICRC). It has also a long and well-established tradition of offering its good offices for diplomatic negotiations.
In fact, the instrument of collective labour agreements is regulated by only three short paragraphs in Swiss law. The negotiation setup typically guarantees that firm and industry specifics are taken into account in the arrangements, so that competitiveness can be preserved. The high employment rate among the domestic working-age population shows that the Swiss labour market is in good shape. Currently running at 80%, employment is almost 15 percentage points above the European average. 4.3  A sound fiscal policy  Another supporting factor for the Swiss economy is sound public finances, as reflected in relatively low fiscal deficits and public debt. This fiscal discipline is related to the political institutions of direct democracy and federalism. Swiss voters tend to be pragmatic and have generally shown little inclination for large and ‘creative’ public projects. Furthermore, fiscal decentralisation is pervasive: the cantons, the main sub-national entities, are like sovereigns on a smaller scale, and have extensive taxation and spending powers. In Switzerland, regional autonomy enhances control of public spending and accountability. One element of the incentive scheme is the tax competition among cantons. The cantons are free to set their own tax rates or establish new taxes. As companies and individuals can vote with their feet, cantonal governments have an incentive to strike the best possible balance between the tax burden they impose and the public services they provide. These traditional elements were complemented at federal level with a stringent debt brake mechanism in the early 2000s.