Free immigration from the EU certainly boosts economic performance, but it has serious side-effects that have been overlooked. It is thus becoming the driving force behind Switzerland's illiberal transformation.
L’original article by Reiner Eichenberger and Fabian Kuhn was published in German in Schweizer Monat.
The free movement of people brings Switzerland more immigration and therefore more growth in population and gross domestic product (GDP). It brings the few «special citizens» - political decision-makers, powerful companies and leading associations - higher tax revenues, sales and membership fees, and thus «vitamin B3»: budget, importance, bonus.
For «ordinary citizens», on the other hand, what counts is whether immigration improves their quality of life. And here, it's not GDP that's relevant, but GDP per capita. To do this, special citizens set thought traps, such as «immigration alleviates the shortage of skilled labor». If this were true, the skills shortage would have disappeared long ago after eighteen years of total free movement of people. But in reality, immigration feeds the skills shortage, because immigrants need housing, goods and services - largely produced by skilled workers.
Immigration thus becomes a natural phenomenon. Rapid population growth makes all those factors that cannot be reproduced at a constant average cost - land, infrastructure, environmental assets, self-sufficiency and efficiency - more scarce and more expensive. These «infill costs» reduce quality of life.
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There are numerous studies on the effects of immigration, most of them commissioned by the Swiss government. Many of them focus on the past evolution of the labor market, although this is where we would expect to encounter the fewest problems - precisely because immigration is a natural phenomenon. Unsurprisingly, they show that as long as the labor market is flexible, the effects of immigration are minimal, neither strongly negative nor strongly positive.
Some studies simulate the consequences of future immigration. A recent study by Ecoplan, commissioned by the Swiss Confederation, analyzes the economic consequences of abrogating the Bilateral I agreements by 2045. According to the Federal Council, this would result in a significant annual loss of 4.9% of GDP for Switzerland. But this is a special Latin. In terms of income per worker, the study finds only minimal effects, despite the assumption that there would be no infill costs. While the population would increase by 344,000 and cross-border commuters by 45,000, earned income would increase by only 0.62% less than with Bilaterals I and the free movement of people. The latter therefore bring almost only filling costs to ordinary citizens.
The black hole of filling costs
To date, filling costs have not been studied. This makes it all the more important to think about the issue in an economically disciplined way. What is decisive for Switzerland is not the effect of immigration, but the effect of the free movement of people. The latter prohibits what is the rule in other immigration countries such as Canada or Australia: limiting, managing and selecting immigration in a targeted manner.
The lack of control, combined with differences in size and prosperity - the EU has a population 50 times larger and a GDP per capita 60% lower than that of Switzerland - results in asymmetrical migratory pressure towards Switzerland. For would-be migrants, it's worth moving to Switzerland as long as the differences in quality of life outweigh the costs of migration. Or, to put it another way, net immigration will only dry up when the Swiss quality of life, due to higher filling costs, falls to the level of the countries of origin plus the costs of migration. But while the costs of immigration fall as the proportion of foreigners rises (for example, because more and more people speak English), the pressure to migrate, and therefore the costs of filling in, continue to rise.
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Infill costs affect almost all areas of life. More inhabitants - 21% in 18 years of free movement of people - need more living and working space, which drives up rents despite the enormous construction activity and shrinking green spaces. They need more transport infrastructure, electricity, health services, training places and so on. Communes and cantons have to develop schools, hospitals, roads and public transport in a short space of time, and ensure self-sufficiency and waste disposal objectives. The costs of all these services rise disproportionately with rapid expansion. The result is a decline in the quality of services, an increase in the burden on public budgets and, ultimately, in taxes.
Immigration boosted by the country's attractiveness
Some see the solution to the problem in greater efficiency, for example by integrating more women and older people into the labor market or deregulating the construction sector. But these too are thinking traps: the more Switzerland uses its resources, i.e., the more efficient it becomes, the more attractive its business location becomes, which in turn increases migratory pressure and filling costs.
This balancing act deprives citizens of the incentive to engage in good politics. In addition, high immigration is eroding Switzerland's successful institutions, such as the militia system and direct democracy. Meanwhile, the share of foreigners in the permanent resident population rises to around 40% in the 30-40 age group. While the demand for militia work in politics, the army and society is increasing with population growth, the supply is hardly growing at all. At the same time, a growing proportion of the population is excluded from direct participation.
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Markets are thus infiltrated. As locals are no longer allowed to discriminate directly against immigrants to protect their comfortable housing and employment situation, they discriminate against them indirectly by discriminating against all «outsiders» wishing to enter the market (i.e. immigrants and their own young people) or all local non-residents (whether Swiss or immigrants). As a result, the rental market is increasingly regulated to protect existing tenants, while new housing applicants are left out in the cold. Similar trends are evident in the labor market, for example in the form of minimum wages or accompanying measures that make it more difficult to enter the market. The free movement of people is thus becoming the driving force behind Switzerland's illiberal transformation.
Constructive solutions
There are two solutions.
1. Direct tourist taxes that do not comply with the free movement of people. Immigration from the EU and certain third countries should be as free of bureaucratic obstacles as possible, but not free of charge. New adult immigrants would pay a tax of 10 to 25 francs per day (similar to a residence tax) for three to five years. This would effectively reduce and direct immigration, making Switzerland less attractive, especially to those who bring little to the table. For foreigners from the EU, it would still be attractive, because even with the residence tax, the tax burden on immigrants would still be much lower than in the EU; a small part of their migratory gain, however, would accrue to Switzerland. The revenue of between 1.5 and 5 billion francs a year (depending on the model) would once again encourage locals to commit to openness and good politics.
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Great Britain shows just how effective the pricing model is. It introduced a comparable model after the Brexit, but for all prospective immigrants. This made immigration from the EU more expensive, but from outside the EU much easier. As a result, immigration from the EU has fallen, while immigration from non-EU countries has soared. The ideal situation for Switzerland would therefore be a 2- or 3-circle model: all new immigrants would have to pay a fair price for their stay. But for prospective immigrants from non-EU countries, there would also have to be a case-by-case examination, for example using a points system. On the other hand, prospective immigrants from the EU benefit from free immigration at a lower «friendly price».
2. State burdens that weigh heavily on the Swiss and constitute genuine «Swiss taxes» must be distributed more fairly, and state services for long-term residents must be increased. The biggest Swiss tax is compulsory military service. It obliges young Swiss men to serve for 245 days - a full year's work - at a cost of between 50,000 and 80,000 Swiss francs in lost earnings and delayed training, despite the loss-of-earnings allowance.
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Compulsory military service could be abolished and replaced by a «contribution to society»: all those entering adult life in Switzerland - whether through their eighteenth birthday or through immigration - would have to pay a contribution of 50,000 francs over a few years, in the form of military service, community service or money. At the same time, the state could build up a capital base for all young people by paying them annual contributions, with which they could also pay their contribution to society as adults. All in all, this would have the effect of a non-discriminatory immigration tax.
Such considerations might frighten liberals into thinking that the free movement of people is a liberal model. But this too is a thinking trap: the free movement of people is not a liberal concept, but rather a socialist one: it deprives citizens of their property rights over their own country by allowing others to use it for free. The fact that it doesn't work is in fact trivial.
Reiner Eichenberger is Professor of Economic and Financial Policy at the University of Fribourg. Fabian Kuhn is a graduate assistant in the same chair.
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