Switzerland has developed a unique federal system with a weak collective federal government, local autonomy, and a strong, largely self-regulating civil society. Many powers are delegated to the 26 cantonal (confederate units) governments and the smaller communes (counties). For instance, it is the communes (and the population itself by referendums) that grant applying individuals Swiss citizenship.
The bicameral legislature, called the Federal Assembly, consists of a 46-member Council of States, or Standerat, whose members are elected in cantonal elections, and a 200-member National Council, or National-rat, whose members are elected by popular vote on the basis of proportional representation every 4 years. The members of the Federal Assembly select the 7 members of the Federal Council (cabinet), who lead the federal ministries for finance, foreign affairs, justice, economics, interior, transportation (with energy and environment), and defense (with sports). The mostly ceremonial position of president of the council (head of government) is rotated annually according to the seniority of the member councilors. Members sometimes exchange their responsibilities as new members are appointed, or new appointees may take over the portfolios of outgoing councilors. The council strives to present a collegial image and rule by consensus but its deliberations are private. Issues on which no consensus can be reached are determined by a secret cabinet vote and its results are not reported. The composition of the council parallels the traditional 4-party coalition that has ruled Switzerland since the late 1950s.
The 4 political groups, usually receiving 70-75 percent of the total popular vote at parliamentary elections, fill the seats on the council. These elections are held once every 4 years. These include the Free Democrats (FDP), the Christian People's Party (CVP), and the Swiss People's Party (SVP), all center-right parties, and the Social Democrats (SP), a left-of-center formation. The 3 largest parties by their popular vote, FDP, CVP, and SP, receive 2 seats each on the Federal Council; and the SVP gets one. In addition, there are at least 2 seats on the council reserved for French-speaking members from any party. This consensual combination of left and right wings and ethnic elements has allowed the coalition to maintain political, ethnic, and social peace, although it has been criticized by supporters of more radical moves.
Since the 1990s, the need for a more streamlined executive branch has led to the consideration of some revisions to the Swiss constitution that may eventually result in a strengthening of the president's powers. Any revision of the legislation, however, is slow and is subject to a referendum challenge before coming into force. Treaties and agreements approved by the 200-seat Nationalrat (parliament) are also subject to challenge by popular vote in the unique Swiss system of people's initiative and referendum. Virtually every major decision in the country may be put to vote by all the citizens. Only 100,000 signatures are required by law for a people's initiative (petition) to be put to a referendum. The system allows strong popular involvement in the federal and local government and keeps both branches under a close and constant civic scrutiny.
The approval of the bilateral agreements with the European Union (EU) and the rejection of the initiative to limit the proportion of foreigners at the 2 referendums in 2000 were welcomed with relief by the federal government. Given the fresh controversy over the treatment of Holocaust victims by Swiss banks during and after World War II (1939-45), a vote in favor of foreigners' restriction and against the EU agreements would have presented a serious embarrassment for the government and would gravely damage the country's reputation abroad.
European integration policy remains an important focus of political debates, as the government remains convinced that strategic national interests would be best protected by a complete integration into the EU. Switzerland is not economically disadvantaged by staying outside the EU. In the late 1990s, it has been doing better than EU leaders Germany or Italy, growing at a rate unseen since the 1980s, when Switzerland was regarded as Europe's economic model. It also has an uniquely massive balance of foreign payments surplus equal to more than 8 percent of its GDP.
Switzerland lies in the center of Europe, and almost two-thirds of its exports are shipped to EU members, and four-fifths of its imports come from the union. Consequently, Switzerland's future prosperity is definitely related to the development of the EU. Many Swiss feel that their country is becoming isolated in Europe. The fact that Switzerland submitted 16 proposals for negotiation to the EU headquarters in Brussels and had to be satisfied with finalizing only 7 of them might indicate that it needs the EU more than vice versa.
Some feel Switzerland is also losing its position in international financial circles. In 1983, the world's leading industrial countries invited Switzerland, as an exception, to share membership in the Group of Ten—with the world's largest economies—but when the leading finance ministers decided in 1999 to form the Group of 20 of the "systemically most important countries," Switzer-land's name was missing. Thus the Swiss no longer have a reserved seat at the top table of the world's economic deliberations. Furthermore, Switzerland, along with small countries like the Vatican and Tuvalu, has so far refused to join the United Nations (UN), although it is a big financial contributor to the organization and hosts the UN office in Geneva plus many other international organizations. It also refuses to be drawn into peacekeeping and peacemaking operations on the grounds that this would jeopardize its neutrality. Still, Switzerland's influence in the world is far higher than its size and even its economic capacity might suggest.
Switzerland has long since developed a market economy based on free initiative, and government participation in the economy is rather moderate. Freedom of trade and industry are guaranteed by the federal and the cantonal constitutions; state intervention is limited, primarily aimed at providing a favorable economic framework, stable currency and prices, efficient infrastructures, and training the workers. In most areas, the federal government legislates and supervises, but the 26 cantonal governments implement the decisions and enforce the laws. The cantons enjoy a high degree of administrative authority, and their own constitutions and laws. The communes (counties), over 3,000 in number, also have independence, control over all local issues, and collect their own taxes. All levels of government have little involvement in manufacturing and services, but their role is considerable in agriculture protection and in trade regulation. Indirect involvement is particularly reflected in the large number of government regulations, especially at the local level. Rules concerning labor laws, business hours, zoning rules, building codes, environmental and noise codes, and administered prices may seem quite pervasive opposed to the United States or even the EU. Obligatory health insurance is another example of the local approach to state involvement in the economy: insurance and health care are provided privately, but the law requires employees to have the insurance. The government subsidizes those who cannot afford it. In the area of competition, unlike the United States and the EU, legislation is loose and cartels in Switzerland have been openly permitted and only broken up when the government has been able to prove that they are socially and economically harmful, which has seldom been the case. In 1996, a new law strengthened the government's antitrust position in mergers, shifting the burden of proof from the court to corporations engaged in anti-competitive activities. Even by EU standards, the new law was relatively weak.
Swiss tax revenues accounted for 35 percent of GDP in 1998, far below the EU average of 41.5 percent and the Organization for Economic Cooperation and Development (OECD) average of 37.2 percent. The level of taxation has risen somewhat during the 1990s, reflecting higher social security and medical insurance costs, as well as a lack of economic growth. But the Swiss tax system is widely known in the world business circles for its fairness and is characterized by moderate local and foreign operating income taxation and tax exemption of holding-company income. For this reason, many foreign companies have set up holdings or mixed Swiss subsidiaries to conduct international operations from Switzerland in order to take advantage of lower taxes on their foreign income. Branches of foreign corporations are liberally taxed at the same rate as domestic corporations, unlike many other nations more protective of their national capital. Switzerland has undertaken to make itself even more fiscally attractive for corporate investors, and a corporate tax reform at the federal level removed the annual federal tax on capital in 1998, setting a fixed federal tax on profits at a rate of 8.5 percent.