September 25, 2012 7:29 pm
Why exit is an option for Germany
By Martin Wolf
Ingram Pinn

Should Germany leave the euro? It is, after all, the big country with an obvious exit option. The question becomes more pertinent after the decision by Angela Merkel, Germany’s conservative chancellor, to support Mario Draghi, president of the European Central Bank, against Jens Weidmann, her appointee as head of the Bundesbank, over plans to buy bonds of governments in difficulty. The president of the Bundesbank, Germany’s most respected institution, has now become a spokesman for conservative German eurosceptics.

The ECB, Germans realise, will not remain a reincarnated Bundesbank. Once again, we are reminded that the eurozone is set to be a miserable marriage. Might a separation, however disruptive, be better?

If we are to address that question from a German perspective, we must distinguish false arguments from valid ones. As Paul de Grauwe, the Belgian economist, now at the London School of Economics, shows in a recent co-authored article, it is easy to find examples of the former.

Click to enlarge
This paper asks whether the accumulation of net claims within the European System of Central Banks means that Germany would lose a great deal if the eurozone were to break up. Its response is: no.


First, Germany has accumulated net claims on the rest of the world – and on other members of the eurozonenot because of internal central bank accounting, but because it has large current account surpluses. Germans have been running two businesses: exporting goods, at which they are excellent, and importing financial claims, at which they are not. In brief, Germany’s surpluses have exposed Germans to financial risk. But balances inside the eurosystem are not a good indicator of that risk. They have exploded, argues the paper, because of speculative financial flows, not current account imbalances (see chart).

These flows do not alter the net cross-border claims. Suppose that owners of a Spanish bank account were to transfer their money to a German bank. This would increase the liabilities of the Spanish central bank and the assets of the Bundesbank, inside the eurosystem. Meanwhile, the German bank would have a liability to the Spanish depositor and a reserve position at the Bundesbank. The net position of Germany would be unchanged. But the net claims of the Bundesbank would rise, while those of Germany’s private sector would shrink.

Second, this does not expose the Germany taxpayer to huge losses. The value of the liabilities of the Bundesbank – the monetary base – do not depend on the value of its assets. The value of money depends on its purchasing power.

In a fiat (unbacked) monetary system, central banks do not need assets, other than for purposes of monetary control. They are able to create money out of thin air. What makes money valuable is not its backing, but that people are prepared to settle transactions, and the state to settle tax obligations, in return for it.

The danger for Germany, in the event of a break-up of the euro, is that there might be too much of the German currency as a result of non-residents’ efforts to convert into the new money. The Bundesbank could prevent this, however, by restricting conversion to German residents alone. Losses would then fall on residents of the countries whose new currencies would collapse in value.

I accept Prof de Grauwe’s points. But we could turn them on their head. If Germans have accumulated worthless claims, via their huge current account surpluses, they might have done better not to have run the surpluses. Similarly, the fact that Germany might exit without suffering some of the damage people fear makes exit an option.

Indeed, Charles Dumas of London-based Lombard Street Research argues that euro membership has encouraged Germany into a costly mercantilist strategy at the expense of its people and the productivity of the economy. He notes that Germany’s real personal disposable incomes have risen remarkably little since 1998 (see chart). So, too, has real consumption. Productivity per hour also grew more slowly in Germany than in the UK or US between 1999 and 2011, perhaps because euro membership protected business from a strong currency. The stagnant real wages, fiscal tightening and relatively high real interest rates constrained demand tightly. But now the necessary cure for the ills of the eurozone will impose higher inflation in Germany, which the Germans will detest; prolonged deflationary recessions in important eurozone markets; and ongoing transfers of official resources to its partners.

All this ensures that neither the economic nor the political gains of eurozone membership are what German policy makers would have wanted. Worse, years of conflict over “bailouts”, debt restructurings, structural reforms and unpopular adjustments in competitiveness now lie ahead. Maybe a painful divorce really would be better than that.

Mr Dumas believes so. He argues that going back to an appreciating Deutschmark would squeeze profits, raise productivity and increase real consumer incomes. Instead of lending surplus savings to profligate foreigners, Germans could enjoy higher living standards at home. Moreover, this would generate swift adjustment in competitiveness of eurozone members, which would otherwise occur too slowly, via high inflation in Germany and high unemployment in partner countries.

The analyses by Prof de Grauwe and Mr Dumas do converge on one significant point. If Germany continues to run large current account surpluses, it necessarily has to accumulate huge claims on foreigners. If experience is any guide, much of these will prove a waste. Prof de Grauwe is right that the accumulation of claims inside the eurosystem is not itself the danger. The danger is that the strategy of real wage suppression and soaring external surpluses is a costly dead end. It may well damage the German economy. It certainly compels Germany to transfer resources to its “customers”, in one costly way or the other.

Exit is indeed an option. If it is rejected, as I predict, much the same adjustments will ultimately occur in even more painful ways. The alternative is the transfer union that Germans fear. Germany has paid a heavy price for the mercantilist strategy. Inside or outside the euro, it cannot – and must notendure.

Copyright The Financial Times Limited 2012.

Conrad Black: Canada’s front-row seat for the American disaster

Conrad Black

Sep 22, 2012 12:01 AM ET | Last Updated: Sep 24, 2012 12:51 PM ET

Carolyn Kaster/AP Photo
Carolyn Kaster/AP Photo Either Romney lucks through, or the most self-destructively incompetent regime since James Buchanan brought on the Civil War, will return.
As many commentators have opined, Canadians should not become smug because Canada has fared relatively well in the Great Recession since 2008. Canada has been as fortunate as it has been wise, above all in having the United States, rather than more historically aggressive countries, as a neighbour; in having the British as the originating force for Canadian institutions and laws; and in being a treasure house of natural resources. It might even, someday, be seen as an advantage to have a viable French contingent of the population. It would require a preternaturally inept people to misplay this geopolitical hand.

It is notorious that most Canadians are to some degree anti-American, though most are also appreciators of America, and this makes the present election in the United States, unfathomably banal though the campaign has been so far, a matter of legitimate comfort to most Canadians. Canada has been to some degree the beneficiary of the self-imposed decline of America these past 15 years. It is a continuing struggle to persuade Canadians that they may safely liberate themselves from the impulse not to aspire to anything more ambitious in the world than to tug at the trouser-leg of the Americans.

Canada entrusted its national security entirely to the United States in the 1930s, and through the end of the Cold War, and pulled its weight sometimes, and sometimes not. And the extent of its independence was mainly posturing through the United Nations in the role of peacekeeper.


Canada was for most of its history a branch-plant economy, where except for the railways and the resources companies attached to them, and the banks, steel companies, media and the main retailers, all was in the hands of foreigners, mainly Americans. George Grant and other authentic Canadian intellectual conservative nationalists, and centrists like Walter Gordon, and more strident nationalists of the left like Mel Hurtig and Bob White, railed and caviled and almost despaired, but it is clearer now than ever that Canada can quickly found and grow businesses, and much of the concern about foreign ownership was exaggerated. Some Canadian nationalists of the past, like Goldwyn Smith, became so exasperated that they thought we would be better selling the whole shooting match to the United States, so talented Canadians could aspire to great power and celebrity within what was after the U.S. Civil War one of the greatest powers in the world. Even I thought we were better off at least raising the possibility of moving closer to the Americans than diluting Confederation to tasteless constitutional gruel through endless concessions to the Quebec separatists.

With the first Gulf War and the implosion of the Soviet Union in 1990 and 1991, the United States arrived at the undisputed summit of the world, with dissident students in Prague and even Moscow uplifting themselves by reading aloud the works of Lincoln and Jefferson, and with the surge of prestige that accrued to the United States as its only remaining rival crumbled. But the United States has fumbled away its gentle overlordship of the world these last 15 years. Huge current account deficits and colossal federal budget deficits arose, and while the United Sates is generally successful in real wars, its habit of calling policy attacks on sociological problemswars” has led to the conspicuous failures of the wars on crime, poverty and drugs.

The Canadian dollar has risen from 65¢ American to par, and Canada’s comparative standard of living has inched upwards, and its wealth is much more evenly distributed. The jagged nature of American democracy left 40 million African Americans unsegregated but still the subject of institutionalized discrimination, and 70% of people with magnificent (free) medical care and 30% with access to care but on a pretty stingy and erratic basis. American education has become very uneven, American justice has degenerated into a turkey shoot for the benefit of a prosecutorial class that terrorizes the country and has given America 10 times the average number of incarcerated people per capita of other advanced prosperous democracies. Sixty million basic manufacturing and service jobs have been out-sourced while 20 million unskilled peasants were admitted illegally to the country, and trillions of dollars of worthless real estate-backed securities inundated the world, pumped out by Wall Street and certified as investment grade, almost asphyxiating the American financial industry while trillions of dollars and thousands of American lives were squandered in the sanguinary Quixotry of nation-building in the Middle and Near East.

And now, in an astounding demonstration of national fecklessness, a failed president is running slightly ahead in the polls of a challenger who has a real CV, unlike recent presidents, but who is so politically oafish and plastic, he makes Elmer Fudd seem charismatic. The incumbent has raised the national debt by 50% on what had accumulated in the 220 years of American independence prior to four years ago — that is $17,000 for every man, woman and child in the United States, in just four years. And Mr. Obama’s tocsin is the comprehensive assertion that: “Experts agree that my plan will reduce the deficit by $4-trillion.” These magic 13 words confirm the reduction of the deficit from $1.5-trillion annually to $1.1-trillion annually in the next ten years, in a country that four years ago had a money supply of only $900-billion.

About 70% of the American deficit is “boughtdirectly or through the banking system by the Treasury’s 100% subsidiary, the Federal Reserve, and the minimal interest paid on it is recycled back through the Federal Reserve to the Treasury, so the cost of borrowing is zero. It is the ultimate Ponzi scheme, the fiscal nirvana of endless, mountainous debt, rendered easily bearable because it doesn’t cost anything.

It is a fraud, a mirage. It all possesses the hypnotic allure of the Gotterdammerung — as the Gods ascend to a burning Valhalla. If this administration is re-elected, Canada, as it has for the entire mighty spectacle of the inexorable rise of the United States, will have the ring-side seat for a disaster. Prudent, hesitant Canada, ran 14 federal government surpluses in a row. We are the pigs in the brick house — it isn’t a heroic position, neither daring nor stylish, but Canadians are peering through the portals of their stout solid home, transfixed and astonished.

The fact that Willard M. Romney is still running almost even in the polls despite his demiurgic implausibility as a candidate, afflicted by a one-person pandemic of foot-in-mouth disease, illustrates the concern of the American voters. Either Romney lucks through and numerate sanity starts to return to American public life, or the most self-destructively incompetent regime since James Buchanan brought on the Civil War, will come back and stoke up a truly spectacular inferno that will purify America in a mighty economic Jonestown.

There will be no more tugging at a trouser leg from Canadaeither a comradely pat on the back, or a neighbourly blast with a fire extinguisher, but this operatic crescendo can’t continue for one more full act.

09/25/2012 04:04 PM

Breaking the Banks

Switzerland Ponders a Future of Clean Money

By Mathieu von Rohr

The end of Switzerland's famous banking secrecy seems inevitable as US and German authorities crack down on tax evaders. Many Swiss are asking themselves whether their prosperity will survive if the country abandons its status as a tax haven. But some academics argue that the importance of the banking sector has been wildly exaggerated.

Jean Ziegler steps onto the veranda behind his house. It's a warm day in late summer. He points to the hilly landscape on the other side of the Rhône River, to France, where Mont Blanc is visible in the distance. "That's where Switzerland finally comes to an end," says Ziegler. It's the kind of joke you would expect of Ziegler, a man notorious for never sparing his own country.

No one else is as well known for his moral criticism of Switzerland. Ziegler is 78, and until a few years ago he traveled the world as a United Nations special rapporteur. The fight against hunger and against Swiss banks has shaped his life. Has nothing changed in the last 20 years? "No, the banditry of the banks is in full swing!" he says energetically. His wife is about to serve a meal of Wiener schnitzel accompanied by white wine.

A search for answers about Switzerland begins in Ziegler's garden in Russin, a wine-growing municipality near Geneva. Where does the country's wealth come from? How much of it is due to Switzerland's tradition of banking secrecy, and for how much longer will it exist? And what happens to Switzerland when that secrecy is gone?

This Wednesday, the finance committee of the German parliament, the Bundestag, will continue a public hearing on Berlin's tax treaty with Switzerland. Under the agreement, the money held by German citizens in Swiss banks would be taxed retroactively, while allowing the account holders to remain anonymous. German Finance Minister Wolfgang Schäuble estimates that the change will bring in about €10 billion ($12.9 billion) in tax revenues.

Full of Clichés

But the Bundestag hasn't voted on the measure yet. The opposition center-left Social Democratic Party (SPD) wants to block the treaty in the Bundesrat, the body that represents the German states at the federal level, arguing that it would be too advantageous for Switzerland and the tax evaders, because they could simply withdraw their previously untaxed funds in advance while remaining anonymous. The debate has brought the subject of Switzerland into the center of German domestic politics.

Many German politicians don't know very much about Switzerland. Clichés shape German views of the country, namely that it's a beautiful and clean place populated by mountain dwellers who speak German with a funny-sounding accent. It's commonly regarded as a vacation playground for the rich.

Another, less flattering cliché of Switzerland is more of a malicious caricature: a safe haven for ill-gotten wealth, a country that is happy to protect tax evaders.

This tradition is reflected in statements made by former Finance Minister Peer Steinbrück, who likened the Swiss to Indians who could be dealt with by dispatching the cavalry, or in a claim by the Süddeutsche Zeitung, a respected German daily newspaper, that the profit from tax evasion was the country's "reason of state."

What's the reality in Switzerland? It is a country that lives in excess and is plagued by uncertainty, one in which the notion of being a special case in Europe is reaffirmed every day by its economic success -- and an unemployment rate of only 2.8 percent. Switzerland is a paradise that seems constantly threatened.

Drawn by High Salaries

Switzerland was a poor country until World War II, but after that it became one of the wealthiest countries in the world, and it was barely affected by the crisis of recent years. As a result, Switzerland has seen more and more immigration, with the population currently growing at an annual rate of 1 percent, to about 8 million, a number that has many people in the country alarmed and has triggered a major public debate. Foreigners make up 23 percent of Swiss residents. Many of them are Germans, drawn to the country by higher salaries than they would earn at home.

Why is Switzerland so rich? Politicians, business leaders, academics and intellectuals offer a wide range of answers to this question.

"It's because of the highly competent and totally cynical fencing activities of our banks," says Ziegler. "Because the financial sector is subsidizing the economy with low interest rates," says Oswald Grübel, the former head of two major Swiss banks, Credit Suisse and UBS. "Because Switzerland, thanks to federalism, pursues better policies, which lead to less debt and low taxes," says Reiner Eichenberger, a liberal economist from the town of Fribourg in western Switzerland. "Not because of the banks, but because of the industrial corporations and the highly specialized small and mid-sized export companies," says Bern banking expert Rudolf Strahm.

Next to the malevolently smiling bankers in James Bond films, no one has shaped the image of Switzerland as a hotbed of immorality as much as Ziegler, and hardly anyone is as polarizing a figure in his own country. Ziegler is the source of the most drastic accusations against the financial industry -- and his outspokenness has ruined him. The house where his wife is now bringing a meal out on to the terrace belongs to a bank.

'Blood Is Dripping from the Facade'

Ziegler is in debt to the tune of more than 6 million Swiss francs ($6.4 million, or €4.95 million), the result of claims for damages, legal fees and court fees relating to his book "Swiss Whitewash." Published in 1990, it describes Switzerland as a "financial hub of international crime" and dictators. Its publication triggered an avalanche of lawsuits.

"You know," says Ziegler, addressing the SPIEGEL reporter with the familiar "du" form that he uses with everyone, "my book showed the world that blood is dripping from the façade." The book, says Ziegler, explained why Switzerland is so rich. "It's because of hot money from the Third World, tax evasion from industrialized countries and Mafia money."

His latest book, "Mass Destruction -- the Geopolitics of Hunger," is an indictment of hunger, the second enemy in his life, and international commodities speculators, many of whom are headquartered in Switzerland. "Those who make astronomic profits with food speculation are killing people," he says.

Ziegler comes from a middle-class family in Thun near Bern. He was born Hans Ziegler, but after fleeing to Paris in the 1950s and connecting with the French philosopher Jean-Paul Sartre, Simone de Beauvoir changed his name to Jean. In 1976, he launched his first attack against banking secrecy, titled "Switzerland Exposed."

'Den of Thieves'

"The fat cats from Zürich and their lackeys vilified me for decades, calling me crazy and pathological, and characterizing my ideas as extreme left-wing delusions," says Ziegler. Today the term "Swiss bank account" has become a loaded expression -- so much so that US presidential candidate Mitt Romney has had to justify having one, even if he declared it in his tax returns.

"Switzerland is a wonderful country," says Ziegler, "but it's been colonized by the oligarchy of banks. We have to liberate it. After all, we don't want to be a den of thieves."

Cracks in the Swiss Fortress

Of course, exaggeration has always been Ziegler's trademark. It isn't quite true to say that nothing has changed. The first cracks started appearing in the Swiss fortress in the 1980s. A period of self-examination began after the scandal surrounding the fortune of the late Philippine dictator Ferdinand Marcos, which he had deposited in Swiss banks. Switzerland enacted a strict money-laundering law in 1997 which makes it far less attractive for potentates. During the Arab Spring, Switzerland was the first country to freeze the assets of the overthrown regimes.

The abundance of money that was being hidden in Swiss accounts to avoid paying taxes, on the other hand, was not publicly discussed in Switzerland until recently. Everyone knew that it existed, but it only became an issue when other countries started running out of money during the debt crisis. Banking secrecy has been under pressure since the end of the Cold War, but it wasn't until the crisis that the European Union, the Organization for Economic Cooperation and Development (OECD) and the United States did everything in their power to destroy it.

Fears of Job Losses

Nowadays, bankers and lobbyists seem as uncertain about the future as the rest of the country. There is talk of job loss, shrinking salaries and the "hundreds of billions of francs" that UBS says could flow out of the country in the coming years, to places like Singapore or the US state of Delaware. What does this mean?

According to the Swiss Bankers Association, Swiss banks managed about 2.7 trillion francs in foreign assets at the end of 2011. A study by financial services provider Helvea estimates that half of this money comes from EU countries and that 80 percent of it is untaxed, possibly amounting to 1 trillion francs in illicit funds. Of that total, an estimated 90 billion francs comes from Germany.

Rudolf Strahm, an economist who is critical of banks, was a Social Democratic member of the Swiss parliament in Bern for 13 years, as well as the head of the country's pricing regulatory agency. He has earned respect for his knowledge of the field, even from some of his adversaries.

Strahm sharply opposes the claim that the Swiss owe their wealth to the banks. "In 2007, the banking sector, not including insurance companies, accounted for about 8 percent of total economic output, and after the crisis it was only about 6 percent. The banks' share of economic activity is constantly overestimated."

Cultivating a Myth

Strahm tells the story of how he once spoke with a senior official at the German Finance Ministry in Berlin, back when Peer Steinbrück was finance minister. "He said to me: You Swiss subsist on the banks. He estimated that the banks make up 30 percent or more of the economy. When I corrected him and started to list other companies, like ABB, Sulzer, Nestlé and Swatch, he said: Oh, right, one doesn't really talk about that."

Strahm says that that "the banks and, with them, the political elite deliberately cultivated" the myth that the banks made Switzerland wealthy. In his book, "Why We Are So Rich," Strahm writes that the country owes much of its wealth to small and mid-sized companies, many of which are involved in the export trade.

In addition to multinational corporations, the country has small companies like Maxon Motor AG from the town of Sachseln in central Switzerland, which supplied NASA with the motors for the Mars Rover. Another outstanding example is the EMS Group, which produces fine chemicals for the world market. Switzerland ranks far ahead of Germany -- which is generally regarded as a champion exporter -- in terms of exports per capita.

Bankers and their lobbyists say that this is naïve, that the true importance of the banks is much greater, and that if all business activity that is indirectly associating with financial services is included, banking accounts for 15 or even 20 percent of economic output.


"That's nonsense," says Reiner Eichenberger, a business professor who teaches at the University of Fribourg. "If everyone applied that sort of math, retail would also account for 20 percent, and all sectors combined would account for well over 100 percent."

But it is true, Eichenberger notes, that Switzerland is much richer than its neighbors. Its per capita gross domestic product is almost twice as high as Germany's. And if purchasing power is taken into account, he adds, the Swiss are more than 15 percent better off than the Germans. The true affluence gap between the two countries, says Eichenberger, is probably somewhere between those two figures.

"The reason is simple," says Eichenberger. "Switzerland pursues better policies. It provides better incentives than France or Germany. This is because of its functioning federalism, in which cantons and municipalities are financially autonomous. A canton that gets into too much debt first has to raise its own taxes."

Eichenberger believes that Switzerland's system of direct democracy leads to thriftier policies and lower taxes, because citizens have a voice in how much money is spent. While other countries have massive debts, says Eichenberger, Switzerland's national debt is only about 49 percent of GDP, and its pension system will impose far less of a burden on government finances in the future. For this reason, he explains, future taxation will be lower while other European countries will have to raise taxes.

Too Much Power

And the illicit funds? "That's negligible," Eichenberger claims. If a trillion francs in illicit funds are deposited in Swiss bank accounts and the banks collect 1 percent a year, this amounts to a gross annual profit of 10 billion francs, and half of that after all costs are deducted. It's a lot of money for the private banks that are supported by these profits, but it's still less than 1 percent of GDP. "You can compare it with agriculture," says Eichenberger. "It doesn't make much sense economically, and yet it's politically significant."

The problem, according to Eichenberger, is that the banks have too much power. This is also the point bank critic Strahm is trying to make: "We are a true democracy, but as far as the banks are concerned, we're an oligarchy. Nothing works in politics without the support of Bahnhofstrasse," he says, referring to the Zurich street where many of Switzerland's banks, including UBS and Credit Suisse, have their headquarters. "When it wants something, the government toes the line." One of the reasons for this is that banks are the major donors for most Swiss political parties, Strahm says: "It's this political dependency, on the one hand, and the conflicts of interest among the banks, on the other, that has brought the country into its current situation."

The Americans recognized much earlier that they could achieve far more by putting a stranglehold on a bank than negotiating with the government, says Strahm. It was UBS that urged the government in Bern to allow it to provide US authorities with the names of 4,450 American tax evaders with Swiss bank accounts. Credit Suisse was looking for a similar deal before being stopped by a Swiss court. The bankers were acting out of fear of being indicted in the United States.

"Switzerland never voluntarily cleaned up the banking industry," says Strahm. "It only did so in response to external pressure, just as it did in the 1990s, when it was a question of the dormant assets of Jews."

Unshakeable as the Mountains

Banking secrecy was once as unshakeable as the mountains, and together with independence, neutrality and direct democracy, it constituted one of the fundamental elements of the Swiss national myth. It was part of the Sonderfall, Switzerland's self-perception of being a "special case" in world history. Literary scholar Peter von Matt refers to it as Switzerland's "arcadian self-representation": the feeling of being chosen, combined with the idea that God himself had given Switzerland its mountains for its protection.

"The old national anthem called it a 'wall bestowed by God,' even though Switzerland isn't actually located within a circle of mountains and is actually quite vulnerable because it is located around the mountains," writes von Matt. In an interview, he added: "In a sense, banking secrecy has to do with the fundamental fantasy of being an impregnable rock fortress."

This explains, at least in part, why Switzerland is so loath to abandon banking secrecy. It isn't just the money that's at stake, but also the country's self-image.

When banking secrecy was introduced in 1934, it was intended to protect Jewish assets, or at least according to the official explanation offered by bankers for a long time. But Switzerland had already developed into a refuge for assets after World War I. In World War II, it became a financial hub for all sides in the conflict. This guaranteed its survival, but it also subjected Switzerland to heavy criticism later on. The German Reich obtained hard currency in return for gold, and the Jews used Swiss banks as a safe haven for their assets. In the Cold War, Switzerland developed into the world market leader in international private asset management.

Dismantling Banking Secrecy

But banking secrecy has been in the process of being dismantled for years, and at a strikingly fast rate, at that. As recently as March 2008, then-Swiss Finance Minister Hans-Rudolf Merz said: "You'll have a tough time with this." Only a year later, following scandals surrounding stolen customer data, threats by the OECD and the attacks by Steinbrück, Switzerland announced that it would assist foreign authorities in investigating suspected cases of tax evasion. Until then, it had only done so in cases involving such crimes as the falsification of documents.

That spelled the end of the old banking secrecy practice, which protected tax evaders. As of this January, foreign tax authorities can even submit group requests, and they are not even required to provide the name of a suspected tax evader anymore: It's enough to describe a suspicious pattern of behavior. Last Friday, the Swiss government violated another taboo, announcing that it also intended to remove protections for tax evasion for its own citizens.

A man who was long a strong advocate of banking secrecy has grown quiet these days. Konrad Hummler has likened it to the right to asylum, a form of self-defense against the state. For him, Switzerland was a monetary safe haven on a continent that, for historic reasons, suffers from what he calls a "fear of confiscation." Hummler, as a former partner in Wegelin & Co., a Swiss private bank, and chairman of the Neue Zürcher Zeitung daily newspaper, is perhaps the country's most intellectual banker. He wrote a regular column for investors, which often doubled as a commentary on the state of the nation.

Now Hummler spends most of his time in a house near the Stiftskirche in St. Gallen, in eastern Switzerland. It's all he has left of his bank, after he was forced to sell the rest. The US government indicted Wegelin for conspiracy to commit tax fraud. This is the kiss of death for a bank, because it prevents it from conducting any transactions in US dollars. Now Hummler is considered a "fugitive," which means that if he leaves Switzerland, he runs the risk of being arrested and extradited.

Part of Swiss Culture

The Hummler case came as a shock to the country, with one of Switzerland's most prominent bankers being hunted like a criminal. American authorities are also after employees of other banks for possible involvement in tax offenses. Other Swiss banks could also face charges soon.

Hummler's case is unique because he was the one who devised the principle of the flat rate withholding tax, the core of the tax treaty with Germany. The private bankers hoped that if tax offenders could pay their taxes while remaining anonymous, they would retain those customers who chose to use this path to legalize their money. Under the agreement, they would pay between 21 and 41 percent in taxes on their previously untaxed assets, and would be spared criminal charges.

Ruedi Noser, a member of the Swiss National Council for the liberal FDP, defends the idea. "The fewest tax fugitives have come here in the last 10 years," he says. Most of the assets, he explains, consist of old money and involve business relationships that have been handed down from grandfathers to fathers to sons. According to Noser, many of these people would like to come clean with their taxes. "It's part of Swiss culture that we provide customers with an honorable way to transition into a new legal system," he says. "The flat rate withholding tax requires a certain amount of forgiveness. Germany is having a hell of a time accepting this. But if German society is no longer capable of forgiveness, it won't have a future."

But the German SPD doesn't want to agree to the treaty, which has already been ratified in Switzerland, primarily for one reason. Banking expert Strahm warned early on that customers who moved their assets abroad before Dec. 31, 2012 could remain undiscovered. This was long a subject of negotiation, with Switzerland prevailing in the end.

Considerable Clout

And now it will likely spell the demise of the treaty, something which many Swiss politicians and bankers already seem to have accepted as inevitable. Some even want it to fail, including Oswald Grübel, the former head of UBS and Credit Suisse. He meets us in his office on the third floor of an office building in the Zurich banking district. Grübel is from the former East Germany, but he has spent his entire career in Switzerland, where he was once one of the country's most powerful bankers, which still gives him considerable clout.

Grübel says that he is disgusted by the way things are going in the world. "There is an ominous development underway today," says Grübel. "We're having trouble dealing with the transparency we create with the aid of technology." This, he says, could lead to a future in which everyone is monitoring everyone else, and the individual is controlled by others.

He laments the fact that "everything that existed in the past is being judged by today's ethical standards. What was once considered a good thing," namely that there was a safe haven for money, "has since been turned around by the media. They have made Switzerland feel guilty as a result."

All of this means that banking secrecy only exists on paper nowadays, says Grübel, noting that the state has gradually softened the policy and no longer seems to support it. "But do secrets even exist anymore? With the technology we have developed, it's become almost impossible to keep secrets."

A Good Place to Hide Assets

Informants, enticed by the money being offered by governments, send secrets around the world in the form of data sets. Bradley Birkenfeld, a former UBS employee, just received a $104-million reward from the US tax authority, the Internal Revenue Service (IRS), for providing information on how he and his colleagues broke the law. Some might consider it ironic -- Grübel says he would recommend the United States to anyone looking to hide untaxed assets, saying that they would never be discovered there.

Grübel says that there will soon be a recession, and the loss of banking secrecy will adversely affect the economy. "The financial sector has subsidized the economy to the tune of 30 to 40 billion francs a year. Because of the influx of foreign capital, banks were able to keep interest rates low," he says. But not all economists agree with his view, with some saying that there are various reasons for low Swiss interest rates, including the attractiveness of the Swiss franc and low inflation.

In contrast to the smaller private banks, major Swiss banks lost their interest in illicit funds some time ago. Nevertheless, Grübel has a low opinion of the government's "clean money strategy," under which banks, in the future, would only be allowed to accept money that has been taxed. "How can this be verified? It would require bank employees to be familiar with tax laws from around the world. No other country has anything like this," says Grübel.

Grübel is opposed to the tax treaty. He believes that the SPD will ultimately accept it. "Because it's a very good solution for Germany," he says. "And who has the luxury to turn down €10 billion these days?" But Grübel does not think it is good for Switzerland. He doesn't like the fact that banks would be required to withhold taxes for other countries. "In the end, will Switzerland be expected to withhold taxes for every country in the world?"

Costly Step

Grübel calls the treaty "nothing but a costly step on the way to the automatic exchange of information," which is something the EU would like to introduce, and that would enable the German tax authorities to obtain customer data. The Swiss government's goal in the past has been to prevent the automatic exchange of information.

But Grübel believes that Switzerland, together with Austria and Luxembourg, which have also resisted this exchange of information, should negotiate a treaty with the EU. It would be "better than this treaty, which is unsatisfactory for everyone, costs a lot and makes customers feel that they are being betrayed. But this would have been less advantageous for Germany."

A few months ago, it would have been inconceivable to hear Grübel talking about the automatic exchange of information. But Pierin Vincenz, CEO of the Raiffeisen Group Switzerland, and former Swiss National Bank President Philipp Hildebrand, have also said similar things in recent weeks.

Some private bankers are also slowly realizing that the current strategy has failed, and that the illicit money business is over. But almost everyone is undecided on what should come next.

For a long time, a few banks made money this way without having to do very much in return. The customers couldn't leave and paid high fees. A finance professor puts it this way: "It was always the least intelligent students who went into private banking." Another professor says: "They used to say that you could turn any hairdresser into an investment adviser." But those days are gone.

'The Recklessness of Inherited Wealth'


There are differing views over how much of its prosperity Switzerland will lose if illicit funds migrate to other tax havens. Some believe that the economy will be able to make up for lost jobs in the financial sector and that because of its stability the country will consistently remain attractive as a financial center, especially for customers from emerging economies. Others fear a slow decline in the high standard of living.

But an even bigger issue in this dispute is Swiss identity. The country is experiencing an identity crisis, because it is having trouble accepting the notion that it is no longer seen as a model pupil by the Western world but more like a villain. In the past, Switzerland benefited from the special path it took in Europe, by not being a member of the European Union and only partly associated with it via bilateral treaties. But for years now, Switzerland has been primarily focused on waging battles over withdrawals from old positions instead of developing an idea for its future.

Private banker Hummler, who can no longer leave his country, described this widespread feeling in a book he edited last year: "For 30 years now, our country has worked hard on its positioning on the European continent and the rest of the world." He continues: "We wear out former successful positions, and then we abandon one or the other, but we don't develop any comparative advantages over other countries. Meanwhile, our young people get bored or throw parties to celebrate their lack of a future with the recklessness of inherited wealth."

Translated from the German by Christopher Sultan