2 March 2006 • Economic Performance Switzerland versus Austria: Pro-active Strategy of EU Integration Giving Austria a Growth Advantage • Fritz Breuss

Austria and Switzerland pursue different strategies with regard to European integration: Austria, a member of the EU since 1995, also participates in the Economic and Monetary Union since 1999. Switzerland has since the rejection of the EEA agreement in 1992 adopted a course of bilateral approach towards the EU, with the conclusion of two bilateral agreements so far. For Austria, the balance of pros and cons of ten years of EU membership is positive, with an acceleration of GDP growth by an estimated ½ percentage point on annual average. Overall, Switzerland is likely to have suffered welfare losses over the last decade.

Switzerland and Austria lend themselves particularly well for a comparative economic analysis of the pros and cons of different integration policy strategies. Recently WIFO has published in its "Austrian Economic Quarterly" a comprehensive study comparing economic performance over the last ten years in different areas: macro-economic developments, structural aspects, foreign trade, outward orientation, integration into international capital markets and into the "European business cycle". Using an integration model, the study arrives at a quantitative assessment of the effects of Austria's full participation in the EC Internal Market and in EMU as well as of the impact of the opening-up of eastern Europe and the EU enlargement 2004. For Switzerland, a separate integration model produces estimates for the effects of the only partial and belated participation in the Internal Market through the Bilaterals I and II, and of the country's staying outside EMU.

While Switzerland excels Austria on almost all indicators of competitiveness and remains one of the richest countries in the world, its economy has for some time already grown more slowly than the Austrian economy. The early 1990s marked a break in the trend of GDP per capita, when Switzerland lost its advantage vis-à-vis the USA. On this indicator of overall welfare, Austria has continued moving up in the 1990s and beyond (following the catching-up process in the early post-war period). The originally large lead of Switzerland over Austria has narrowed to only 6 percentage points, according to the latest data.

Austria's growth advantage over Switzerland of around 1 percentage point per year over the last decade can be taken as the result of the following factors:

• The (gradually abating) catching-up effect of some  1/3 percentage point per year drives the convergence of GDP per capita between the two countries.

• The impact of the creation of the Internal Market and EMU (accelerated productivity growth due to stronger competitive pressure, a higher reform momentum and increased spending on research and development) is estimated at some  1/3 percentage point per year.

• Austria benefited to a high degree from the opening-up of eastern Europe (since 1989). The effect on growth may also amount to  1/3 percentage point per year. With the EU enlargement of 2004, Austria continues to enjoy this growth "bonus", albeit to a somewhat lower degree.

Austria and Switzerland, two small countries of almost equal size in the centre of Europe, have since the mid-1990s followed different routes in the European integration process, after having shared as members of EFTA the same integration policy strategy as from the early 1960s:

• Austria, having joined the European Economic Area (EEA) for one year, became a member of the European Union (EU) in 1995 and participates in the EU Economic and Monetary Union (EMU) since 1999.

• Switzerland has since the rejection of the EEA Agreement in a referendum in 1992 pursued a strategy of gradual approach towards the EU via bilateral agreements. The "Bilateral Agreements I" have been in force since 2002, and some elements of the partial "Bilaterals II" agreements have already taken effect in 2005. In two referenda, the Swiss population has given its approval to participation in the Schengen Agreement and to the opening of the Swiss labour market being extended to the 10 new EU member states. Switzerland has thereby adopted ex post the essentials of the EEA Agreement. The Bilaterals II take some integration steps going beyond the EEA Agreement (participation in the Schengen and Dublin Agreements, agreement on the taxation of interest income) that facilitate a high degree of economic integration into the EU. By opting for this strategy, Switzerland avoids certain drawbacks of EU membership, such as the financial burden of being a net contributor to the EU budget, and remains autonomous in its political decisions. It retains its specific model of direct democracy, while for Austria the decisions, notably in the economic policy area, are largely taken at EU level.

An overall assessment of all the effects examined suggests that Austria is likely to have benefited from EU membership and participation in EMU, whereas for Switzerland the delayed and only partial integration into the European Internal Market has been economically neutral at best. In Austria, economic growth as measured by real GDP has probably been raised by some  1/3 percentage point per year as a consequence of the country's full integration into the European Internal Market. Including the spill-over or "passive" integration effects (via foreign trade) from the creation of the EC Internal Market since 1993 (+0.1 percentage point) and the impact of EMU participation on GDP (+0.1 percentage point), European integration has given Austria an overall growth impulse of around ½ percentage point per year. For Switzerland, the positive spill-overs from the creation of the EC Internal Market may have offset the negative consequences of the country's staying outside. Together with the (on balance) neutral effects of non-participation in EMU, the overall impact of Switzerland's integration strategy on the Swiss economy is also estimated to be broadly neutral.

For further information, please refer to Professor Fritz Breuss, phone (1) 798 26 01, ext. 220, Fritz.Breuss@wifo.ac.at

For the full text of this article see http://publikationen.wifo.ac.at/pls/wifosite/wifosite.wifo_ search.get_abstract_type?p_language=1&pubid=26160