How Do Decentralized Federations Fare in Times of Crisis? Insights from Switzerland

Abstract

This article examines federal dynamics during times of crisis in a decentralized federation, taking Switzerland as an example. Based on qualitative research, we analyse how the relationship between the federal government and the cantons evolved since the 2008/09 demand crisis. Following common wisdom, we hypothesize that due to its decentralized structure, the Swiss federal model is well equipped to deal with economic and deficit crises. Our results show that Switzerland indeed adapted without any major federal conflicts in the 2009 recession, but this was only a short period of economic downfall. The more recent deficit crisis reveals that there are coordination problems, also in decentralized federations. In Switzerland, tax competition has reached a point where many cantons cannot continue reducing taxes but need to generate revenue to consolidate budgets. This puts stress on the federal order and important reforms, such as fiscal equalization, turn into substantial federal conflicts.

Keywords: Financial and economic crisis, debt crisis, federal dynamics, Switzerland