SWITZERLAND AND EUROPE 1991 was Switzerland's 700th birthday, but there was no grand, flag-waving celebration. Throughout the year, cities and villages celebrated in their own way, with alpine yodeling and wrestling fests, fireworks over Lake Zurich, and ballet in Lausanne. This country -- made up of 26 highly independent cantons, embracing four languages -- is simply too diverse to host a big, nationalistic bash such as the United States put on in 1976, the Swiss explain. Seven hundred years ago, if legend is to be believed, three brawny peasants met on a pretty meadow called the Rutli at the foot of the steep climb to the St. Gotthard pass, then as now the most direct route from the upper Rhine to Venice and the silk routes leading east. The perpetual alliance they swore is usually considered the nucleus of the Swiss Confederation. The three men in the meadow 700 years ago were tribal chieftains of what later became the cantons of Schwyz, Uri and Unterwalden. They signed a treaty for mutual protection in the crisis of succession after the death of the Habsburg ruler Rudolf I. The Habsburgs' ancestral castle was not far away, and the men of the forest cantons worried that some more remote king might be less amenable to leaving them alone to collect bridge-tolls and provide guided mule trains. Twenty years later the neighbors in Lucerne were invited to join the loose confederation. Its influence spread, sometimes by persuasion and often by conquest, only after a resounding defeat by the French at Marignano in Lombardy in 1515 did the mountaineers decide to eschew foreign military adventures. That neither kept them from fighting among themselves for a few centuries more nor, since the country was desperately poor in natural resources, from hiring themselves out as mercenaries for others. The last survivors of that practice are the Vatican's Swiss Guards. But expansion has its limits. In December, 1992, the Swiss electorate voted against affiliation with the European Community. What should we make of the Swiss vote? Here is the richest country in Europe (and on some measures the richest in the world), in the middle of the world's largest trading bloc, saying it can stand back from closer union. On the face of it, it looks as though the Swiss have made a serious and uncharacteristic error, at least in economic terms. While the vote will not lead to any economic catastrophe, conventional wisdom suggests that it will clip something off future growth. Swiss firms live by their exports and, to some extent at least, they will find it harder to export across the border. They may be forced to push some production over to subsidiaries within the European Community. Perhaps some investment that would have gone to Switzerland will go elsewhere. It was fear that the brilliant Swiss economy would be damaged that encouraged the political leaders to press for membership of the European Economic Area. Is this a case of ordinary voters allowing their hearts to rule their heads against the advice of the establishment? The conventional view was that the decision would hinder future economic growth. It reckoned that as far as the stock market was concerned a combination of higher trade costs and lower gross domestic product growth would more than offset any advantages from non- membership such as lower interest rates and freedom from EC competition policy. By this theory the economic effects of a "no" vote would justify a permanent fall in Swiss share prices. This was an intriguing exercise, but of course a move in the stock market of between 5 and 10 per cent is not that much, given the scale of the swings that take place in securities prices every week. The implication for growth is perhaps more worrying. A major investment banking firm, Goldman Sachs, immediately published a crisis report reckoning that the diversion of investment following the "no" vote, and labor migration (skilled people leaving) might together chip 0.6 per cent off annual growth over 10 years. That would be quite a lot, if it were to happen. But will it? There is a counter argument to be made, which is that staying outside the EEA might actually enhance Switzerland's economic performance. It runs like this. Switzerland happens to be in an extremely strong structural position. It has great strength in industries that look like being winners for the next decade or more. These include financial services (the three big banks and the Geneva-based fund management industry), pharmaceuticals (the three big chemical companies), food (Nestle, Suchard), and up-market tourism (St. Moritz, Klosters and Verbier). These are all areas of the world economy in which Japan and the newly industrialized countries cannot actively compete, and where the price of the product is not being constantly shaved by some new technological advance. By contrast, Switzerland is not strong in cars, aircraft, electronic consumer durables, computers -- all areas where European industry is, or is about to be, threatened by the Far East. In that sense it is better protected than most of the EC. Switzerland does have important industries in areas like machine tools, which are more open to international competition and might suffer if the economy were distanced from the rest of Europe, but much of its strength is in areas where it is quite well protected. Indeed in some of these areas, being outside the EC is a positive advantage. Take financial services, which accounts for 30 per cent of the value of the securities on the Swiss stock market. Swiss banks trade on their safety and their discretion. It was fascinating to see that foreign money actually flowed into Swiss securities following the vote. Switzerland was perceived as being a safer place to put cash if it remained outside the EEA, presumably for fear that at some future date the EC bureaucrats would get their fingers on those numbered bank accounts. In most of the other areas noted above, EEA membership is not really an issue. In pharmaceuticals there might be some modest disadvantage from staying outside, but the market is such an international "brain-based" one that it is hard to see any serious damage. Food products? Well, Nestle generates roughly 97 per cent of its turnover outside Switzerland, and is not really dependent on exports across the Swiss national boundary into the rest of Europe. Tourism? Membership of the EEA is not an issue. So while there might be some modest disadvantage to Switzerland, the Swiss winners would be fine. Some sectors, in particular financial services, would do better by staying outside. The effect might therefore be merely to push the country even further towards its specialties. But since these are good growth areas that does not matter. One could even construct an argument that Switzerland will benefit by keeping apart from the rest of Europe.