If Britain does not sign up to the new EU Constitution in a referendum, says EU Trade Commissioner Pascal Lamy, it could become a nation like Switzerland. Is that such a bad thing?

Is Switzerland part of the EU?

No. The Swiss export twice as much per head to the EU as we do (the EU is Switzerland's largest trading partner) yet they still disdain membership. They make no financial contributions to Brussels and receive no direct financial benefits. And they retain their own currency, tax regime and labour market laws. However, the Swiss have made 13 treaties with the EU which guarantee the free movement of goods, capital and labour, and cover such matters as mutual recognition of qualifi­cations and maximum weights of lorries.

Why don't the Swiss want to join?

Because they have always jealously guarded their historic neutrality (see box) and been notoriously slow in coming to judgement about anything. They may play host to a number of international bodies such as the Red Cross, Uefa, the Olympic Association, and much of the United Nations (Geneva alone has 32,000 international civil servants), yet they only joined the UN in 2002 after decades of hesitation. The official aim of Swiss foreign policy is to work slowly towards full EU membership, but when Swiss pro-Europeans, the so-called Euroturbos, launched a campaign for negotiations with Brussels to commence without delay, 75% of the Swiss turned them down in a referendum.

Why are the Swiss so anti-EU?

Partly because Brussels's central bureaucracy is the antithesis of Swiss constitutional tradition. While the EU is often said to suffer from a democratic deficit, Switzerland has, if anything, a democratic surplus. The Swiss vote more than ajiy nationality in the world, and they vote about anything and everything, at national and local level. They even have the power to vote on their finance minister's budget. Anyone can call a national referendum: all they need is 50,000 signatures gathered within 100 days of a new law being proposed, and the results are binding on the government. The same applies at the level of the 26 cantons and even at communal level, the number of signatures required being correspondingly smaller. The idea of giving up such direct democracy for a system of centrally agreed mandatory direc­tives is anathema to many Swiss.

What issues do they vote on?

In the past four years there have been 46 national referendums in which, among other things, the Swiss rejected proposals for shorter working hours and voted in favour of army cuts. They rejected new rights for the disabled and car-free Sundays, voted to decriminalise abortion, and killed bids to abolish nuclear power and to hold the winter Olympics in Bern. This February they voted for the harshest laws in Europe on locking up paedophiles.

How does the government cope with all this democracy?

Switzerland is a confederation of 26 cantons who guard their freedoms jealously; central government hardly exists. There's no prime minister; the Swiss Federal Council (equivalent of our cabinet) comprises seven represen­tatives from the four main parties whose job it is to come up with a compromise on every issue. Under this arrangement known as "the Magic Formula", there is a rotating non-executive presidency: the incumbent drawn annually from among the seven federal ministers. (Few Swiss actually know who he or she is.) Council members keep a low profile, not wanting to be accused of fostering a personality cult. The Swiss equivalent of Margaret Thatcher or Tony Blair would be inconceivable.

Has Switzerland suffered from being outside the EU?

Not noticeably. Switzerland and fellow non-joiner Norway are the richest nations in Europe. Swiss taxes are lower than in the rest of the EU and interest rates are about half the Eurozone's. Mortgage rates are 3% compared with 6% or more in the EU. Taxes are held down by fierce competition between cantons (in many can­tons, there are no inheritance taxes). Nor are the Swiss hampered by EU social laws. There is no 35-hour week - the Swiss work a weekly average of 41.5 hours - and more are still working at the age of 64 than in any other country. Employers are relatively free to hire and fire. As a result, unemployment has been rising slightly but at 4% is still way below that of France or Germany. Inflation has hovered at between zero and 1 % for the last decade.

And is there a downside?

Swiss supporters of the EU, the so-called Euroturbos, point out that, despite Switzerland's relative prosperity, its economy is one of the few doing worse than the EU's. Part of the reason, they argue, is that while Swiss companies that trade internationally are often world-class, the often heavily subsidised domestic sector, immune from EU competition rules, has become much less competitive. They also argue that Switzerland's odd position in relation to the EU - receiving all the advantages of trading in a common market with few of the disadvantages of abiding by its rules - is not sustainable. Better to join the EU, say the Euro-turbos, than to have to submit to the diktats from Brussels which Switzerland has no part in shaping.

What sort of demands?

Last year Switzerland was threatened with sanctions by the Commission for its failure to budge on bank secrecy. (When the Swiss held a referendum on bank secrecy, 80% voted in favour of retaining it.) It was also pressured by Brussels into levying a withholding tax on EU citizens' bank accounts. And this year there was chaos at the Swiss-German borders as EU border controls were fully enforced against the Swiss. Brussels now insists that Switzerland contribute to the funds the EU gives poorer members, and says it will only give the Swiss passport-free access if they crack down on cross-border tax evasion. But all this seems to have firmed the Swiss resolve to stay out. In last October's election the anti-EU People's Party made substantial gains and now holds two seats in the seven-member Federal Council.

The tradition of neutrality

Switzerland has had a bad press over the years. The 19th century wit Sydney Smith called it "an inferior sort of Scotland". Orson Welles in The Third Man famously scorned it as the producer of the cuckoo clock. It is hardly surprising people don't understand Switzerland: it has four official languages and a kaleidoscope of ethnic groups, which makes one wonder how it managed to stick together for so long.

The Swiss first established a separate political identity when they won independence from the Holy Roman Emperor Maximilian I in 1499. Surrounded by larger foreign powers, they viewed neutrality as a pre­requisite to survival. And in 1815, after a brief period of being subsumed in the Napoleonic empire, Switzerland was guaranteed permanent neutrality in the Congress of Vienna. The Swiss have guarded that neutrality ever since. In WWI, their only involvement was in the organising of Red Cross units. In WWII, they played a more dubious role as money launderer for Nazi Germany. Army tradition runs deep in the life of the nation. In the Cold War years, Switzerland had one of Europe's largest land-based armies, although its militia system, under which every adult male was conscripted and remained in the reserves until middle age, is now being slowly streamlined.