LUGANO, Switzerland — Italy and Switzerland have been waging a quiet border war lately, and this picturesque town on the shores of an Alpine lake is caught in the cross-fire.
It all started last summer when Italy, struggling as ever with high taxes and huge government deficits, decided to crack down on tax evasion, which ranks, alongside soccer, as the great national obsession.
In the postwar boom, Italy produced millionaires as if on an assembly line, particularly in the industrial north, which snuggles up under Switzerland — an ideal place for the rich to shield their money from the prying eyes of the Italian tax collector. If Lugano had not existed, the Italians would have had to invent it.
A town of 57,000 people, Lugano has become the third-largest banking center in Switzerland, after Zurich and Geneva. Stroll through the narrow streets of its old center, and you will find just about every bank you have ever heard of.
And banking has brought affluence. The main shopping street, Via Nassa, features butchers, bakers or grocers no longer, but rather Versace, Bulgari and Bucherer, a jewelry chain with banks of Rolex displays.
Moreover, Lugano is the heart of Italian-speaking Switzerland, so Italian bank clients do not have to struggle with French, German or English.
“Swiss political stability, terrorism in Italy, led important Italian entrepreneurs to flee a fluctuating lira and a punishing fiscal system,” said Franco Citterio, 47, a former banker, now director of a local banking association.
What are now called “the troubles” here began when Giulio Tremonti, the finance minister under Prime Minister Silvio Berlusconi, a proponent of low taxes and fiscal discipline, announced his intention to “dry out” Lugano as a haven for tax evaders.
He had closed-circuit cameras installed along the Italian-Swiss border near Lugano to register the license plate numbers of Italian cars crossing into Switzerland. The owners of those cars would then be subject to audits by the Italian tax police. In October the Italian police raided branches of Swiss banks in Italian cities, including some from Lugano, in search of evidence of tax evasion, angering the Swiss.
But Tremonti’s biggest gun was the announcement of a tax amnesty that allowed Italians to repatriate assets from foreign bank accounts without fear of criminal prosecution and made them pay only a 5 percent penalty on the total.
Tremonti recently announced that $136 billion had been brought back to Italy, showering Rome with a $7 billion tax windfall. He announced that the amnesty would continue, at least until the end of April, though with steeper penalties.
The threat to Lugano’s financial health is considerable. Of the $390 billion in assets in its banks, Citterio said, about three-fourths are held by foreigners. Of that, Italians hold an estimated two-thirds. By some estimates, up to four-fifths of that Italian money may be undeclared.
Last April, Switzerland concluded a dozen taxation agreements with major countries, including the United States, but negotiations with Italy are frozen.
Fulvio Pelli, 58, leader of the Liberal-Radical Party, the largest in the canton of Ticino, where Lugano is located, blames Tremonti. “It’s not acceptable,” he said, accusing Italy’s leaders of a “vendetta, a missionary zeal.”
Riccardo Dorna, 56, who runs a company that cuts stone for building sites, said the fault lay in Lugano. “The good side was, we had a strong financial sector,” he said. “Now, however, that’s the sector that’s hurting.”
Fortunately for Lugano, the region has benefited from rapid growth in recent years in businesses outside finance, like computer technology and shipping. Italian fashion houses like Gucci and Versace now ship apparel and accessories worldwide from Ticino, relying on the Swiss over unpredictable Italian airports.
“Thanks to these structures, compared to other cantons, Ticino is not doing too badly,” said Luca Albertoni, 45, the director of the local Chamber of Commerce. Indeed, every day about 45,000 Italians, many of them well-trained technicians, engineers and money managers, cross the border to work in Ticino, returning to Italy in the evening.
Some here see them as bargaining chips in the border wars. In October, the newspaper of the conservative party, League of Ticino, urged the expulsion of 500 Italian day workers for every billion Swiss francs withdrawn from Lugano because of the amnesty.
Albertoni said the Swiss should stop blaming others for their problems. “Mr. Tremonti,” he said provocatively, “is doing a good job. It’s a Swiss problem, not an Italian problem. We lived too long with the illusion that we could forever take advantage of the Italian situation.