AUG. 1 is Switzerland's 700th birthday, but there is no grand, flag-waving celebration planned.Throughout the year, cities and villages have been celebrating 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 French put on two years ago, the Swiss explain. Just as well, say many here, for Switzerland is going through a period of soul-searching and is not in a jubilant mood. Recent political scandals have shocked a nation which has always considered itself the most democratic in Europe. Social problems have become more visible and urgent, spurring public protests. Some 500 of the country's intellectuals are boycotting the celebrations. And one heavily debated issue challenges even the country's sense of identity: Should Switzerland hold on to its traditional neutrality and isolationism, or should it put in a bid to join the new Europe? Two years ago, no one here seriously considered the question. But "these days, no politician can avoid having at least five standard sentences on Europe in his repertoire," says Urs Ziswiler, government spokesman on EC issues. Those who support EC membership admit that it would probably require Switzerland to modify its treasured form of democracy, in which all major decisions must be taken to the people for a direct vote via referendum. But Switzerland will be influenced by EC decisions whether it wants to be or not, they argue, and better to have a hand in those decisions by being a member. What has pushed the issue to the fore is that the EC is proving to be more than an economic club, which the wealthy Swiss never felt they needed; it is a major political influence on the continent. Eastern Europe is clamoring for membership. And Sweden and Austria, two of Switzerland's neutral trading partners, have already applied. Some Swiss - so far mostly politicians and journalists - fear their country will be left behind. Indeed, dissatisfaction is growing in a country that many Swiss residents and visitors have considered the closest thing on earth to Nirvana. The Swiss were shocked to learn in 1989 that the government kept secret files on nearly one in six citizens. The files contained information, sometimes inaccurate, on their politicial leanings and activities. Another blow to Swiss trust in their government was the resignation in 1989 of Justice Minister Elisabeth Kopp, who allegedly had warned her husband that his company was under investigation for money laundering. Mrs. Kopp was aquitted last year of violating official secrecy laws. Even Swiss democracy is under attack. "We don't really have a democracy," says Elfie Schopf-Zoller, "only an appearance of democracy." Swiss women won the right to vote at the federal level only 20 years ago. Last November, the last half canton, Appenzell IR, gave women the vote on a regional level, under federal court order. Ms. Schopf-Zoller organized a strike in June in which half a million women, including housewives, protested that Swiss women still earn 30 percent less for comparable work than men. It was the first widespread work stoppage in Switzerland in more than half a century. The turnout, says Schopf-Zoller, "shows there is a lot of displeasure among women." The list of social ills goes on. Drug abuse is rising markedly in cities like Zurich, Bern, and Basel. Immigration is raising public concern, as the number of asylum-seekers increased 80 percent this year. Switzerland already has more per capita than any other European country. These domestic problems certainly trouble the Swiss, but the question of EC membership is perhaps a more emotional issue. All predictions and polls point to a defeat were the issue to be presented now in a referendum. Even an agreement to participate in a "European Economic Area" (linking the EC and the European Free Trade Association) is likely to be turned down by the conservative population. (Switzerland is not even a member of the United Nations.) In the short-to-mid-term, EC membership is not an economic necessity, the naysayers argue. The Swiss already conduct the bulk of their trade with the EC, thanks to trade agreements. And most Swiss firms have set up subsidiaries in EC countries to circumvent trade restrictions. If the reason for joining is simply to take part in a political vision of a united Europe, many Swiss don't believe the sacrifice is worth it. They say their neutrality has kept them out of two world wars and enabled them to hold their country together. But Mr. Ziswiler says neutrality is becoming increasingly irrelevant with the disintegration of the Warsaw Pact. And a government study group set up to research the subject is likely to downplay the importance of neutrality. The study group is likely to conclude that neutrality could be compatible with EC membership, if it is interpreted in a strictly military sense and not used as a political tool. Even with some kind of compromise on neutrality, many Swiss remain cold to EC membership, because they don't like the decisionmaking authority concentrated in Brussels. The Swiss like their highly federal system of government. Maximum authority goes to the cantons and minimum to the central government, which only has seven ministers and whose parliamentarians are not full-time politicians. Only two of the seven Cabinet ministers are openly pro-EC-membership, and those in their camp realize it will be difficult to win others over to their side. They admit that the Swiss probably won't welcome membership until their country begins to substantially suffer from isolationism - a condition at least a decade away, they say.