Switzerland-EU Bilateralism: From Pragmatism to Mutual Frustration
Cenni Najy (University of Geneva)
Switzerland’s European integration trajectory has been unique and very puzzling to most observers. Switzerland is indeed a particular case. It is the only country of Western Europe not to have joined the EU or the multilateral association offered by the European Economic Area (EEA) or even a bilateral association scheme. Instead, Switzerland patiently developed a dense web of sectoral, stand-alone agreements with the EU, the so-called bilateral way.
Following the negative outcome of the 1992 referendum on Switzerland’s accession to the EEA, Switzerland put forward the idea of deepening its existing bilateral relations with the EU, which mainly included a free trade agreement for industrial products. The Union pragmatically accepted the Swiss proposal and seven sectoral agreements were concluded in 1999. Several other agreements were concluded in the early 2000s.
In total, around 120 sectoral agreements are now in place covering several issues from technical barriers to trade to immigration. Five of these agreements, including one covering free movement of persons, allow for deep integration with the single market and can be considered of great importance to Switzerland’s and, to some extent, to the EU’s economy.
These market-access agreements lack legal coherence. They do not generally require Switzerland to adopt the evolution of relevant EU laws (acquis ), but only refer to the incorporation of relevant EU legislation. Furthermore, the European Court of Justice does not adjudicate disputes between Switzerland and the EU (with the exception of air transport). In view of preserving a level playing field within the single market, both parties can incorporate new relevant pieces of EU legislation through constant updates of the agreements. However, Switzerland decided not to adopt some new relevant acquis measures, including important pieces of legislation related to free movement of persons. In parallel, Switzerland passed internal measures to protect its labor market from wage dumping (part of the so-called “flanking measures” package) which the EU considers as incompatible with the free movement agreement.
The EU grew increasingly frustrated with Switzerland’s unwillingness to maintain a high degree of legal homogeneity. In 2008, the Council of the EU requested the opening of negotiations in view of establishing a common institutional agreement for existing and future market-access agreements. It also decided that the EU would not conclude any new market-access agreement without such an institutional agreement in place. After a long exploration phase between Swiss and EU experts, the institutional negotiations started in 2014. 32 rounds of negotiations took place between the Swiss and the EU delegations. The talks were difficult, especially on the provisions related to dispute settlement. On condition of anonymity, EU diplomats often accused Switzerland of procrastinating. As a result, the Commission threatened not to renew stock-market equivalence (MiFIR which introduces a trading obligation for shares applicable to investment firms). This decision was taken to incentivize the Swiss side to swiftly conclude the negotiations. Some, however, speculated that the Commission’s move was also meant to be a warning for the British government. If the UK were to withdraw from the EU without an agreement, its (huge) financial sector would also be exposed to the EU’s discretionary decisions on MiFIR-type equivalences.
On 27 November 2018, both parties agreed on a common final text. However, the agreement was subsequently not endorsed by the Swiss college of ministers (Federal Council). As a result, the final text was not initialed. In early 2019, the Federal Council launched an internal consultation phase to assess the level of domestic support for the “project” agreement (note that an internal consultation had already taken place in 2013). The responses to these consultations were overwhelmingly critical, especially from the left and extreme-right of the political spectrum, which together account for more than 50% of the electoral shares in Switzerland.
On 7 June 2019, the Federal Council asked the EU for three “clarifications” (the reform of the flanking measures, the prohibition of state aids along the lines of EU law and the adoption of the European citizenship directive). On 11 June 2019, the Commission answered that it was ready to provide for all the necessary clarifications. Since then, however, the talks have stalled. As a result, the EU decided not to renew the MiFIR equivalence. In response, the Federal Council also took restrictive measures which prevent EU trading venues from listing to trade of shares of Swiss companies. The economic consequences of this financial dispute are hard to assess. However, they will certainly limit the liquidity of both Swiss and EU stock-markets.
The main problem for Switzerland and the EU is to avoid a mutually harmful escalation. Sotto voce, the Commission already threatens to take other counter-measures, even if it maintains that the “door is open” to further talks with the Swiss. Additional retorsions could take many forms. For instance, the EU could decide not to update the mutual recognition agreement (MRA) with Switzerland. This decision will only be taken in the autumn, leaving some time for the EU and Switzerland to iron out their differences on the institutional agreement. However, if no solutions are found, bilateral political relations will suffer. Negative economic consequences will also be felt by both parties, especially Switzerland. In 2018, the EU was Switzerland’s main export market for goods. Meanwhile, Switzerland was EU’s third export market for goods.
Other difficulties may arise soon and increase frustration on both sides. Next year, the Swiss people will vote on a proposal to reduce EU immigration flows. If this popular initiative is accepted, Switzerland will certainly end up terminating the free movement agreement. Consequently, the so-called guillotine clause would be automatically activated by the European Union, meaning that all of the other six market access agreements concluded in 1999 would also be terminated.
Cenni Najy is a political researcher at the University of Geneva, Switzerland. He is also Vice-President of Foraus, a Swiss think tank active in foreign policy related issues. He currently works on Swiss-EU relations and Brexit.