Switzerland walks away from EU partnership treaty

• Switzerland ends seven-year treaty talks with the European Union
• Switzerland walks away from EU cooperation deal over Brussels free movement demands
• Will Switzerland pay the economic price of the Swiss-EU treaty standoff?
• Swiss Foreign Minister Ignazio Cassis believes Switzerland can mitigate the impact of the broken trade accord over time

Switzerland, home to 8.6 million people and known for having the highest wealth per adult globally, is landlocked by European Union member states.

Although the small country rejected European Economic Area (EEA) membership back in 1992, it maintained close ties with the EU – its largest trading partner.

Last year, the EU accounted for more than 40% of Swiss exports and 50% of imports, worth EUR 142.4BN and EUR 108.6BN, respectively.

The two countries are currently governed by over 100 bilateral agreements dating back almost four decades. They attempted to formalise a new accord on Wednesday that would have strengthened EU-Swiss relations and created a more effective platform for resolving disputes.

Switzerland and the European Union had reached a “framework agreement” on a trade accord back in 2018, which was supposed to upgrade economic ties between their two nations. However, Bern asked the EU to clarify three points in the agreement before signing.

The treaty aimed to cement ties on international travel, mutual recognition of industrial standards, agricultural products, state aid, medical devices, civil aviation and land transport.

The European Union had been pushing for a Switzerland-EU trade deal for a decade now, which would rewrite existing agreements and have the Swiss routinely adopt changes to EU market rules.

A letter from the European Commission wrote: “Without this agreement, this modernisation of our relationship will not be possible, and our bilateral agreements will inevitably age.”

Given that the European Union is Switzerland’s largest trading partner and approximately two-thirds of Swiss imports derive from the bloc, and a half of its exports go to the EU, Wednesday’s result could spur further tension down the line.

So, after seven years of negotiations, why has the Swiss government ditched talks and jeopardised their chances of striking an EU partnership treaty?

What are the sticking points in the Swiss-EU treaty standoff?

Switzerland said no to the EU cooperation deal due to Brussels demands over freedom of movement, labour rules, citizens’ rights and state aid concerns.

Bern pulled the plug on years of negotiation that were reminiscent of UK-EU Brexit trade talks, citing “substantial differences between Bern and the bloc on significant aspects of the agreement.”

The Swiss government said the Federal Council decided to reject the treaty and bring negotiations to a close as the signing conditions were not met.

However, failure to secure the EU cooperation deal will jeopardise Switzerland’s membership in the EU common market. It will receive third country treatment and be denied new access to the bloc’s single market.

As Bern is keen to maintain access to the EU’s single market, officials have reportedly asked the government to unblock CHF 1.3BN in outstanding payments to the EU’s cohesion funding pot to strengthen their financial relationship.

However, comments from the European Commission have already suggested that the bilateral relationship between Brussels and Bern is under significant strain, and existing accords may continue to erode as goodwill is in short supply.

Swiss President Guy Parmelin implied that Switzerland would pay the economic price of the move after stating that attempting to work out the potential costs of the failed treaty was futile.

Foreign Minister Ignazio Cassis also expects the broken treaty to impact Switzerland negatively but hopes that the “erosion of the existing bilateral accords would happen slowly and allow the Swiss government to react.”

The unresolved issues in the Swiss-EU treaty standoff

The bloc wanted Bern to frame their future trading relationship into a single overarching treaty, much like the post-Brexit accord with the UK.

Despite some progress, three major sticking points remained. Bern claimed that they could not accept Brussels demands as Swiss nationals would reject them in a legally required referendum on the deal.

The EU and Switzerland failed to bridge the differences on freedom of movement, citizens rights, state aid and labour rules, with the Swiss system of “flanking measures” seen as a red line for Bern.

Switzerland officials were also reluctant to give EU citizens the same privileges as Swiss nationals, such as access to social security for non-employed residents, job seekers and citizenship, despite Brussels arguing that this aspect was part of the deal.

Regarding state aid, the European Union proposed a dynamic alignment with EU law, which would require Switzerland to ban state aid that could affect competition for its single market.

Brussels also wanted to give the EU Court of Justice the power to rule on disputes that emerged from the agreement, insisting that it would avoid regulatory “cherry-picking”.

Meanwhile, Swiss officials rejected the EU’s demands to incorporate the Citizens’ Rights Directive (CRD), arguing that freedom of movement or residence “raises social security costs” and creates “a paradigm shift in Switzerland’s migration policy.”

The EU Commission said they deeply regret Switzerland’s “unilateral decision” to terminate negotiations and accused Bern of “cherry-picking” during talks between the two sides.

However, Swiss ministers indicated that the treaty would have given the bloc leverage over Switzerland and undermine the country’s defence priorities, wages and cantonal banks.

What will happen to trade between the EU and Switzerland?

Failure to secure a new accord with the EU means that both sides will continue to be governed by 120 separate bilateral agreements, including a 50-year-old trade deal.

Furthermore, as Switzerland is not an EU member state, it can continue negotiating trade agreements with other countries. However, failure to reach a new umbrella treaty will deliver a massive blow to cross-border firms that depended on access to the EU’s market.

Switzerland has been denied access to the EU’s market for refusing to accept Brussels’ demands on level-playing field rules, freedom of movement and the jurisdiction of the European Court of Justice.

A senior EU official said that access to the bloc’s single market would be “impossible” to negotiate without a partnership treaty. Given that current access to the EU’s market exists on outdated accords, further hardships lay in wait.

“Our existing agreements on cooperation in the areas of trade, education and research could also be hindered,” warned an EU spokesperson.

Meanwhile, the European Commission said that this week’s result could see the Helvetian nation deprived of its “privileged” connection to the EU’s electricity system. Swiss airlines could also lose access to the centrepiece of the bloc’s legal order.

That’s not to say that the EU will not be affected by the move as the broken accord will also hinder exports from the European Union, which have already lost market share following the UK’s departure from the bloc.

Britain’s departure from the EU’s single market on December 31st 2020, has created significant barriers to cross-border trade, with industries on both sides of the Channel reporting major disruption.

Still, Britain’s trade relations with the European Union have been relatively straightforward, whereas Switzerland-EU trade relations have been long-been complicated.

Before the latest dispute, the two nations had quarrelled in 2019, after the bloc refused to renew equivalence for Switzerland.

In 1992, Switzerland applied to become a European Union member state but withdrew its application for EU membership in 2020.