Switzerland and the European Union: Balancing Sovereignty and Close Economic Ties

Switzerland is one of only a handful of European countries that are not members of the European Union. While the ties between Switzerland and the EU are strong, the future of the new framework treaty is uncertain.

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Switzerland is not a member of the European Union, but that doesn’t mean there aren’t many ties and deep connections between the sovereign confederation and the 28-member (soon 27-member) union.

The European Union is Switzerland’s main trading partner. More than half of Swiss exports go to the EU—and nearly three-quarters of Switzerland’s imports come from the EU.

Switzerland is—along with non-EU members Iceland, Liechtenstein, and Norway—a member of the European Free Trade Association.

Surrounded by four EU states—Germany, Austria, Italy, and France—Switzerland maintains a bilateral relationship with the EU, meaning that the EU and Switzerland negotiate separate agreements on various issues.

Enter the potential framework agreement between Switzerland and the EU—intended to replace the 120 existing bilateral agreements—which would bind Switzerland more closely to the EU.

The EU-Swiss Framework Agreement

The framework treaty, which would more or less replace the existing bilateral treaties, would preserve the five main market-access agreements between Switzerland and the EU, acting as a kind of “roof” for these agreements. They pertain to (1) free movement of persons, (2) technical and trade barriers, (3) agriculture, (4) surface transportation, and (5) air transportation.

Four years of negotiations have not resulted in a new agreement, and two-thirds of Swiss voters are skeptical of an agreement redefining Switzerland’s relationship with the European Union. Despite the desire for continued strong Swiss-EU relations, the Swiss government also did not find enough common ground to sign a draft treaty by the EU’s June 2019 deadline.

Once the deadline passed, the EU, which has been seeking a framework agreement for a decade, made good on its threat to end recognition of Swiss stock exchange rules—which is what let EU investors make trades in Switzerland.

Despite much speculation and dire predictions about the negative effect that the battle of the bourses would have on Switzerland, Swiss stocks traded smoothly on July 1, the first day that the Swiss stock exchange opened for business without EU recognition. Since then, shares in Swiss companies have been able to be traded only on local exchanges. A month later, Swiss stocks were still soaring.

There are two overarching issues currently preventing agreement on a Swiss-EU framework treaty:

  • Misalignment of Swiss law with the evolving law of the EU’s single market. Misalignment of laws could lead to distortion of competition if Swiss companies were allowed continued access to the EU single market without having to abide by the same rules as their EU competitors; and
  • Lack of a regulated dispute-settlement mechanism. While both the EU and Switzerland can bring up conflicts with relevant committees, these committees allow the two sides only to make consensus decisions—which means that many a dispute remains unsettled for years.

Of many disagreements on specifics, there are five major sticking points:

  • State subsidies. Switzerland’s cantonal governments, especially, worry that the subsidy rules of the framework agreement would have far-reaching effects on Switzerland’s economy;
  • Wage protections.Unions and parts of the Social Democratic Party do not want existing protections—such as “equal pay for equal work”—to be placed under framework rules;
  • The EU’s “Union Citizens’ Directive.”The EU maintains that this directive is a progression of the existing right to free movement of persons in the Schengen Zone (of which Switzerland is a part), and that Switzerland should long since have adopted it. The directive places Switzerland in a precarious situation: It would extend entitlements of EU workers in Switzerland who become unemployed to claim Swiss social services; it would also make deportations more difficult;
  • Foreign law, foreign courts.Critics maintain that the framework treaty curtails Swiss sovereignty, as Switzerland would have to adopt EU law; and
  • The “guillotine clause.”Should the framework treaty be agreed and later terminated, a termination clause (the so-called guillotine clause) would also cancel any market-access agreements that were concluded while the framework treaty was in force.
    • This guillotine clause would not automatically terminate the five existing market-access agreements. Instead, these five agreements would be suspended if a settlement could not be negotiated within three months after a termination of the framework treaty.

At a length of 34 pages, the proposed framework treaty is a short and manageable document. (Especially compared to the draft of the failed Brexit deal, which ran 585 pages in November 2018). Still, the EU- Swiss framework treaty raises highly complex issues on both sides, and for now, the framework treaty is stalled, the Swiss stock exchange is not formally recognized by the EU, and bilateral ties are strained. How long this state of affairs continues is anyone’s guess, but, as Swiss Foreign Minister Ignazio Cassis said one month after the treaty officially stalled—a quick EU-Swiss deal would be a miracle.

Major Swiss–EU Agreements 

Bilateral agreements allow Switzerland to work closely with the European Union. By entering into specific contractual agreements, both Switzerland and the EU gain market access, and collaborate on key issues:

  • The Bilateral Agreements I led Switzerland toward more economic integration with the EU. In 1992, the Swiss had declined to join the European Economic Area, which would have required Switzerland to adopt part of EU law.
    • One of the most significant Bilateral I agreements is the 2002 Agreement on the Free Movement of Persons which made it easier for EU citizens to work, live, and buy property in Switzerland, and vice versa.
  • The 2004 Bilateral Agreements II expanded economic integration to industries not included in the Bilateral Agreements I, such as food and tourism, and established political cooperation on security, tax and financial fraud, asylum laws, the environment, and retirement issues.
    • With the Bilateral II agreements, Switzerland paved the road to membership in the Schengen/Dublin Association Agreement, which Switzerland would formally join in 2008. The Schengen agreement, which took effect in 1995, established a group of European countries among which border controls were abolished. The 1990 Dublin agreement is a European Union law that determines which member nation is responsible for processing asylum requests from non-European Union refugees and migrants. (Click here for details.)
  • The 2012 agreement on Swiss cooperation with the European Defence Agency (EDA) in the armaments sector in intended to strengthen Switzerland’s economic, research, and technology position.
  • The 2015 Automatic Exchange of Information (AEOI) agreement is intended to prevent cross-border tax evasion. Since 2017, Switzerland and the 28 EU states have been collecting citizens’ account data; the exchange started in 2018.
  • The 2016 European Asylum Support Office (EASO) agreement is intended to support Schengen states whose asylum systems are especially strained, and to help make the Dublin system fairer and more efficient.

Before the European Union: Major Swiss–EEC Agreements

Today’s Swiss–EU trade relations are based on a major agreement (that predates the EU, formally established in 1992) between Switzerland and the European Economic Community (EEC), the precursor to the EU:

  • The 1972 Free Trade Agreement (FTA) created a free trade zone for industrial products between Switzerland and the EEC, and governs the bilateral trade in processed agricultural products. This FTA remains one of the main pillars of trade between Switzerland and the EU today.
  • The 1989 Insurance Agreement allowed Swiss insurers to open agencies and branches in the EEC, and EEC (now European Union) insurers have the same rights in Switzerland. The agreement applies to casualty insurance—such as homeowners, motor vehicle, or travel insurance. (Life and pension insurance are excluded from the agreement.)

Additional information:

“Switzerland and the European Union,” Swiss Federal Department of Foreign Affairs

“Switzerland can afford to gamble on EU referendum,” Lisa Jucca, Reuters

“How should Switzerland position itself with the EU?” Five members of Switzerland’s Foreign Policy Commission present their views

“Europe, not the economy, will decide Swiss political fate,” Claude Longchamp, Swissinfo.ch

EU-Switzerland Institutional Framework Agreement (as of March 26, 2019), European Parliament

“Switzerland’s European policy: Institutional agreement,” Swiss Federal Directorate for European Affairs