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10 December 2019

Negotiations between Switzerland and the European Union (EU) on an institutional framework agreement (German only) aimed at placing bilateral relations between Switzerland and the EU on a more sustainable footing and paving the way for the conclusion of further market access agreements have stalled in recent months. In the summer of 2019, the EU reacted by withdrawing the Swiss stock exchange equivalence. For the Swiss financial centre and also for other economically important sectors, it is of great importance that an agreement between Switzerland and the EU be reached next year.

The framework agreement as the cornerstone of relations with the EU

Switzerland maintains a close relationship with the EU not only at the economic level, but also on the political and cultural levels. In total, there are more than 120 bilateral agreements granting Switzerland access to the EU internal market and enabling Switzerland to be linked to the EU in a sectoral manner similar to membership.

The EU has long criticised the fact that the current treaty network of bilateral agreements does not guarantee homogeneity in the application and further development of the law and that there is no institutional framework overall. At the centre of criticism is the fact that most agreements do not contain an explicit obligation for Switzerland to regularly adapt market access agreements to relevant developments in EU law. The EU therefore makes new market access agreements dependent on the conclusion of a framework agreement that regulates institutional issues in a uniform and superordinate manner. In addition to the dynamic further development of the bilateral agreements, this agreement also provides for a mechanism for settling disputes and overall increases legal certainty and transparency in decision-making.

The scope of the framework agreement is limited to the existing five bilateral market access agreements (free movement of persons, removal of technical barriers to trade, land transport, air transport and agriculture) and to all future market access agreements.

Negotiations currently in deadlock

After almost five years of negotiations, the Federal Council published the draft framework agreement with the EU in December 2018 and sent it to a domestic policy consultation.

In its media release of 7 June 2019, the Federal Council approved the report on consultations on the institutional agreement between Switzerland and the EU, but pointed out that certain issues still needed to be clarified. The consultation showed that the political left and right are united against the agreement, albeit for different reasons. While the left criticises primarily that wage protection would be undermined, representatives of the right complain that "foreign judges" could rule on Swiss affairs.

Because the Federal Council has not yet been able to have the negotiated agreement signed, the EU Commission has already reacted with retaliatory measures. Since 1 July 2019, the EU has no longer recognised Swiss stock exchange regulation as equivalent to EU stock exchange regulation. This is a purely politically motivated manoeuvre for which there is no objective reason.

It is not yet clear how much longer the negotiations will take. However, before the vote on the initiative for moderate immigration ('limitation initiative") launched by the Swiss People's Party (Schweizerischen Volkspartei) in May 2020, hardly any significant progress can be expected in the negotiations. The adoption of the initiative would result in the termination of the agreements on the free movement of persons, which would make a framework agreement superfluous (cf. blog article "No Limitation for Europeans").

Federal Council demands clarification of disputed points

The internal policy consultation process has shown that the current version of the framework agreement does not enjoy widespread support. Particular criticism is levelled at the softening of wage protection, state subsidies and ambiguities regarding the EU Citizenship Directive, which creates additional entitlements for EU citizens in the area of social assistance and family reunification. Another highly controversial issue is the dispute settlement procedure, which is intended to resolve disputes between EU law and Swiss law, and the dynamic adoption of the law, which obliges Switzerland to adopt new EU law on an ongoing basis. Contrary to what the opponents of the agreement claim, however, this is not an automatic adoption of EU law, since Switzerland can decide separately on each adoption of EU law in the planned mechanism for legal development and the constitutional rights are always observed - the referendum option is therefore fully preserved.

What happens if the framework agreement fails?

A failure of the contract negotiations would have negative consequences for Switzerland and would entail an incalculable risk. For one thing, it would make it impossible to conclude further market access agreements with the EU, and for another, there could even be a risk of the existing agreements being dropped or suspended.

For example, it could be expected that the current negotiations on the electricity agreement and in the areas of public health and food safety would be broken off. In addition, it can be assumed that the EU could, in addition to the non-recognition of the equivalence of the Swiss stock exchange, react with further retaliatory measures such as the exclusion of Switzerland from the continuation of the EU research programme Horizon 2021.

A failure of the negotiations would have devastating consequences not only for the Swiss financial centre, but also for the export industry. In view of the fact that around 55 percent of all Swiss exports go to the EU, non-discriminatory access to the European internal market is of great importance for Switzerland. For this reason, an agreement with the EU as Switzerland's most important trading partner is unavoidable.

In the event that no agreement is reached even after the vote in spring 2020, the question of a Plan B arises. In order to mitigate the negative consequences of a possible non-acceptance and to allow negotiations to resume at a later date, the conclusion of an interim agreement could be considered. This would make it clear that while Switzerland has no right to conclude further market access agreements, the existing agreements would remain in force.

Not least because of the threat of a suspension of cohesion payments, which Switzerland will have to pay to the new EU member states over the next 10 years, the EU should also have an interest in such an agreement. The Council of States and the National Council have agreed on the amount of CHF 1.3 billion for cohesion payments, but have made the payments conditional on the EU refraining from discriminatory measures such as the withdrawal of Swiss stock exchange equivalence.

It remains to be seen how the EU will position itself on the framework agreement in the coming year under the new head of the EU Commission, Ursula von der Leyen.

Our Immigration Team will be happy to answer any further questions you may have.

Authors: Blanka Batschwaroff & Urs Haegi

Topics: ImmigrationInstitutional Framework AgreementSwiss stock exchange equivalencebilateral agreements

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