13 September 2016

The EU’s “Swiss Model”: will it even exist in 2017?

Brexiteers are rushing to come forward with proposals for the UK’s future relationship with the EU that might be workable. Acronyms are bandied about furiously but a frequent reference is to the “Swiss model”. At the height of the summer holidays, the Financial Times ran a front page story that “the City” had already given up on its demands for “passporting” rights into the Single Market and had decided to push for the Swiss model instead. The story was immediately branded as “grossly misleading” by the British Bankers Association – authors of the report.

However, it is clear that serious thought is being given to the possibility of different approaches. So what actually is this model? Perhaps more importantly, will it even exist in its current form by the time the UK gets into serious negotiations with the EU on future trading relationships? In early September, the Swiss Government seemed to start backing down on the stand-off with the EU on free movement of people. Will that be enough?

There is a very clear message for the UK’s financial sector here: even if the UK Parliament decided that “Vote Leave, take control” meant that Parliament would simply enact all existing EU Regulations into UK law, it would have to continue to follow all amendments – MiFID 3, CRD 5 etc. - as they inevitably flow through in the years ahead. That is the core of the power struggle that is playing out with Switzerland. If the Single Market is to remain “single”, then all those who have access to it must agree to play by the rules that the EU alone has set for its own benefit.

Time is running out for the Swiss model. Unless the recent proposals by the Swiss government on migrant quotas are accepted by the EU, the December 2016 European Council will take a hard line – unless it is willing to reverse its policy thrust of the last few years. Either way, there will be a clear message for the Brexit negotiations – whenever they start.

First – a bit of background. Switzerland is famous for its direct democracy whereby referenda can take decisions that bind the government as they actually become part of the constitution. However – and rather oddly – the country does not have a Constitutional Court so there is no way of forcing the government to enact detailed policies that really do implement the general `will of the people’ as expressed in the referendum wording.

Second – a bit of history. Switzerland joined the European Free Trade Area (EFTA) when it was set up in 1960 – largely driven by the desire of Britain to have an alternative model to the Common Market. Britain then abandoned this particular ship in 1973 and joined the rival ship, leaving four states behind. As time wore on, the Common Market morphed into the European Union and EFTA realised it needed a better trading relationship with the EU so the European Economic Area came into existence in 1994 to give EFTA states an opportunity to participate in the Single Market. But a referendum in Switzerland turned down EEA membership, stranding it in a “free trade” time warp.

As the EU is Switzerland’s largest trading partner by far, the Swiss government set about respecting the principle of the referendum but achieving much of the substance of Single Market membership through a web of bilateral treaties with EU – now exceeding 200. The original seven agreements include free movement of people and incorporate the “guillotine” clause – revoking one, revokes all.

In February 2014, a referendum voted against continued “mass immigration”, requiring a quota system to be implemented within three years. This would breach the bilateral agreement with the EU which immediately and formally rejected a request to renegotiate the agreement. Without a solution, the Swiss model will unravel in February 2017– ironically just at the time the UK may well serve its Article 50 Notice of its intention to leave the EU.

However, it had become ever more clear after the Lisbon Treaty gave the European Parliament co-decision powers with the Member States in the European Council that the notion of hundreds of bilateral treaties on Single Market issues between 8 million Swiss and 500 million EU was unrealistic. So, the European Council declared - in December 2012 - that there will be no more treaties on Single Market issues unless Switzerland and the EU agree on a new legal framework similar to the EEA. In effect, Switzerland would have to adopt the “EEA system” of automatically applying EU legislation.

Following the “mass immigration” referendum, the European Council hardened its position and decided that there must be a “comprehensive assessment” of EU-Swiss relations before arriving at any conclusions on the institutional arrangements for Swiss participation in the Single Market.  The Council’s basic concern is to preserve homogeneity and legal certainty in the Single Market.

This goal was re-iterated by the co-legislator – the European Parliament - in a 2015 report on relations with Switzerland. It called for “timely and as close to simultaneously as possible implementation of the relevant Single Market legislation by the EEA EFTA states… in order to uphold the integrity of the Single Market”. In the meantime, negotiations on such items as electricity treaties and improved access for financial services were put on hold. The question now is whether they will ever come out of the deep freeze? Or will they be joined by the rest of the EU’s “bilaterals” with Switzerland?

© Graham Bishop