Switzerland too Falls Out of Love with the EU

by Don Quijones, Wolf Street:

Did someone say “referendum?”

The EU’s relations with key third-party country Switzerland have sunk to their lowest point in years thanks to a last-minute decision by the European Commission to grant Swiss stock exchanges just one year’s further access to the single market. Switzerland is not a member of the EU but it does have close links to the bloc, having signed 120 bilateral trade agreements with Brussels in the last few decades.

Furious Backlash

“[Access for Switzerland] can be extended provided there is sufficient progress on a common institutional framework,” said Valdis Dombrovskis, the EU commissioner in charge of financial-services policy, just before Christmas. In other words, for Switzerland’s stock exchanges to continue to enjoy full access to the single market, it must accept further integration. By contrast, other foreign exchanges such as those in the US or Hong Kong were given open-ended access.

The decision, which formed part of the EU’s new sweeping MiFID II financial regulations, has triggered a furious backlash from Swiss policymakers. “We are in front of a pile of s***,” thundered Leader of the Social Democrats Christian Levrat. “The relationship with the EU is worse than ever. [Switzerland needs] a serious domestic political debate on the basis of facts.”

Mr Levrat’s comments chime with the views expressed somewhat more diplomatically by the country’s outgoing President Doris Leuthard, who called for a referendum to clarify what sort of future relationship, if any, the country should have with the EU. Some EU member states are putting Switzerland in the same basket as Britain and want to set an example while others see its financial center as a competitive threat that needs to be kept in check, Leuthard complained.

“The bilateral path is important,” she said. “We must therefore clarify our relationship with Europe. We have to know in which direction to go.” As such, a “fundamental referendum would be helpful.”

The Dreaded R-Word

If there’s one word that strikes mortal fear into the heart of any senior EU apparatchik, it’s “referendum.” And in Switzerland referendums are held all the time, for just about any major policy decision, particularly one seeking to amend the country’s constitution.

The last time the country held a major referendum on EU policy was two years ago when Swiss voters, concerned about rising immigration, narrowly supported a proposal to limit the number of workers coming in from the EU, effectively abandoning Switzerland’s commitment to free movement of people. Since then, relations between Berne and Brussels have been strained, even though the Swiss government is yet to introduce any actual restrictions on EU workers out of fear of EU reprisals.

But those reprisals have come anyway. By threatening to block financial access to the single market, the Commission has sharply escalated tensions. According to the Commission, the main reason why it took this decision was that the trading of Swiss shares in the EU is “more widespread” than with the US or Hong Kong, so trading in Switzerland has a “bigger and more immediate impact on the integrity of EU financial markets.” It also noted the “far closer commercial ties binding the EU and Switzerland.”

While there may be an element truth in that, the timing of the move is too convenient to ignore, coming just days after the EU’s chief Brexit negotiator, Michel Barnier, warned that financial services wouldn’t be included in an eventual post-Brexit trade agreement, much to the dismay of City of London representatives. “There is no place (for financial services),” he said. “In leaving the single market, (UK-based banks) lose the financial services passport.”

Whether the trade talks do ultimately extend to finance or not, one thing is now abundantly clear: the EU is determined to use market access for U.K. banks and insurers as leverage on other issues, just as it has done with Switzerland.

“That’s what they do with smaller states, and that’s what they will do to Britain as well,” Karel Lannoo, head of the Centre for European Policy Studies in Brussels, told Bloomberg. “We’ve seen it in the [Brexit] negotiations. You will continue to pay as long as you’re a member of the single market, even if you have politically nothing to say.” In other words, you get to enjoy all the obligations of an EU Member State with none of the rights.

Dangerous Game

The ploy is not without its risks. The EU may be a bigger fish than either Switzerland or the UK and both countries may depend heavily on the EU as its prime export market, but in using the former as a pawn in its negotiations with the latter, the EU risks alienating a nation that jealously guards its independence, neutrality and national sovereignty more than arguably any other in Europe.

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