Amid Brexit Drama, EU Flexes Its Muscles With Swiss
Brussels has ramped up pressure on Switzerland to accept an overhaul of their complex ties
Britain isn’t the only European country tangling with Brussels over future relations with the European Union. Switzerland is in its crosshairs too.
The EU has escalated pressure on Switzerland—which isn’t in the EU but has extensive relations with the bloc—to accept an overhaul of their complex bilateral ties. On Friday, Switzerland moved to protect its stock exchanges should the EU press forward with plans to end a longstanding market-access agreement at the end of the year.
The pressure is deepening tensions with Switzerland, where anti-EU parties are making fresh attempts to limit immigration from the bloc. For the U.K., which has struggled through more than 18 months of tricky talks with the EU on its planned departure, Brussels’s approach to Switzerland offers a reminder that it can be as vigilant in pressing its rules and standards on nonmembers as on those within the bloc, and it isn’t shy about applying leverage to get what it wants.
The EU and Switzerland have been in discussions for years about roughly 120 bilateral treaties governing Swiss-EU ties. They are negotiating what they call a new framework agreement, which would bundle all the treaties into one accord. Brussels wants the framework agreement to ensure that Switzerland can’t renege on certain obligations, like free movement of people from the EU, without paying a broader price in terms of EU market access.
Swiss officials have repeatedly said they are pursuing the same goal as the EU but talks have dragged on and the Swiss government has repeatedly delayed the target date for completing negotiations and signing a broader agreement.
One year ago, the EU gave itself leverage over the Swiss to advance the talks. It involves the ability of Swiss equities to be traded on platforms within the EU.
These types of agreements, known as equivalence, are common among countries in Asia, Europe and the Americas to facilitate trading activity world-wide. This way, shares of Swiss companies like Nestlé SA and Novartis AG—which have among the largest market capitalizations in Europe—can be bought and sold by investors through platforms in Zurich, as well as the likes of Frankfurt and Milan.
These arrangements are typically unlimited. But last December, the European Commission, the EU’s executive arm, granted Switzerland only a one-year extension. Crucially, Brussels tied a new extension to making significant progress on the broader framework agreement. EU officials say negotiators have a text ready that needs political backing.
“It’s basically now up to Switzerland to take action and to decide,” said commission spokesman Alexander Winterstein on Tuesday.
The Swiss have complained that the EU is employing hardball tactics by turning a technical arrangement on market access into a political tool. The Swiss Bankers Association has called the “unrelated” linking of the two issues “incomprehensible.” It applauded the government’s decision Friday.
On Friday, the Swiss Federal Council said that, effective Jan. 1, 2019, EU-based trading venues must cease trading in Swiss shares unless the EU extends the equivalence agreement. EU banks would still be able to use Swiss platforms or those in non-EU countries.
A commission spokesman said Friday that the EU would assess Switzerland’s decision.
About 70% of shares in blue-chip Swiss companies are traded through the Switzerland-based SIX exchange. If EU investors lost access, liquidity could dry up, affecting not just Swiss companies but also the country’s reputation as a financial center. For that reason, the Swiss billed Friday’s move as protective, not retaliatory. There is an escape clause in the measure that would nullify it if an equivalence agreement is reached.
“The best solution for all affected market players in Switzerland and abroad remains a swift and unlimited extension of stock market equivalence,” the Swiss Federal Council said Friday, which was its self-imposed deadline to announce how it would protect its exchanges.
The EU’s powers to issue and revoke equivalency across financial sectors also haunted the Brexit talks. The U.K. pushed for the EU to create new mechanisms that would have given Britain more time to respond to a threat to remove equivalence from a particular part of the financial sector.
Now the EU can cut off a country’s banks, insurers or fund managers from providing a service in the EU with only 30 days’ notice. The EU refused to budge but it has committed to completing a review of U.K. equivalency by July 2020 provided the U.K. Parliament backs Britain’s withdrawal agreement.