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On Thursday, 27 May 2021, The Federal Council of Switzerland terminated negotiations with the EU regarding the so-called “Framework Agreement”. Originally negotiated between 2014 and 2018, the agreement was designed to consolidate Switzerland’s relationship with the EU, currently governed by over 100 bi-lateral treaties – some of which date back to 1972. These treaties cover areas such as free movement of people, industrial standards, agricultural products, medical devices, civil aviation, land transport and state aid to name just a few.

From an EU standpoint, the main focus of the Framework Agreement was claimed to be to ensure that anyone operating in the EU internal market conforms to the same rules and conditions. From the Swiss perspective, the decision to walk away from talks was based on 3 key areas: salary protection, state aid rules, and the access of EU citizens to Swiss social security benefits. Many Swiss voters saw the Framework Agreement as a step too far in these areas, and a final nail in the government’s attempt at backdoor EU membership, after this was rejected in a national vote several decades ago. The Framework Agreement implies the Swiss electorate accept future decisions from Brussels without any say – contrary to the Swiss constitution.

The EU Commission has since issued an indirect warning that the rejection of the deal will have serious consequences for Switzerland with regard to future agreements for participating in the single EU market. As Switzerland currently ranks as the EU’s fourth largest trading partner, failure to finalise the agreement could have a damaging economic effect on both sides. As individual bi-lateral treaties become outdated they will need to be renewed or renegotiated. As a more strained Swiss – EU relationship appears to be on the horizon, we take a look at some of the possible scenarios.

First, a snapshot of the current situation:

  • While Switzerland chose to remain outside the 27-nation bloc, it has always maintained a close relationship with the EU, which is currently by far its largest trading partner.
  • Roughly 2/3 of imports to Switzerland come from the EU while in return 50% of Switzerland’s exports go to the EU.
  • An estimated 1.4 million EU nationals live in Switzerland, while 450,000 Swiss citizens are resident in various EU countries.
  • Approximately 120 agreements were concluded over recent decades between Switzerland and the EU.
  • In 1999, Switzerland and the EU signed seven agreements, also covering the free movement of persons – affording citizens from each side the right to live and work in the EU or Switzerland, provided they had a job or other sources of income.
  • For some time now, the EU has attempted to enforce an overlying framework deal insisting that no new bilateral accords could be signed until then.

As a result of the breakdown in negotiations, relations between Switzerland and the EU could deteriorate, with existing bilateral treaties on issues such as trade becoming outdated. Many of the bilateral agreements are already considered by some to be out of date.

The first bi-lateral agreement of immediate consequence to expire, is that of regulatory permissions allowing Swiss-certified medical devices to be sold in the EU.

Ignazio Cassis, a Swiss physician and FDP Party politician and serving Member of the Swiss Federal Council since 2017 recently commented: There will of course be a readjustment situation on the part of certain sectors of the industry which will find themselves facing some difficulties to overcome. The federal council will do everything possible to give them a hand, but it is undeniable that it is an effort that the whole of Switzerland must make and not just politics.”

In reality this means that all Swiss manufacturers and distributors of medical devices have now been demoted to third country status for all medical devices. Specifically, companies have to appoint a European authorised representative for all medical devices exported to the EU and a Swiss authorised representative for all medical devices imported into Switzerland. Commenting on this change, Industry body Swiss Medtech said new administrative requirements will cost the sector around CHF114 million initially and then CHF75 million annually thereafter.

Although Swiss leaders said Switzerland hoped to remain a close partner of the 27-nation EU bloc, recent examples from Brexit don’t bode well for Switzerland.

  • George Riekeles, Associate Director of the European Policy Centre thinktank in Brussels, said the decision to walk away could prove expensive for Switzerland with consequences which will be felt immediately. In fact, it is estimated that as the “conscious decoupling” continues, this could cost Switzerland up to €1.2bn (€140 per capita) per year.
  • Jan-Egbert Sturm, Director of the KOF Swiss Economic Institute, was recently quoted as saying that without some kind of framework agreement with the EU, it will become increasingly difficult for the Swiss economy to remain competitive.
  • Industry Sector Lobby Swissmem has called barrier-free access to the single market essential. MEM industries export 80% of their products, with around 55% going to the EU.

There has been a mixed emotional response in Switzerland regarding the decision to walk away from EU Framework Agreement negotiations. But what are the short to medium term consequences?

  • With prospects of health care cooperation and labour market supply potentially about to suffer, the Swiss mechanical engineering sector could be next to face difficulties with an expiring mutual agreement due to occur in 2-3 years.
  • The secure supply of electricity versus the increasing demand for electricity due to climate change, means an electricity agreement in particular is vital and urgent, not only for Swiss industry, but also for countries like Germany who are becoming heavily dependent on Switzerland as a source of stored hydroelectric energy during peak times as they replace their fossil fuel and nuclear generation by weather dependent renewables.
  • Failure to sign a Framework Agreement could also hamper access of air carriers from Switzerland to the EU’s internal market.
  • In terms of exports: A study by the BAK Economics think-tank this month found that setbacks to trade resulting from technical barriers could reduce goods exports of the sectors directly affected by around 12% cumulatively by 2040.
  • Other accords which could also have negative effects:
    • As with Brexit, the equivalency enjoyed by the Swiss stock market with the EU has also been terminated by Brussels and this reciprocated by Bern.
    • The Swiss research community remains anxious about Switzerland’s participation in the Horizon Europe research programme, although to date the EU members have pragmatically voted to keep them.
  • In addition to outdated bilateral agreements with the EU, there is also a danger with some non-European companies and start-ups shunning Switzerland as a site for their European headquarters.

Although there is obviously a certain amount of brinkmanship in the air, Paolo Dardanelli, a reader in comparative politics at the University of Kent, UK said that Switzerland had to find a way, or modus vivendi with the EU. Dardanelli also noted that due to Brexit, the situation with Switzerland and the EU has become more complicated. The EU is trying to avoid loopholes and exceptions (their so called “Cherry picking”) at all costs. In the absence of any such flexiblity, a negotiated solution does not appear likely.

Clive H. Church, author of “A Concise History of Switzerland” recently stated that Switzerland’s relationship with the EU has also drawn comparisons with that of Britain, especially now, that it has put the sovereignty of its people above economic gain. In fact in practically every other sense but the word, Switzerland is faced with a similar decision to that of the UK and Brexit.

The Swiss confederation has been a federal republic since 1848. But its roots date back much further to 1291 when an alliance was formed bringing the first three Swiss cantons of Uri, Schwyz and Unterwalden together. At the heart of Swiss culture lies direct democracy in which the Swiss people themselves decide on policy initiatives. This bottom up approach is counter to the EU’s apparent concept of democracy. Having the EU dictate their policy to the Swiss was never going to be an easy sell and now as the majority of the Swiss electorate have voted against closer ties with the EU, a period of patience and flexibility lies ahead.

Switzerland starts with the position as one of the strongest and most diverse economies worldwide, with its neutrality and independent character respected globally. Landlocked and surrounded by the EU it has so far been tolerated. It remains to be seen whether Switzerland will turn toward the EU and eventually capitulate, or begin to focus on strengthening its many global ties. As the renowned Swiss psychologist Jean Piaget famously said: “Intelligence is what you use when you don’t know what to do”.

As Switzerland’s most trusted payroll provider, Accurity GmbH has over 20 years’ experience in changing times, providing clients with the best advice about their payroll, pensions and social security and living options ensuring they make the right decisions. If you would like to speak with one of our team of experts, simply contact us now to see how we can make Switzerland easy for you!