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Brexit Bulletin: Why the EU-Swiss talks this autumn matter for the UK

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Formal EU-UK Brexit talks are expected to start in 2017, but negotiations between the bloc and Switzerland over the future of free movement will turn hot before the end of the year.

Brexiters as well as several independent experts continue to speculate that the UK’s status as the world’s fifth largest economy will enable Westminster to negotiate a preferential deal with the EU, retaining access to the single market while also regaining the power to meaningfully limit inward migration. The forthcoming Swiss-EU talks, however, highlight that these hopes will be difficult to materialize.

The Swiss-EU negotiations over introducing unilateral curbs on EU migration are relevant for those following Brexit, not only as a case study of what is in store for future EU-UK talks. The EU’s deal with Switzerland, a country which is- like the UK will be in future- a non-EU member formally outside the European Economic Area (EEA), will almost certainly set thresholds for the reciprocity of market access and freedom of movement behind which the EU can hardly afford to fall back in future EU-UK discussions.

While Westminster is still trying to figure out its strategy, we are taking a closer look at the Swiss case.

Swiss-EU relations

In a binding referendum in early 2014, Swiss voters ordered their government to limit migration from across the EU and restrict foreigners’ access to Swiss benefit payments. As in the case of the UK’s Brexit vote, the Swiss voted to restrict immigration despite warnings of the negative economic impact that could be caused by the EU responding by restricting access to the single market. The EU is the biggest destination for Swiss exports.

Swiss voters narrowly opted for the initiative, backed by the country’s strongest political force, Christoph Blocher’s at times outright xenophobic Swiss People’s Party (SVP). In talks between the federal council (the Swiss government) and the European Commission since then, the EU has made it very clear that the so-called bilaterals between the two parties - Swiss-EU trade and cooperation agreements in vital areas such as agriculture, transport, public procurement, and science/education - will only be maintained if a core provision of these agreements, freedom of movement for EU citizens, is maintained.

The size of the trading relationship between the EU and Switzerland should be seen less of an asset and rather as a warning sign for the UK, highlighting the EU’s determination to stick to its principles throughout negotiations. This is especially true in relations with key regional peers. On the one hand, the EU-27’s exports to the UK are approximately twice as large as the bloc’s exports to Switzerland; on the other, Switzerland is by no means a minor trading partner for Europe. At approximately EUR 150bn, the Alpine republic was the third largest importer of EU-made goods in 2015, beaten only by the world’s two largest economies, the US (ca. EUR 370bn) and, more narrowly, China (ca. EUR 170bn). It is comfortably a larger market for EU goods than, for example, Turkey (ca. EUR 80bn).

Unlike Iceland, Liechtenstein and Norway, Switzerland is not a member of the European Economic Area (EEA) and not part of the single market. Swiss voters blocked the country’s planned accession in a referendum in the 1990s. However, the ties the country has established since then, mainly through bilaterals, in fact largely resemble a EEA relationship. This is mainly due to the so-called guillotine clause included in the initial set of bilateral agreements, stipulating that if one individual deal falls (for instance, the agreement on free movement), all others will be cancelled, too.

The EU has for years tried to use its EEA-like leverage over Switzerland, demanding that Bern further formalize its EU relationship in a so-called framework agreement that would sit above or potentially even replace the largely interconnected but separate bilaterals. Without such an agreement in place, the EU has come to the conclusion that it will not conclude further bilateral agreements, freezing Switzerland’s level of EU market access at current levels.

Both issues - the negotiations about migration in light of the 2014 referendum and stalling talks about a new framework agreement- will enter a decisive phase of negotiation between September and the end of this year.

Calm summer, hot autumn

Swiss Federal President Johann Schneider-Ammann will host EU Commission President Jean-Claude Juncker in Zurich on 19 September. They will likely discuss a draft version of the proposed framework agreement, the result of 15 rounds of technical talks since 2014. If a breakthrough can be achieved, the Commission will start consulting EU member states in earnest. If everything goes according to plan, work on the agreement could be concluded by the end of December 2016.

Since 2014, and as a result of the talks, good progress seems to have been made on the Swiss incorporation and interpretation of EU law. However, the issue of dispute settlement - effectively sovereignty, a key question in the new age of identity politics- still poses problems.

The EU insists that its European Court of Justice (ECJ) shall have the last word on disputes that might arise under the bilaterals, while Switzerland wants to limit the ECJ’s competencies to only those aspects of EU law that Bern has incorporated. This would exclude other special agreements achieved between both sides. A related question is that of the future of the guillotine clause, which Switzerland would like to scrap but the EU is unwilling to give up.

A resolution of these outstanding questions by the end of this year would mean the framework agreement is concluded at the same time the Swiss parliament is obliged to have passed legislation to limit EU migration in line with the 2014 referendum. The referendum set out a three year limit for the result to be implemented into Swiss legislation.

The converging timeframes lend themselves to a package solution connecting both issues. With a view to domestic Swiss politics, however, this strategy is not without risks. Unsurprisingly, Swiss hopes for a comprehensive cap on immigration have not been fulfilled in the EU talks, which may offer parallels for how they might end up for the UK too. Some limited, sectoral or regional solutions, forcing Swiss businesses to look for employees at home first, appear to be the maximum possible without the caps and quotas Brussels wholeheartedly rejects.

These relatively minor changes to EU immigration legislation, at least as a temporary solution, would likely be in line with the obligations under the 2014 referendum. However, the presentation of a draft framework agreement at the same time would raise political tensions within the all- party government, with the SVP making clear that it will fight against the agreement (a further referendum would likely be required in any case to approve the new framework agreement). A package deal therefore risks that any compromise on migration also falls flat, with the risk that the EU enacts the guillotine clause on all other Swiss-EU bilateral agreements.

Swiss EU relations will continue to spell significant uncertainty until at least 2019, by which time yet another referendum - this time on reversing the 2014 anti-immigration clauses - will have to be held. By October 2016, Bern will have to decide whether it counters the respective popular initiative with its own proposal in the referendum to be held by 2019. The government will probably do so, advocating the introduction of an all-new article into the Swiss constitution to clarify EU relations once and for all.

In recent public opinion polls, Swiss voters- in light of the obvious impossibility to retain market access while capping immigration - seem to clearly favor the presence of the existing bilaterals with the EU over pushing for new migration caps. It cannot be ruled out that towards the end of this decade, the initially eurosceptic conversation in Switzerland ultimately yields closer EU integration. In any case, the way in which the EU’s Swiss talks have so far been evolving will likely further constrain the UK’s options once Brexit talks commence.

Brexit Bulletin is a joint publication produced by a team of experts at the heart of the European quarter in Brussels and in London.

The views and opinions in these articles are solely of the authors and do not necessarily reflect those of Teneo. They are offered to stimulate thought and discussion and not as legal, financial, accounting, tax or other professional advice or counsel.

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