Wednesday, 15 December 2010

EU gets tough with Switzerland

Any Swiss citizen working in the EU, or vice versa, should take note of some stern language used toward Switzerland by EU foreign ministers in Brussels yesterday. Warning Switzerland that the system of bilateral agreements that govern the Alpine country's relationship with the EU has "clearly reached its limits," the ministers called the current arrangement incoherent and unwieldy. Switzerland, they warned, is in danger of losing its rights for free movement of goods, persons, services, and capital with its neighbours.

Switzerland's relationship with the EU is governed by a complex system of bilateral agreements which make the country a sort of "semi-member state". Switzerland has to follow certain areas of EU law, but doesn't have to follow others. It participates in the free movement provisions of EU law, which means that any EU citizen can work in Switzerland, and vice versa. It also participates in certain common market rules, but is not part of the customs union (which is why you can buy tax-free goods when flying from Switzerland to elsewhere in Europe). At the same time, as a non-EU member it gets no European Commissioner, has no vote in the European Council and does not have MEPs in the European Parliament.

This semi-member arrangement also exists between the EU and Norway, Iceland and Liechtenstein – with one significant difference. Those other three semi-members are part of a specific organisation that has a set code for interactions with the EU – the European Economic Area. This entity was created in 1994 after passage of the Maastricht Treaty (which created the European Union) meant that it was no longer tenable for a country in Western Europe to be completely outside the common market. So the EEA was created for countries that chose not to join.

But in 1992 Swiss voters rejected EEA membership in a referendum, leaving the government with a problem. It was economically impossible for Switzerland to be an unconnected island in the middle of the EU common market, but voters had rejected membership in the mechanism that would allow Switzerland to participate in that market in any way. So the Swiss government went around the county's strict direct democracy requirements and instead worked out a series of bilateral accords with Brussels that did not require passage by referendum. These accords essentially equate to the same thing as EEA membership, but instead of EU law applying automatically as it does in the EEA, Switzerland has to enact the laws passed by Brussels. Importantly, these accords come with an 'all or nothing' stipulation. In theory, if one accord is violated, they all must be torn up and Switzerland would be left economically isolated.

But since then, Switzerland's adherence to the accords it signed with Brussels has been inconsistent – and the country's violations of its obligations are only getting more frequent as time goes on. Brussels has been routinely angry that Swiss cantons have set up laws that favour Swiss companies over other European companies – a direct violation of the accords allowing the country access to the common market. What has particularly irked Brussels is the favourable corporate tax rates that certain Swiss cantons give to Swiss companies, which many consider to be domestic subsidies.

Switzerland has long been accused of being a haven for tax evasion and fraud for EU citizens, and Brussels has accused the country of allowing this situation even though it violates the accords. Last year Brussels went after Switzerland demanding that it open its accounts and enable the automatic exchange of information with other European banks. But since then Brussels has have backed off from this demand.

The country has also been accused of violating its free movement obligations, for instance by requiring EU citizens to apply to live in the country 8 days before they enter. This is a direct violation of the accords, as an EU citizen should never have to apply to live in a country within the common market. The recent referendum which will establish a law expelling EU citizens from Switzerland if they commit a crime is just the latest Swiss law which directly violates its agreements with the EU.

By contrast, the EEA countries of Iceland and Norway have mostly lived up to their obligations – and this was recognised by the ministers yesterday in their resolution. The main message of the resolution passed yesterday seemed to be that the relationship between Switzerland and the EU has become too much of a one-way street – Switzerland gets all the benefits of having access to the common market but it is not meeting its obligations to keep that market common. The highly complex set of multiple agreements, they wrote, are not guaranteeing that Switzerland adopts EU law. This damages the "necessary homogeneity" of the market, and is not sustainable.

Swiss reaction

According to the Swiss press, the Swiss government in Bern has been unphased by this condemnation from Brussels. This is perhaps unsurprising, after all the EU isn't exactly negotiating from a position of strength these days. Given all of the bloc's internal problems, picking a fight with Switzerland is not likely high on their policy agenda. And given that Switzerland has managed to escape the economic crisis unscathed and still acts as Europe's banker, Brussels would be very hesitant to cut the country off right now, to say the least. So Bern has some time. But once the EU gets beyond this difficult period, foreign ministers have signalled they will surely turn their attention to the rapidly deteriorating relationship with Switzerland. And so, Bern has a few years to plan its next move.

In October the Swiss issued a report suggesting a "model agreement" which could solve the problem. Under this arrangement Switzerland would automatically accept EU law like in EEA countries, but Bern would still reserve the right to put certain laws to a vote by parliament or a referendum if it so chooses. If the law is rejected, Brussels could take retaliatory measures, but the measures would have to be put to an independent tribunal to make sure they are proportionate.

The compromise might be acceptable to Brussels now, but it all depends on what kind of position of strength they are in whenever these negotiations actually happen. 2011 is a federal election year in Switzerland, and like in many European countries, the EU is an issue politicians never want to talk about during a campaign. So there's no way there's going to be any movement on this in 2011. That means we're probably looking at late 2012 or 2013 for serious negotiations on this to start. Given how quickly situations seem to change these days, we could be looking at a very different economic landscape in Europe in three years. If the EU has recovered from the economic crisis by 2013, Bern may find Brussels a bit less willing to compromise on a new Swiss relationship with the EU.

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