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Deal or no deal Swiss battles with EU are ominous for UK fund managers

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(© Keystone / Gaetan Bally)

The Swiss have so far kept at bay a European Commission that is growling like an angry bear at the country’s refusal to finish a deal that settles the near three decades of negotiations about Switzerland’s future relationship with the EU.

Unlike British politicians, who since Boris Johnson became prime minister have been gung ho about rupturing with Europe, the Swiss political elite have been twisting and turning, trying to avoid an abrupt break while preventing a domestic backlash that could turn a difficult relationship into a serious conflict.

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At the heart of today’s fight is the concept of “equivalence”, the power that Brussels has to deem any other country’s financial system to be regulated in compliance with and accepted by EU member states.

The decision is entirely in the hands of the commission. It is not negotiated with other countries, including a future Brexit Britain, and it is usually time-limited, so equivalence can be turned on and off at the commission’s pleasure.

With the end of the Cold War, Finland, Austria and Sweden all became EU member states. Norway did not but accepted EEA membership, which de facto means obeying all EU rules and laws, including freedom of movement and accepting all important ECJ decisions.

20 years of haggling

Switzerland rejected the EEA option. Instead Bern developed a tortuous bilateral relationship with Brussels, negotiated agreement by agreement.

After more than 20 years of haggling, both sides agreed this was not a grown-up way to proceed. The Swiss — with their three languages, devolved government and long tradition of rule of law, peace and democracy — were arguably more European than any EU member state.

But the politics of Switzerland remain brittle with the strong nationalist, anti-European grouping in the Swiss People’s Party, which wins up to 30% of the vote in Swiss national council elections. That gives the party two members of the seven-strong Swiss Federal Council — in effect the governing cabinet for decisions affecting the entire confederal state.

The Swiss People’s Party stock in trade is hostility to immigrants of all sorts even though 26% of the Swiss population was born in an EU member state. Like other anti-EU nationalist parties, the Swiss People’s Party constantly beats the drum against Brussels, EU institutions like the ECJ and the principle of freedom of movement.

Yet Swiss business is more integrated into Europe than the economies of other EU member states. Swiss banks, insurers and traders have set up major offices in EU capitals, notably London, to get full unfettered access to the EU markets. Swiss executives often have an EU passport from a parent or grandparent who came to Switzerland to work and use it to obtain residence and other benefits under EU citizenship rules.

The main stumbling block over completing and ratifying the EU-Swiss framework agreement lies in the issue of who controls the Swiss labour market. Specifically, the Swiss trade unions insist that before a worker from the EU is offered a job, it should be first advertised to see if local Swiss workers want it. For Brussels, even this minor limit on absolute freedom of movement is too much and the ECJ case-law has usually sided with an ultraliberal anti-union interpretation of workers moving from a low-wage to a better-paid labour market.

Suspended equivalence

To put more pressure on the Swiss, the commission decided to suspend the equivalence afforded to the Swiss bourses, principally the main SIX exchange in Zurich. In return, the Swiss government announced it would ban trading in Swiss shares on EU bourses.

This sounds like a sharp tit-for-tat but in effect both sides have pulled back to lick their wounds and wait to see what this autumn’s Swiss elections will bring.

However, the fact that the commission has the discretion to grant and withdraw equivalence and is willing to use this power as pressure has come as a shock.

In London, there is a lot of loose talk about the City easily obtaining equivalence even outside the EU. But as the Swiss story reveals, a rejection of the ECJ and freedom of movement as well as other aspects of EU law and regulations weighs in the scales on whether Brussels grants or withholds equivalence across a range of financial services.

The Bern-Brussels stand-off over equivalence is therefore a marker for much bigger tensions that will emerge if the politics of Brexit in London turn towards a full no-deal amputation. Even if a negotiated settlement is reached, maybe taking as long as the quarter century of Swiss-EU talks, it will still be in the EU’s hands to turn equivalence on and off at will.

Denis MacShane is the UK’s former Europe minister. His next book, ‘Brexeternity: The Uncertain Future of Britain’, will be published in September.

Copyright The Financial Times Limited 2019


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