The refusal of the Alpine state to agree to all conditions for closer single market ties with the EU - for instance on vexed issues such as free movement - has led Swiss policymakers to abandon talks. Ironically, this is happening at at time when Switzerland and the UK are pushing for closer trade ties.
Long-running talks to meld Switzerland more closely to the European Union’s single market collapsed this week, with issues such as free movement across national borders proving to be a barrier to a deal.
The Swiss government has abandoned a draft 2018 treaty that would have strengthened ties to its largest trading partner.
A new treaty would have supplanted scores of bilateral accords, meaning that Switzerland would routinely adopt single market rules, as well as resolve disputes.
"Without this agreement, this modernisation of our relationship will not be possible and our bilateral agreements will inevitably age: 50 years have passed since the entry into force of the Free Trade Agreement, 20 years since the bilateral I and II agreements. Already today, they are not up to speed for what the EU and Swiss relationship should and could be," the Commission said in a statement earlier this week.
The standoff also throws Switzerland’s relationship with the UK into sharp relief after Brexit. The two nations, both home to important financial centres and wealth management hubs, are in talks about cementing ties.
Policymakers in Bern said substantial differences remained on key aspects of the EU/Swiss agreement - including on the free movement of people, EU citizens' access to Swiss social benefits, and state aid (Reuters.)
The three main sticking points for the Swiss relate to the potential for the EU’s state aid rules to undermine support for cantonal banks; concerns that high wages in Switzerland could be eroded, and the possibility that EU citizens would gain access to Swiss social security benefits.
In a note, David Oxley, senior European economist at Capital Economics, said: "Uncertainty about how future relations with the EU will pan out is not helpful from an economic perspective. At the very least, Switzerland and the EU will drift apart as agreements expire. A deal covering privileged access to the EU market for Swiss exporters of medical equipment has already lapsed, and reports suggest that Switzerland may be blocked from access to new elements of the single market, including the electricity union (whatever that is!)."
"That said, the direct near-term macroeconomic importance of this should not be exaggerated. After all, exports of medical equipment to the EU make up just 0.6 per cent of Swiss goods exports. Moreover, the IEA [International Energy Agency] notes that Switzerland is an important transit country for electricity on the continent and that its hydro storage and reservoir capacity are of `strategic importance' to the EU. This (admittedly rather specific) example illustrates that the EU does not hold all the cards in the relationship and it is in its interest to cooperate. Many Swiss manufacturers are heavily integrated into European supply chains too," he continued.
"More generally, in contrast to the metaphorical cliff edge that towered over the UK/EU trade talks at the end of the Brexit transition period last year, the economic stakes are not as high for Switzerland, given that the status quo will persist and the vast bulk of activity is unaffected for now. And while `Vote Leave' highlighted the potential for the UK to send less money to the EU, the Swiss government has pledged to contribute to the EU’s cohesion fund – presumably to ensure that the `new chapter' in relations with the EU that President Parmelin has spoken of gets off to an amicable start. All told, while negotiating an entirely new framework proved too ambitious for Switzerland, a reworking of some of the existing 120-odd bilateral deals might be achievable at some stage and better than nothing," he said.