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Institutional Framework Agreement: What Repercussions Will Its Failure Have?

Posted on 8 June 2021
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08 June 2021

Institutional Framework Agreement: What Repercussions Will Its Failure Have?

Historical Background

The relationship between the European Union and Switzerland has always been particularly unique. Even though Switzerland is a small country surrounded by EU Member States it has remained outside of the EU and has also had a different relationship with the Union than other countries in a similar position like Norway or Iceland.

Switzerland rejected EU membership after a referendum in 1992. Nevertheless, this result did not stop both the EU and Switzerland from being able to forge a close relationship through the years, as Switzerland in a member of the Schengen Area, inside which there are no border controls (de Gruyter, 2021). Nonetheless, Switzerland has managed to establish a very different relationship with the EU than other countries like Norway, due to the fact that in 1994 it was the only European Free Trade Association (EFTA) member that decided not to enter the European Economic Area (EEA), thus Switzerland established its own bilateral relationship with the EU, where agreements were done sector by sector in order to obtain favourable access to the European market. This has expanded to 120 different bilateral agreements between both parties, going from agriculture to police cooperation, which has resulted in a significant amount of EU law being applied in Switzerland (Cummins, 2020; BBC, 2021).

This relationship has been fruitful for both parties, as the trade exchanges between the EU and Switzerland are worth an average €1 billion every working day. In addition, they are both notably important for each other’s economy as Switzerland is the bloc’s fourth-largest trading partner after China, US and the UK and the EU is by far Switzerland’s largest trading partner. Still, Switzerland has been able to profit the most from this as, for instance a study carried out in 2019 argued that Switzerland has been the country, which has profited the most from the EU single market. This study stated that the average EU citizen profits $1,008 extra per year for having Switzerland as a member in the EU single market, which pales in comparison to the $3,499, which the average Swiss citizen profits from this relationship. Not only that but, this cooperation has also resulted in an important exchange of population between the EU and Switzerland, 25% of Switzerland’s workforce is made up of EU citizens, of which 343,809 are cross-border workers, which are key for hospitals, restaurants and other businesses, located in age border regions. All of this has led many to consider Switzerland to enjoy a “passive EU membership” (Amiel, 2021; de Gruyter, 2021).

However, this process has been regarded as significantly troublesome, especially for the EU, due to the fact that, this Swiss model requires fresh negotiations for each and every one of the different EU policies that both parties agree on (Cummins, 2020). Moreover, the Swiss are seen in Brussels as a difficult country to deal with, due to the fact that they continually use the tactic of withholding their financial contribution to the EU as a form of lobbying. These regular difficulties in negotiations, added to the 2014 referendum in Switzerland, where the population voted on whether or not to establish an immigration quota, which violated the bilateral agreements to safeguard the free movement of people resulted in a change of stance for the EU, which acknowledged that the bilateral agreements model was outdated and there was the need for a new institutional framework, which would not only condense all the existing agreements but that would also provide much more stability to the relationship, especially because of the fact that with the bilateral agreements model, if one agreement is breached or cancelled this would produce a chain reaction that would provoke a collapse in the system. The final text was agreed in 2018, however, after Swiss political parties, social partners, and its citizens heavily criticised the agreement, a re-opening of negotiations was needed since the Swiss government had three extra demands to appease the critics. These negotiations were particularly tumultuous and ended in May 2021, with Switzerland leaving the negotiating table (de Gruyter, 2021). This has had a major impact on the EU politically, especially for the European Commission, since it had made an important investment in time an effort during this whole negotiating process. The impact is clearly portrayed in a statement by former Commission President Jean-Claude Juncker in 2019 as he said that one of the three “biggest regrets” of his tenure was his inability to finalise the deal with Bern (Von der Burchard, 2021).

Why did the Institutional Framework Agreement fail?

The Institutional Framework Agreement (IFA) between the EU and Switzerland failed due to a wide variety of reasons. Firstly, the Swiss government cited that there were “substantial differences” between both parties in the deal regarding three main issues, which were salary protection, state aid rules, and the access of EU citizens to Swiss social security benefits. This last one was a particularly difficult one to agree on, Swiss Foreign Minister Ignazio Cassis clearly stated that accepting the demands that Brussels put forward, which consisted of equal rights for EU workers in Switzerland  would have resulted in a “paradigm shift” for the country’s migration policy. However, it has also been speculated that there were other issues that made it very difficult to reach an agreement like Switzerland’s rejection of the jurisdiction of the European Court of Justice in Luxembourg over matters regarding the IFA (Boffey, 2021; O’Sullivan, 2021).

Nevertheless, there were also external factors, which made it increasingly difficult for the negotiations to be fruitful. One of these main external factors has been Brexit and how it has changed the way in which the EU is able to carry out deals with third countries, especially its neighbours. The European Commission had to establish such a tough negotiating position with the United Kingdom, especially in crucial areas like protecting the EU’s single market, left the EU unable and unwilling to adopt a more lenient position in its negotiations with Switzerland. Thus, the EU rejected the new Swiss proposals as “simply not acceptable”, due to the fact that since Switzerland wanted a closer position with the EU market than the UK, then it had the obligation of abiding by similar rules as the rest of the Member States. These requests also raised criticism from the EU Member States, as the German and Austrian foreign ministers accused Switzerland of “cherry picking” (Bondolfi, 2021; Von der Burchard, 2021).

The opinion of some sectors of the Swiss population also had a tremendous influence on the position that the Swiss government had to adopt, especially considering the fact that the agreement would have had to be ratified by referendum in Switzerland. There was great scepticism among the Swiss population about how the IFA might influence the modus operandi in their country, for instance regarding their direct economic system. Laurent Goetschel, director of the think tank Swisspeace and professor of political science at the University of Basel also stated that “the Swiss would want to be part of the EU economically, but they don’t want to be part of the EU politically.” He also argued that there was “general scepticism about the framework agreement, which was about the dynamic adaptation of Swiss legislation to legislative developments in the European Union, and also a certain role of the European Court of Justice” (Amiel, 2021). Switzerland also experienced domestic resistance coming from the right and the left, for instance, the national-conservative Swiss People’s Party (SVP) rejected any major agreement, which would position Switzerland closer to the EU. Moreover, the pro-European Social Democratic Party (SP), also rejected the IFA, due to the fact that it feared that a deal like this would make it increasingly troublesome to maintain the high Swiss wages. This sentiment was also shared by unions and businesses that feared that Switzerland would not have been able to maintain the high salaries and cost of living in the country, due to the fact that it would have experienced “wage dumping” (Bondolfi, 2021; the German Eye, 2021).

The decision of the Swiss government to leave the negotiating table sparked very different opinion, as well as questions about what the relationship between the EU and Switzerland will look like in the future. The Swiss government was very quick to show their commitment to remain working closely with the EU, for instance President Guy Parmelin stated at a news conference in Bern that “Switzerland remains a leading partner [of the EU] and vice-versa.” He also stated that this was the start of a “new chapter” in Swiss-EU relations that will focus on “cultivating and developing” relations on the basis of the existing bilateral agreement. Nonetheless, the Swiss government has not only showcased this praise, but also has put forward some more tangible proposals, like launching a political dialogue with Brussels with the objective of pursuing common priorities for the future. Not only that but, the Swiss government has also committed itself to urging the Swiss parliament to give the green light for the release of Switzerland’s contribution to the EU cohesion fund, which amounts to around CHF1 billion ($1.1 billion) “as soon as possible”, since this is a crucial topic for having a satisfactory relationship with the EU (O’Sullivan, 2021).

The reactions coming from the EU have been quite different, as the European Commission has refused to participate in any negotiations regarding alternative deals with Switzerland. A senior European Commission official remarked that Member States had a similarly position in 2019 when they clearly stated that the “conclusion of the Institutional Framework Agreement on the basis of the present text is a precondition for the EU for the conclusion of future agreements on Swiss participation in the EU’s internal market.” This senior European Commission official also declared that agreements on electricity or mutual recognition of medical devices, which are very important areas for Switzerland were “put in a limbo” by the Swiss decision of rejection the IFA. What is more, Andreas Schwab, chair of the European Parliament’s delegation on Switzerland, stated that the decision of the Swiss government was “quite detrimental” and also showed serious regret as “more than seven years of negotiations and patient waiting have been senselessly wasted.” Nevertheless, he also argued that the EU should maintain an open mind regarding future negotiations with Switzerland, as they will be crucial for the EU but most notably for the citizens living in the border regions, he declared that “we need to continue to provide pragmatic solutions for the people in the region who have no sympathy for the supposedly patriotic bickering in Bern” (Von der Burchard, 2021).

Possible Consequences

It is evident that this decision will have some serious consequences that will continue to be felt throughout the future. Brussels has made it very clear that these deals will age with time, therefore if there is not an agreement on a broader partnership treaty like the IFA  “no new agreements with Switzerland will be concluded and the existing agreements may not be updated.” If the bilateral agreements are not updated, this could have significant negative consequences for both sides, but especially for Switzerland since the EU is by far its biggest trading partner  (O’Sullivan, 2021; Von der Burchard, 2021). The sector that will probably be most immediately affected is the health sector, more particularly regarding medical devices since the agreement on mutual recognition expired soon after the Swiss stepped away from negotiations, this would make it increasingly more difficult for manufacturers to trade such devices between the EU and Switzerland, due to the fact that they will be downgraded to ‘third country’ and thus will need to comply with the EU’s product-labelling specifications (Bosley, 2021; Willems, 2021). The medical technology products sector will suffer harsh consequences as the Swiss MedTech organisation estimated that this decision would cost the industry 114m Swiss francs (€104m) and 75m every year afterwards. The med-tech sector is a particularly important one for Switzerland as it employs over 60,000 people and it is worth around 3% of Switzerland’s GDP (BBC, 2021; (Willems, 2021). This clearly showcases the importance of having agreed on the IFA, since it would have automatically renewed this partnership treaty (O’Sullivan, 2021; Von der Burchard, 2021). The German-Swiss Chamber of Commerce clearly warned about the negative consequences that the decision not to continue negotiating the IFA would have both parties “for companies in Switzerland, but also for those in the EU, market access risks to become significantly more complex and expensive, as products must be re-certified for the respective markets, for example, and legal representatives must be appointed,” the statement said, adding: “In addition, disruptions in the supply chain may also arise, as exporting products from the EU to Switzerland may no longer be worthwhile” (Von der Burchard, 2021).

It is not only the med-tech industry, which is expected to suffer the consequences of these broken negotiations, as there are also expectations that Switzerland will have it increasingly difficult to trade in sectors like the food sector, or the aviation sector where Swiss airlines will find themselves having less access to the EU aviation market, while the EU airline carries will experience the same issues on the Swiss market (Von der Burchard, 2021). In addition, contracts fundamental for the correct functioning of industries like the Swiss machinery, electrical and metal industries are expected to expire within the next two years, leaving an incredibly negative situation as these are industries, which are paramount for the Swiss economy as it employs over 300,000 people and it sells around 55% of the goods they produce to the EU (the German Eye, 2021). The Swiss universities are also among the ones that will probably experience future problems due to the failed negotiations for the IFA, as there is the possibility that they will be left out of important EU programs like the research program Horizon Europe, which would leave Swiss universities without a significant amount of money for financing, as well as ground-breaking research initiatives, which are carried out between Europe’s leading universities. Detlef Guenther, vice president of the Federal Institute of Technology in Zurich clearly stated that “if Switzerland was no longer a part of the Horizon funding programme it would be like being knocked out of the Champions League of football.” Thus, this would also have another very negative consequence for Swiss universities, which is that leading scientist would probably move to the EU or discard Swiss universities (the German Eye, 2021; Shields, 2021). Not only that but, Switzerland would not only suffer the consequences of the expired deals, but also not having the opportunity of entering newer ones, like for instance regarding electricity supply, which Switzerland sees as crucial. The national grid operator Swissgrid warned that Switzerland could be left out of the balancing energy market, in which European grid operators are able to balance the grid in the event of unplanned power flows (the German Eye, 2021).

In conclusion, it is clear that the decision by Switzerland to break negotiations will have serious consequences for both the EU and Switzerland, but mainly for the latter since it is much more dependent on the EU for its exports and for other issues like electricity supply. It has already been argued that this decision will probably make Switzerland a less alluring place to do business than before. Therefore, it is imperative for both parties to reconsider and come back to the negotiating table, since the problems, which discarding the IFA and therefore allowing the bilateral agreements to run their course until they expire vastly outweigh the problems that this framework agreement might create (Shields, 2021).

Bibliography:

By Mahmoud Refaat: The European Institute for International Law and International Relations.

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