Britzerland – or even more?

Prof. Dr. Dr. h.c. Carl Baudenbacher (Partner Nobel Baudenbacher, Zurich/Brussels, Door Tenant Monckton Chambers, London, Visiting Professor at LSE, Former President of the EFTA Court) discusses the relationship between the United Kingdom, Switzerland and the European Union.

I. Introduction

British Prime Minister Boris Johnson received Ignazio Cassis, President of the Swiss Confederation, in London on 28 April 2022. HM Queen Elizabeth II subsequently welcomed Cassis and his spouse for a courtesy visit. The UK and Switzerland signed a joint declaration to further develop their bilateral partnership and agreed to deepen cooperation in the field of science. They confirmed the launch of exploratory talks to modernise the existing free trade agreement. Finally, they discussed Switzerland’s and the UK’s relations with the European Union. The latter is a political sensation. Europe’s two oldest unbroken democracies had failed to coordinate in any way in their negotiations with the EU during the years 2016-2020. Rather, they faced Brussels separately and were treated accordingly. In the Withdrawal Agreement, the UK recognised the indirect jurisdiction of the ECJ (“Ukraine”-model), and in the Northern Ireland Protocol, it even accepted direct ECJ jurisdiction. In the Trade and Cooperation Agreement, London successfully refused any role of the ECJ. The price it paid for this, however, was its departure from the Single Market. The European Commission took revenge for Brexit by vetoing the UK’s accession as an individual member to the Lugano Convention on jurisdiction and the enforcement of judgments in civil and commercial matters. The Swiss government, for its part, was fixated during the Brexit years on concluding a “framework agreement” with the EU. This treaty was to provide an institutional umbrella over the most important bilateral agreements with the Union. Contact with the UK was not sought because Brussels was not to be angered.

Boris Johnson greeted his Swiss guest with the words that he wanted to create a “Britzerland” alliance between Britain and Switzerland outside the EU. The Prime Minister thereby implicitly referred to a notion he had created in 2012 as Mayor of London on occasion of a visit to Switzerland

The two economically advanced EU outsiders face significant challenges in their relationship with the bloc. Brexit has led to an appreciable decrease in trade in goods between the UK and the EU. The Northern Ireland situation is considered unsatisfactory in London. The exclusion of the UK from the Lugano Agreement is also an unfriendly act towards Switzerland, which had given the green light to the British, as had Iceland and Norway. As far as the two financial centres are concerned, the City of London lost its European passport; it can therefore no longer offer its services directly in the EU. Swiss banks and insurance companies never had a European passport. Large insurers have founded subsidiaries in the EEA/EFTA state of Liechtenstein, the banks in the EU.

Switzerland pulled out of the seven years of negotiations with the EU on the conclusion of an “institutional framework agreement” on 26 May 2021. The EU reacted in the way it had announced: It is no longer willing to conclude new bilateral treaties with Switzerland and wants to let existing treaties “erode” by refusing to adapt them to new developments in EU law. Unfriendly actions (so-called “pinpricks”) have occurred in particular in the area of the export of MedTech products. Switzerland is a leading global manufacturer of such goods. The EU has refused to recognise the equivalence of Swiss stock exchange legislation since 2019 and, finally, Switzerland is also being discriminated against regarding to access to the Horizon 2020 research programme, contrary to an explicit earlier promise.

II. Milestones in Switzerland’s EU policy

Rejection of the EEA 1992

To make Switzerland’s situation comprehensible to a British readership, I must backtrack a little. The difficulties began with the rejection of the EEA Agreement in a referendum of 6 December 1992. The EEA would have given Swiss industry full access to the Single Market. Switzerland would have dynamically taken over the relevant EU law together with the other EFTA States, without a co-decision right, but with a co-determination right in the adoption of new EEA-relevant EU legislation. Like the other EFTA States, Switzerland would have been subject to the supervision of the neutral EFTA Surveillance Authority [“ESA”] and the jurisdiction of the neutral EFTA Court. Switzerland would have been present in both institutions with one member. The types of proceedings would essentially have been the same as in the EU. The most important would have been the infringement procedure, the preliminary ruling procedure, and the nullity procedure.

The business community was happy with the treaty, banks and insurance companies would have received the European passport. However, the Government made a crucial mistake. In May 1992, six months before the referendum, it applied to Brussels to join the EU. This allowed the opponents of any integration to say that the vote was not about joining the EEA, but the EU. After the abandonment of the EEA, the Federal Council maintained that it wanted to join the Union.

Institution-free bilateralism

After several years of waiting, Switzerland was able to conclude two packages of institution-free bilateral agreements with the EU in 1999 and 2004. (The only exception was the Air Transport Agreement, under which the Commission and the ECJ have direct jurisdiction.) The most important treaties concern the free movement of persons, the association to the Schengen system and the taxation of savings, now the automatic information exchange. Joint Committees administer the treaties according to diplomatic rules. Swiss industry thus gained sectoral privileged access to the Single Market. Both Berne and Brussels intended this as a transitional solution until Switzerland’s accession to the EU. At this point, however, the imponderables of Swiss direct democracy got in the way of the planners: in 2001, 76.8% of Swiss voters said no to a popular initiative “Yes to Europe”. From then on, the Government could no longer openly pursue EU accession.

ECJ model

From 2008 onwards, the EU demanded that Switzerland – while sticking to its sectoral approach – had to accept supranational supervision and judicial control. The Union proposed “docking” with the EFTA Surveillance Authority and the EFTA Court. Docking would have meant to subject the bilateral agreements to the competence of these institutions. Switzerland could have nominated an ESA College member and an EFTA Court judge.

The Federal Council, however, tried to use the opportunity to join the EU through the back door, so to speak. It wanted to conclude an “institutional framework agreement” as an umbrella over the most important bilateral treaties. There was to be one type of procedure only: dispute settlement with the EU and Switzerland as parties. To the amazement of all observers, the Commission was to have the right to refer Switzerland to its own court of justice, the ECJ. No role was intended for citizens and business operators. The dispute settlement procedure was to take place in two phases: In the first, the ECJ would rule on whether Switzerland violated treaty obligations. If Switzerland lost and did not implement the judgment, in the second phase a (real) arbitration tribunal would decide on the appropriateness of compensatory measures by the EU.

Of course, a model with the watchdog and the Court of Justice of the other party ran counter to everything that had hitherto characterised Swiss EU policy. The Foreign Ministry therefore launched a campaign that fulfilled the notion of “bullshit” as defined by the American moral philosopher Harry G. Frankfurt: “Talk aimed at persuading without regard to truth”. The worst of countless false claims were (a) that EFTA Court rulings in infringement proceedings were not binding on the EU, so Switzerland would have nothing to gain from a victory, and (b) that the ECJ would not “sentence” Switzerland but merely issue advisory opinions.

After initial doubts, the business community agreed in view of the privileged access to the internal market, which was considered indispensable. The Federal Council’s attempt to sell the mechanism with the Commission and the ECJ was nevertheless unsuccessful. It became clear to the public that the EU institutions would not have been neutral but partial. In 2017, the main person responsible for this policy, Foreign Minister Didier Burkhalter, resigned.

“Ukraine” model

In Switzerland, the members of the seven-member Federal Council, the world’s only directorial government, are elected by Parliament. Burkhalter’s successor Ignazio Cassis – who is currently both Foreign Minister and President of the Confederation, with the latter post rotating every year – had promised in his campaign to “press the reset button” in the EU dossier. However, at the suggestion of Brussels, once in office, he agreed to the same model of dispute resolution that the EU would later propose to the UK: the mechanism of the association agreements with Ukraine and other former Soviet republics. An “arbitration panel” was to decide formally, but it would have had to ask the non-neutral ECJ for a binding ruling on every important issue. The EU has also envisaged this mechanism for future trade agreements with the former colonies and protectorates of European powers in North Africa. Here, too, there would have been two phases, as under the pure Commission/ECJ model.

The traditional business associations went along with this and agreed with the government, which praised the sham arbitration as a sovereignty-saving novelty. However, since there is no bilateral agreement on services, banks and insurance companies would have remained without a European passport. In the end, the Federal Council realised that its attempt to sell the court of the other side behind the curtain would have a hard time in a referendum. Such a thing would neither be acceptable in any EU state nor in Norway and Iceland. Since it had actively promoted the “Ukraine”-model in the past, the Government did not want to admit that it was on the wrong track. It therefore looked for other hairs in the soup: it found them in the fact that the EU’s proposals on wage protection when working across the border, the adoption of the EU Citizenship Directive and EU state aid control were opposed by different pressure groups.

Until 2018, the industry had followed the Federal Council in all its volte-face. In the years since, however, new industrial associations have formed that have thrown overboard the belief that Switzerland needs privileged access to the internal market. These circles rely on the idea of systemic competition and some financial service providers dream of “Singapore on the Limmat”.

III. The Swiss governments new egg dance

Switzerland has two general options for the future: It either retains its privileged access to the single market or, like the UK, it leaves it. EU membership is politically out of the question. Switzerland could achieve full access to the single market by joining the EEA on the EFTA side. Perhaps the EU would also be prepared to offer the docking model again. It proposed this approach to the UK in 2018. The Berne government, however, is having trouble coming to terms with an EEA solution, because at least in the back of its mind it is still dreaming of EU membership in the long run. It has therefore proposed to the EU that the institutional questions should no longer be regulated via a framework treaty, but in the individual bilateral agreements themselves (“vertical” instead of “horizontal” approach). The “Ukraine” mechanism has not been ruled out. However, the Government has recently favoured a model taken from a very technical agreement on customs facilitation and security from 2009: according to this, in the event of a conflict, a political decision is to be taken in the first phase without the involvement of the ECJ. If a negative result is not implemented by Switzerland, a genuine arbitration tribunal would decide on the appropriateness of compensatory measures by the EU in the second phase. In my view, it can be ruled out that the EU will agree to this renewed attempt to create a hybrid model. In fact, in its first statements, the Commission has insisted on a general institutional solution involving a supranational court. Leaving the single market would not be easy for Switzerland given its geographic situation and the general mood in the country.

IV. Switzerland joining forces with the UK

“Britzerland”, as it is now envisioned, would be a bilateral alliance. The first building block could be a financial services agreement that is about to be signed. The UK and Switzerland are among the largest exporters of financial services in the world. Messrs Johnson and Cassis have furthermore announced their intention to negotiate a comprehensive free trade agreement and to cooperate more closely in the field of science and research. Both countries are home to leading universities. Finally, there are considerations on both sides to conclude a bilateral “Ersatz” Lugano Convention between London and Berne. It thus seems that “Britzerland” could become reality in a bottom-up process, i.e., gradually. The British and the Swiss have a lot in common: they do not adhere to a Hegelian model of the State, traditionally believe in free trade and have a liberal image of man (in Britain called “the man on the Clapham omnibus”). These are important extra-legal foundations for closer cooperation.

On the other hand, one can also imagine multilateral initiatives. There would be a whole new ball game if the UK came back to its decision to leave the single market. In that case, it would make sense for the two outsiders UK and Switzerland to enter talks with the three EEA/EFTA States Iceland, Liechtenstein, and Norway on the formation of a second structure in Europe. This could be realised by the UK joining EFTA, which it co-founded in 1960. However, the Five could also go a step further and consider membership of the UK and Switzerland in the EEA. This would provide an opportunity to renegotiate the EEA Main Agreement, which has remained unchanged since 1994. The fact that the EFTA States participating in the EEA do not have a right to vote in the setting of new EEA-relevant EU law is generally seen as the Achilles’ heel of the EEA. The Brussels think tank Bruegel made interesting suggestions on this in August 2016 which culminated in the idea that the non-EU states could have a “political” co-decision right. ESA and the EFTA Court would be strengthened by additional members. “Britzerland” could in other words be the nucleus for a new EEA Agreement. Finally, a European Economic Area of different speeds would also be conceivable. This could offer an option to States that currently belong neither to the EU nor to EFTA. 

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