How did the draft deal come about?

The idea of a new framework agreement to streamline relations between the EU and Switzerland was first floated in the Swiss senate back in 2002 but the main impetus came from Brussels in 2008.

Bilateral relations between Switzerland and the EU are currently based on some 20 main agreements and around 100 secondary agreements negotiated by the two sides since Swiss voters rejected a proposal to join the European Economic Area back in 1992.

But a decade ago, Brussels pushed for new arrangements designed to ensure Switzerland applied EU law in a standardized manner. This desire partly arose in response to a long-running dispute over Swiss measures to protect its labour market.

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These measures include a provision which requires foreign-based firms that deploy foreign staff in Switzerland on a short-term basis to give eight days’ notice to Swiss authorities.

The idea behind this measure is to give Swiss authorities time to ensure that foreign firms are not undercutting local wages by bringing in cheaper foreign workers. But Brussels argued the measure contravened the free movement of persons treaty between Switzerland and the EU.

The then Swiss President Doris Leuthard and European Commission president Jean-Claude Juncker in November 2017. Photo: AFP

However, bilateral talks began in earnest in 2014 after the “against mass immigration” popular initiative was narrowly passed by Swiss voters in a referendum.

The initiative called for quotas on foreign nationals in Switzerland. It also demanded that the Swiss government renegotiate its treaty on free movement of persons within three years. If it failed to do so, the agreement would be revoked.

If the initiative had been implemented in full, it would have triggered the so-called guillotine clause imposed by the EU which states that if one treaty between Switzerland and the EU is not renewed or is terminated, the EU can render all other agreements invalid

Both sides rushed to try and salvage bilateral relations. In May 2014, negotiations began. Meanwhile, the Swiss government worked to limit the impact of the referendum, finally passing a much watered-down version of the initiative in 2016.

Negotiations between Switzerland the EU have been followed especially closely since the Brexit vote of 2016 with many observers suggesting they may provide insights into UK-European relations in the future.

What have these negotiations focused on?

Based on Swiss demands, talks towards a new framework deal have focused on just five agreements related to Swiss access to the EU market. These are the agreements on free movement of persons, air transport, transport of passengers and goods by rail and road, trade in agricultural goods, and mutual standards recognition.

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Much of the discussion has focused on how EU law should be adopted in Switzerland and on how disputes between the two parties should be settled.

What have been the main sticking points in the negotiations?

Both the traditionally pro-Europe Socialists and unions have drawn a line in the sand over the eight-day notice period for the posting of foreign workers. Meanwhile, the anti-EU SVP has argued Swiss sovereignty will be affected if Switzerland is forced to adopt EU law.

What are the key points of the new deal?

The 34-page document made public by the Swiss government on Friday (and still only available in French) calls for the so-called “dynamic adoption approach” for EU law in Switzerland. This would see bilateral agreements updated “as quickly as possible” in line with changes to EU legislation.

Switzerland would not be required to automatically adopt EU law. The Swiss parliament would have the right to choose whether to adopt legislation, as would the Swiss people (through referendums).

Under the deal, known as InstA, serious disputes would be settled by an independent arbitration panel. In cases where the dispute concerns EU law, arbitrators could ask for a ruling from the Court of Justice of the European Union. This ruling would then be binding. If Switzerland subsequently failed to implement a ruling of the court, the EU could take measures including suspending a bilateral agreement.

The Luxembourg-based Court of Justice of the European Union. Photo: AFP

When it comes to free movement of persons, the draft deal would give Switzerland three years to adopt EU rule changes dating from 2014 and 2018 on the posting of foreign workers.

Read also: Switzerland praises 'successful integration of qualified workers'

But the deal also sees the EU making concessions in this regard. Switzerland could continue to demand foreign-based firms give advance notice of the posting of foreign workers to Switzerland in at-risk sectors (such as construction). However, the current eight calendar day notice period would be reduced to four working days.

Critically, the new draft deal does not mention the Citizens' Rights Directive. This directive gives citizens of the European Economic Area (which includes the EU and Switzerland) and their families a wide range of rights in terms of freedom of movement and entitlement to welfare benefits.

Because the draft deal does not mention the directive, this means there is no exception for Switzerland. As a result, all disputes regarding the directive would be subject to formal dispute settlement procedures.

What is the current state of the draft deal?

The document is marked “final version” and the EU was pushing very hard for the Swiss government to approve it by last Friday, December 7th.

Brussels has tried to pile pressure on Bern by announcing it would remove the so-called 'equivalence' status of the Swiss stock exchange – granted temporarily for a 12-month period in late 2017 – unless Switzerland says yes to the new deal.

This stock market equivalence means EU-based trading platforms can buy and sell Swiss stocks. If Brussels withdraws it, the Swiss exchange could see trade volumes seriously reduced. Switzerland's international image as a financial hub would also be damaged.

The headquarters of the Swiss stock exchange in Zurich. Photo: AFP

But in a preemptive strike, the Swiss government in late November announced measures aimed at protecting its stock exchange if it lost that equivalence. The government then played for more time by making public the draft deal on December 7th and announcing a consultation process would now take place.

In a statement, the Federal Council said it “considers the current outcome of the negotiations to be largely in Switzerland's interests and in line with the negotiating mandate”.

But it stressed it had “decided not to initial the institutional agreement for the time being” because of “outstanding issues” including the Citizens' Rights Directive and measures designed to protect Swiss wages.

How has Brussels responded?

In a statement, the European Commission said it “respects the wish of the Federal Council to consult all stakeholders” before submitting the deal to the Swiss parliament for approval. But it called for a speedy approval of the draft treaty.

However, it may be that the Swiss have won the latest round of poker. On Tuesday, Reuters reported EU sources as saying Brussels would extend equivalence for the Swiss stock market for another six months, which would give Bern more time to negotiate, despite EU assertions the talks are now done and dusted.

An official statement on stock market equivalence is expected from the EU early next week.

So what happens next?

This is the big unknown. However, the general consensus in Switzerland is that the current deal is dead in the water because both left- and right-wing parties in the Swiss parliament will not approve it as it stands.

If, by some chance, the current deal were to be approved in its current form by Bern, that might not even be the last hurdle. This is because the deal could then also be subject to a referendum under Switzerland’s system of direct democracy.

In a more likely scenario where the EU extends Switzerland's stock market equivalence for another six months, the Swiss government would then have half a year to drum up consensus in the parliament or try and thrash out a revised deal and hope that Brussels is willing to come back to the negotiating table. 

But if the Swiss government can't find cross-party agreement, or if Brussels won't renegotiate a deal it already says is final, then relations could sour even further.

The EU could begin by withdrawing stock market equivalence or it could – as Swiss daily Le Temps noted in a recent editorial – target even more painful measures for Switzerland like its access to the internal EU electricity market.