Switzerland is the third largest economic partner of the EU, after the USA and China. Switzerland is able to participate in the EU's single market thanks to a series of bilateral agreements. This approach suits the Swiss confederation, but its complexity has become problematic for the EU and attempts are now under way to simplify the relationship.
Switzerland is surrounded by the EU – it borders Germany to the north, France to the west, Italy to the south and Austria to the east. A federal republic, it comprises German, French and Italian lingo-cultural regions and a small Romansh-speaking community.
It is one of the richest countries in the world, with a GDP per capita of more than €53,000 and low unemployment among its 7.6 million citizens. The country has a long tradition of direct democracy and neutrality, staying out of both World Wars.
According to the European Commission, over 900,000 EU citizens live and work in Switzerland and many more travel through its borders on a regular basis.
The EU is the country's most important trading partner, accounting for around 60% of its exports and 80% of imports. For its part, the Union only exports more to the United States than it does to Switzerland.
The establishment of the Economic Free Trade Association (EFTA) in 1960 and the signing of the Free Trade Agreement in 1972 between the European Economic Community (EEC) and Switzerland form the basis of its relations with the EU.
The country appeared to move towards EU accession in May 1992: it negotiated the European Economic Area (EEA) agreement – which allows EFTA states to participate in the Union's single market – and then submitted an application for EU membership.
However, Swiss citizens voted against joining the EEA on 6 December 1992 and EU membership talks were consequently suspended. The referendum was a major defeat for the government and marked the rise of the Swiss People's Party (SVP), a right-wing political force headed by Christoph Blocher.
Since then, Switzerland's dealings with the EU have taken a decidedly bilateral track. Two series of sectoral agreements, negotiated in 1999 and 2004, resulted in ten treaties that align a large portion of Swiss law with that of the EU (see 'Issues').
The 'Bilateral I' and 'Bilateral II' agreements effectively mean that Switzerland enjoys the benefits of EU member states and EEA countries on free movement of people, goods, services and capital – but without having lost any sovereignty or decision-making power.
The country's scepticism about joining the EU was confirmed in a March 2001 referendum, when 76.8% of citizens voted against a popular initiative called 'Yes to Europe!' aimed at opening membership negotiations.
Since December 2008, Switzerland has participated in the EU's Schengen area, which facilitates travel in the participating states by removing identity controls at common borders. It also partakes in the EU’s Dublin agreement on dealing with asylum seekers.
The Swiss confederation was close to crisis in its relations with the EU in February 2009 due to a referendum on opening its labour market to Bulgarian and Romanian workers. A 'no' result would have suspended a number of trade agreements, but 59.6% of citizens ultimately approved.
In March 2012, Switzerland signed an agreement initialising cooperation with the European Defence Agency. The same month the Swiss parliament suspended negotiations on agricultural free trade, food safety, product safety and public health that were opened in 2008.
Bilateral approach proving problematic
The Swiss electorate's decision to stay out of the European Economic Area (EEA) in 1992 laid the ground for a multitude of sector-specific agreements between the country and the EU – the 'Bilateral I and II' packages and more than 100 other technical accords.
Agreed in 1999, Bilateral I covers free movement of persons, technical trade barriers, public procurement, agriculture and air and land transport. It allows Switzerland to participate in EU research programmes.
Bilateral II, launched in 2004, added cooperation in the Schengen/Dublin areas and agreements on taxation of savings, processed agricultural products and fraud. It also heralded Swiss involvement in the European Environment Agency and its media, education, training and youth programmes.
In September 2010, the Swiss Federal Council confirmed its preference to continue with this sectoral approach. Yet the complex system of agreements has led to various problems surrounding the application of EU law – resulting in legal uncertainties for authorities, business and citizens.
It has become evident that a truly effective participation by Switzerland in the EU’s internal market cannot be delivered through limited agreements on certain sectors.
A dispute is ongoing about company tax regimes in some of Switzerland's cantons, which the EU regard as state aid incompatible with the 1972 Free Trade Agreement. EU member states have repeatedly called on the country to abolish these ''tax incentives''.
The absence of a wider framework has caused problems in both the enforcement of existing agreements and the uptake of new EU legislation – including case-law from the European Court of Justice, the Union's judicial body. The lack of a dispute settlement mechanism is another key issue.
Towards a cooperation agreement?
The EU has made clear that it wants to move on from just negotiating individual treaties. In July 2010, European Council President Herman van Rompuy warned Switzerland that it must take up the EU's legal framework – the acquis communautaire – if it wants to access the market.
While EU membership remains firmly off the agenda, the prospect of Switzerland joining the EEA has resurfaced, as a way to overcome the legal and bureaucratic problems. Unlike Switzerland, EEA member Norway automatically adopts any changes to EU legislation.
However, the deep-rooted Swiss traditions of independence and direct democracy – whereby most decisions must be ratified by referenda – mean that the 'automatism' of adopting EU laws would simply not be accepted.
Instead, the focus has shifted to a potential cooperation agreement to govern the array of bilateral deals currently in place: a tailored version of an EEA. In July 2010, the European Commission and the Swiss government established a working group to explore the options for simplifying bilateral relations.
Switzerland's President at the time, Doris Leuthard, stated that experts from both sides would work on the basis of respect for Swiss sovereignty and the ''proper functioning of existing institutions''. The group was set to release its first report before the end of 2011.
Sources in the European Commission close to the dossier say that the issue of automatism does not constitute a significant problem, as sectors which cannot comply because of a resultant 'no' referendum vote would simply be excluded from the agreement.
On 14 December 2010, EU foreign affairs adopted new conclusions on relations with EFTA countries, including Switzerland. The text does not make nice reading for Berne, stating that the system of bilateral agreements has ''clearly reached its limits''.
The ministers criticised the ''incoherent application'' of EU agreements and new Swiss measures that are incompatible with them. The Swiss retorted that the agreements are ''working well'' but admitted the relationship should be more consistent and dynamic.
Alongside the economic, legal and bureaucratic issues raised by Switzerland's bilateral cooperation with the EU, political relations between the two have not been without strain in the last couple of years.
Freedom of movement?
In April 2012, Switzerland announced that it would temporarily re-introduce an authorisation requirement for workers coming from the eight East European countries that joined the EU in 2004 (the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia).
As a signatory of the EU's Free Movement of Persons directive, Switzerland must allow citizens of other participant countries to live, work and study in the country. The country opened its labour market to the EU-8 on 1 May 2011. However, it has decided to make use of a "safeguard clause" in its freedom of movement agreement with the EU.
The Swiss decision was sharply criticised by EU foreign policy chief Catherine Ashton. She said the measure was in breach of a bilateral EU-Switzerland agreement, which in her terms did not allow for any differentiation between EU citizens.
Ashton added that the Swiss measure was neither economically justified by the labour market situation nor by the number of EU citizens seeking residence in Switzerland.
Switzerland has one of the highest ratios of foreigners in Europe, 22.4%, Swiss Federal Statistical Office figures show. Figures also show that more than 55% of the foreigners living in Switzerland are from the EU-15, the older members of the Union before the 2004 enlargement.
Some 85.2% of Switzerland’s permanent residents are of European origin, more than two-thirds of whom are nationals of an EU or EFTA member state. Italians make up the largest group (16.3%), followed by nationals of Germany (14.9%), Portugal (12%). The number of foreigners from Eastern EU countries is not indicated. Serbians comprise 6.9% of the foreign-born population.
Some 250,000 workers cross the border every day and are made up in large of qualified individuals with more than half of European migrants having a post-secondary degree.
In a February 2009 referendum, anti-immigration politicians including the Swiss People Party (SVP) led by Christoph Blocher urged citizens to vote against opening the country's labour market to workers from Bulgaria and Romania.
The 'no' campaign played on fears about waves of immigrants from the EU's new member states, portraying black crows on huge posters across the country. Yet with mainstream parties pushing for a 'yes' vote, the agreement was ratified with 59.6% in favour.
The same year, 57% of Swiss citizens approved a ban on the construction of new minarets, drawing widespread condemnation and in November 2010 53% of voters passed another SVP proposal to automatically deport foreigners convicted of crimes including rape or drug trafficking. Those convicted of serious crimes will be expelled after one year of prison and banned from returning for up to twenty years. Such measures could infringe the free movement of people principle, a fundamental right guaranteed to EU citizens, as well as the UN Convention Against Torture.
Social and political pressures that result from the migration are a growing concern to the Swiss population. The centre-right Conservative party is exploiting these fears and threatening the agreement with an initiative “against mass immigration” presented in February 2012.
Switzerland is also a member of the Schengen zone so citizens from participating countries do not have to submit to a passport check.
Europe’s electricity hub?
Because of its central location, 20% of European electricity trade goes through Switzerland and the country is directly affected by EU energy policy seeks to play a role as a geographical electricity hub for Europe. For both parties the main priority is supply security.
Recently, EU policies have expanded significantly as the EU has taken on a central role in energy supply and security.
Brussels officials believe that Switzerland could become one of Europe’s most important hubs for electricity storage if it was to join the single market for electricity.
The Swiss are aiming to sign a bilateral accord on electricity. But sources have indicated that such an accord is unlikely to be contemplated without a liberalised electricity market in Switzerland.
The Swiss launched in 2008 a phased liberalization of the electricity market. Large customers have been free to choose their electricity supplier since 1 January 2009. From 2014 this will also be possible for small businesses and private individuals.
The phased liberalisation of the Swiss electricity market is by far the largest change experienced by Switzerland's electricity sector since electricity supplies first became available, according to Swisselectric, the leading association of Swiss electricity providers.
Another innovation is the introduction of the feed-in tariff for electricity from renewable energy sources.
Speaking to a meeting organised by the Swiss mission in Brussels lat year Jean Arnold Vinois, the acting director of the EU’s internal energy market directorate. said: “Switzerland could be the only energy island remaining in Europe after 2015 because it is not concerned by European Council prescriptions.
Thomas Tillwicks, an executive board member of the national grid operator, Swissgrid, strongly denied any suggestion that Switzerland was risking energy isolation, pointing out that Swiss lines carried 11% of all cross-border electricity flows in Europe.
When it comes to the energy mix, Switzerland was the first European country to decide to phase out nuclear power, after the Fukushima tragedy in Japan in 2011.
Together with hydroelectric power and two non-carbon energy sources, nuclear power provides 95% of Switzerland’s electricity today.
Switzerland needs a foreseeable energy supply because it has energy-intensive industries, such as pharmaceuticals and metalworks. Berne is considering replacing nuclear plants by gas-fires stations, but that could create a domino effect that could call into question Switzerland’s good climate record, and its crucial role of storing excess electricity in its reservoirs.
Transport policy eyeing modal shift to rail
The European Union has approved the revision of the Eurovignette directive in September 2011 and member states have two years to transpose it into their national legislation.
The new European framework law aims at reducing pollution from road freight transport and making traffic flow smoother by levying tolls that factor in the cost of air and noise pollution due to traffic (so-called external costs) and help avoid road congestion.
To this end, member states may apply an "external cost charge" on lorries, complementing the already existing infrastructure charge designed to recover the costs of construction, operation, maintenance and development of road infrastructure.
Switzerland has gone a step further in implementing a real “modal shift”, aiming to transfer heavy goods traffic from the road to alternative modes of transport, in particular for traffic through the narrow and sensitive Alpine valleys.
A circulation tax has been applied to all heavy trucks from January 2001 and a large portion of the revenues goes towards the construction of new railway lines.
That is part of the 1999 bilateral agreement on inland transport between Switzerland and the EU, which accepts the principle of HVF (the distance-related heavy vehicle fee).
Compared to the EU average, over the last 10 years Switzerland has seen a threefold increase in rail travel per resident. The results of the Swiss investments are illustrated in the last Global Competitiveness report that showed that Switzerland’s’ top position was strengthened by its excellent transportation infrastructure.
“Rail is a cornerstone of the Swiss economy contributing to the quality of life,” said Andreas Meyer, chief executive of the Swiss Federal Railways.
The final breakthrough of the Gotthard base tunnel, the world’s longest rail tunnel, was achieved in October 2010, also thanks to the money raised through the heavy goods vehicle tax (HGV tax).
Imposing the HGV tax on all trucks, on all roads in Switzerland made it possible to halt the upward trend of freight traffic, leading to a share of well beyond 60% of goods crossing the Alps being transported by rail.
But that is not enough. By law, no more than one million trucks should have crossed the Swiss Alps in 2011, but about 1.25 million did, a 25% than the target fixed. That would make it difficult for Switzerland to meet it intermediate target for 2018 when the aim is to reduce the number of heavy vehicles on the road to 650,000.
Thus, the need for the EU to support even more the modal shift as Switzerland has realised that despite the additional rail capacity it was unable to meet its goals.
Gregor Saladin, head of communication for the Swiss Federal Office of Transport, said: “The success has also been at a price. The Swiss transport concept demands further infrastructure and rolling stock.”
The Alpine region, and the improvement of transport conditions in the Alpine valleys, has been a political commitment for Austrian MEP Eva Lichtenberger, who started her political career 20 years ago in the Austrian state of Tyrol.
“I always say I know half of the German population because they all pass my house,” she has said.
The Austrian MEP has mentioned her wish that Austria and Switzerland had cooperated more closely in the 1980s and beginning of the 1990s. If they had, she said, “transport policy in Europe would be different today.”
As Switzerland celebrates this year the 40th anniversary of the free trade agreement signed in 1972, the first of its kind concluded by the then European Economic Community with a partner country, Berne is keen to maintain its political independence, but that does not keep it from seeking closer economic ties with the EU. Switzerland is the seventh largest EU-EFTA economy and ranks among the world’s most competitive economic centres.
Economic integration is very important to both Switzerland and the EU. 80% of Swiss exports come from the EU. Nearly 60% of Swiss exports of goods and services are destined for the internal EU market. For European companies, Switzerland is the third largest trading partner after the United States and China, and ahead of Russia and Japan. The EU’s trade surplus with Switzerland for goods and services is €40 billions. The two parties have a shared strategic interest in the easiest possible market access.
“The European Union has expressed its wish to go beyond the present system of bilateral agreements and to ensure that a number of underlying institutional aspects of the relationship are properly addressed,” Barroso said.
Bilateral discussions are currently being held on the topic of giving new impetus to institutional arrangements. In these areas, the EU wishes to see automatic adoption by Switzerland of the EU acquis, independent surveillance and application of its obligations, and dispute resolution mechanisms.
On 14 December 2009, EU foreign affairs ministers called for an overhaul of the current system of bilateral treaties with Switzerland, which they say has ''clearly reached its limits''. They criticised the ''incoherent application'' of existing EU agreements and new Swiss measures that are incompatible with them.
''In full respect of the Swiss sovereignty and choices, the Council has come to the conclusion that while the present system of bilateral agreements has worked well in the past, the challenge of the coming years will be to go beyond this complex system, which is creating legal uncertainty and has become unwieldy to manage and has clearly reached its limits,'' stated the ministers, adopting conclusions on relations with EFTA countries.
In reaction, the Swiss Federal Department of Foreign Affairs replied that the agreements are ''working well'', but admitted that something needs to be done to make the relationship more coherent, consistent and dynamic.
Speaking on 19 July 2010, European Council President Herman Van Rompuy stressed that the bilateral agreements between the EU and Switzerland need to be properly implemented and warned Switzerland that it must take up the EU's legal framework if it wants to access its market.
''The EU is convinced on the need to develop the relations with Switzerland on sound legal and political foundations. The EU Council Conclusions of December 2008 laid down the criteria and conditions which must be fulfilled by future negotiations allowing the participation of Switzerland in our internal market and policies,'' he said after meeting Swiss President Doris Leuthard.
''Such criteria and conditions refer in particular to the acceptance of the evolution of the acquis and its homogeneous interpretation and application,'' he added.
European Commission President José Manuel Barroso described the network of EU-Swiss bilateral agreements as ''complex'' and ''very hard to manage''. The working group set up to examine options for improving EU-Swiss cooperation must respect the country's decision not to join the European Economic Area (EEA), he said in July.
In a November 2010 speech, Ambassador Jacques de Watteville, head of the Swiss Mission to the EU, stated that the bilateral treaties between the EU and Switzerland work well ''globally'' but admitted that they bring some difficult issues and ''hard talks''. New agreements in a range of areas are under negotiation, he revealed.
The existing agreements allow Swiss companies broad access to the EU market but large fields such as trade in services are not fully covered yet, he noted. Switzerland and the European Commission are conducting ''exploratory talks'' towards an agreement that would put Swiss companies on an equal footing with their EU counterparts, he said.
As for a dispute about company tax regimes in some cantons, which the EU views as state aid that is incompatible with the 1972 Free Trade Agreement (FTA), Ambassador de Watteville said Switzerland ''vigorously rejects'' the accusation.
The FTA excludes taxation matters and these tax regimes – which are much older than the agreement – were not addressed during its negotiation, he stressed. The issue is ''on hold'' as not all member states agreed to a solution negotiated in spring 2010, he added.
Swiss Foreign Minister Micheline Calmy-Rey told EurActiv in October that bilateral agreements remain ''the best way for Switzerland to establish its position in Europe".
Asked whether Switzerland wanted to imitate Iceland and join the Union in the wake of the financial and economic crises, the foreign minister replied: "Applying to join the EU isn't really on the agenda."
In August 2011, Christoph Blocher, vice-president of the Swiss People's Party (SVP), accused other Swiss politicians of trying to push the country towards EU membership even though the majority of people are opposed.
"What do we need from the EU? Nothing. And what does the EU wants from us? Changes in tax laws, a loosening of bank secrecy, information exchange, payments for cohesion policy and so on,'' he said an interview with Swiss newspaper Sonntag.
Following a Swiss referendum approving a ban on the construction of new minarets, Dutch MEP Emine Bozkurt (Socialists & Democrats group) said that racial discrimination in the country was "not new but in the news" and that most incidents went unreported.
"I remember from my history lessons that Switzerland was the country which always protected discriminated groups in Europe," said Bozkurt, deploring that "this might now have changed".
Professor Carl Baudenbacher, a Swiss jurist and president of the European Free Trade Association (EFTA) Court, believes that the current bilateral approach has reached its limits and that the Switzerland should now join the EEA.
The argument that 'bilateralism' protects Swiss sovereignty is weakened by Swiss lawmakers' increasing readiness to implement EU rules on an autonomous basis, he argues. By joining the EEA, the country would go a long way towards solving many of the problems created by the various bilateral agreements.
In April 2012, President of the European Commission Barroso said: "It has become evident that a truly effective participation by Switzerland in the European Union's internal market, the largest in the world with 500 million consumers, which Switzerland essentially aims at, cannot be delivered through limited agreements on certain goods or sectors."
- 3 May 1960: Switzerland forms European Free Trade Association (EFTA) with six other countries outside the European Economic Community (EEC).
- 22 July 1972: Free Trade Agreement between Switzerland and the EEC establishes free trade zone for industrial products.
- 10 Oct. 1989: Switzerland and EEC sign agreement on non-life insurance.
- 2 May 1992: Switzerland negotiates European Economic Area (EEA) agreement along with other EFTA countries.
- 20 May 1992: Swiss government submits application for EU membership.
- 6 Dec. 1992: Swiss citizens reject EEA accession in a referendum; government suspends EU membership negotiations.
- 12 Dec. 1994: Negotiations begin on a series of bilateral agreements between the EU and Switzerland, the so-called 'Bilateral I' package.
- 21 June 1999: Bilateral I agreements signed.
- 4 Mar. 2001: An initiative to open EU membership talks is rejected in a referendum, with 76.8% voting against.
- 1 June 2002: Bilateral I package enters into force.
- 26 Oct. 2004: Second series of bilateral agreements signed – the 'Bilateral II' package – including Swiss participation in the EU's Schengen and Dublin areas.
- 5 June 2005: Swiss electorate approves Schengen/Dublin participation.
- 5 Dec. 2008: Council of Ministers adopts conclusions on EU relations with Switzerland.
- 12 Dec. 2008: Schengen/Dublin come into effect in Switzerland.
- 8 Feb. 2009: Referendum ratifies agreement to open the country's labour market to Bulgarian and Romanian workers.
- 29 Nov. 2009: A ban on the construction of new minarets in Switzerland is approved in referendum, with 57% of citizens in favour.
- July 2010: EU-Swiss working group set up to explore options for a bilateral cooperation accord.
- 14 Dec. 2010: Council of Ministers adopts new conclusions on EU relations with Switzerland, criticising the current bilateral system.
- Dec. 2010: EU-Swiss working group to present first report.
- 23 Oct. 2011: Switzerland holds Parliament elections. The eurosceptic SVP remains the largest party in parliament.
- 16 Mar. 2012: Switzerland and the European Defence Agency (EDA) sign a corresponding cooperation framework.