The European Union and Switzerland have imposed new restrictions that affect each other’s financial firms.
It is a striking deterioration in what has long been a close economic relationship.
What are the new restrictions?
Investment firms in the EU are no longer allowed to trade on the Swiss stock exchange. The arrangement, known as “equivalence”, which previously allowed them to do that lapsed at the end of June and the European Commission has decided not renew it, for now at least.
In response to the EU’s move, Switzerland has banned the trading of Swiss shares on EU markets.
Why did the EU take this action?
This is part of a wider issue between the two sides.
Switzerland’s economic relations with the EU are governed by about 120 separate bilateral agreements. These give Swiss businesses access to most of the EU’s single market.
But the EU wants to update and simplify the arrangement with a new framework agreement. The European Parliament has described the current situation as “complex, sometimes incoherent and not easy to sustain”.
They have a draft of a new agreement, but the Swiss side first went for public consultation and have more recently asked for clarification.
The EU has become frustrated by the delay and has allowed the equivalence arrangement for Swiss stock markets to expire.
What are Switzerland’s reservations?
The Swiss government has concerns that the agreement might lead to EU citizens receiving more welfare benefits.
They also fear that it might limit government subsidies to businesses and make it harder to protect Swiss wages – which are high – from low wage competition.
But there is also a wider political context.
The right wing Swiss People’s Party – which received the most votes in the last four elections – is hostile to the European Union and to the free movement of workers that goes with Switzerland’s relationship with its much larger neighbour. And there is an election later this year.
What exactly is equivalence?
In some areas of financial regulation the European Commission can decide that other countries have equivalent standards to the EU.
In relation to stock markets, the requirements include a high level of investor protection and preventing insider trading.
The significance of an equivalence decision is that the EU investment firms can then trade on the exchanges of the country concerned.
Similar decisions were made at the end of 2017 for the United States, Australia and Hong Kong, along with Switzerland. The Switzerland decision had a time limit of a year. It was then extended for six months but has now expired.
Does this have any implications for Brexit?
It might do.
Finance is a very important sector of the British economy and access to customers in the EU is valuable. It is also useful for EU investment firms to be able to trade on the London Stock Exchange.
Many firms hope that equivalence will enable them to continue to deal with the EU after the UK is no longer a member.
This is much wider than the specific issue about stock markets that the EU and Switzerland have acted on.
The European Commission has made equivalence decisions on insurance, credit rating and auditing among other areas.
What the Switzerland row shows is that the EU, and the Commission in particular, are prepared to use equivalence in a negotiation. If they feel it can be useful in applying pressure to the negotiating partner, they are apparently willing to use it.
And of course Britain is likely to be on the other side of the table at some stage in the not too distant future, with some important businesses that could be hurt by an adverse decision on equivalence.