On Sunday, Switzerland held a referendum on a proposal to make the Swiss Constitution supercede international law, with around two-thirds rejecting the measure.
It was raised in the context of ongoing negotiations between Switzerland and the EU, with the next deadline in the process coming up this weekend. The issue combines with Brexit, and can have an impact not just on financial markets, but how the Swiss relate to the rest of Europe.
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Switzerland rejected joining the EU, and has remained working with a series of temporary compacts and agreements. Some of them are coming up for renewal, and the EU is pressing for a more permanent solution, with emphasis on certain areas that cause a certain amount of discord. Negotiations have been ongoing for nearly four years.
The issue is taking renewed precedence now, however, because Swiss stock market recognition under EU regulation is set to expire by year-end, and the government in Bern self-imposed a deadline of December 1st to have a solution to the issue.
Negotiations in that regard appear to be stalled, with the EU using the situation as leverage to pressure Switzerland on immigration and labor issues.
Untangling the mess
Switzerland’s financial relations with the rest of Europe are governed by over 120 individual bilateral agreements and both parties want to come to a political agreement to consolidate regulation under MiFID II.
While this measure would streamline relations between the two economic groups, it would imply a certain amount of EU influence on Swiss markets, the independence of which the Alpine nation guards jealously.
The timing is also somewhat problematic with the issue coming up in the middle of the Brexit situation, with authorities in Brussels worrying that leniency towards Bern could set a precedent in the treatment of London.
This is especially relevant regarding the issue that has sparked a lot of controversy throughout Europe, and was a major factor in Brexit negotiations: the movement of people, and their impact on labor markets.
The Swiss government is, therefore, in something of an impossible dilemma: accede to the EU demands and face the agreement being voted down in a referendum, or reject the proposal and face reprisals from Brussels (including the lapse of recognition of Swiss stock markets).
What could happen?
If logic prevails, then Swiss stocks would continue to be recognized by the EU; given that Zurich is the fourth largest market on the continent. Plus, with the prevalence of major names on the index, there does seem to be quite a lot of economic motivation to reach an agreement, if not by December 1st, then at least by year-end.
However, should the agreement lapse, it’s not exactly clear how that would affect trading in Swiss equities – and not knowing is often the worst scenario for the markets. At least if there was some negative impact that was known, it could be priced in.
Presumably, the increased difficulty in investing in Swiss stocks would lead to investors not investing, or withdrawing their funds, weakening the market and demand for the Swissie. The SNB might finally have a scenario where the CHF wasn’t too strong.
Switzerland’s economy relies largely on facilitated capital flows and increased restrictions from the EU side – the largest economy in the world if we consider the Eurozone – could cause the country’s financial institutions significant headaches.