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Switzerland's Stock Market Has Been Taken Hostage

Lionel Laurent

(Bloomberg Opinion) -- An unnecessary and misguided economic split at the heart of Europe, driven by populist politics and trade spats. Nope, this isn’t Brexit, it’s the bitter diplomatic standoff between Switzerland and the European Union. 

The small Alpine republic is at diplomatic loggerheads with its biggest trading partner over how to renegotiate and repackage the swathe of bilateral agreements that binds the Swiss economy to the bloc without it being a member. Brussels wants clearer terms of how Switzerland accesses the single market and for the country to offer more freedom of movement for EU citizens. Bern is trying to balance these demands against local anxieties about sovereignty, immigration, and the related fear about the pressure on wages and social services that might come with more migrant workers. The Brexit parallels have not been lost on Brussels, which wants a speedy resolution above all.

After years of negotiations and foot-dragging by the Swiss, EU officials now want to get the talks wrapped up before the new European Commission is formed in November (indeed, before the next deadline for Britain’s departure on October 31st). So they’re stepping up hostilities.

Brussels says that, given the snail’s pace of the negotiations, there’s no reason to keep recognizing Switzerland as an “equivalent” financial market to the EU, or one whose rules and supervision are deemed sufficiently close to the bloc’s. In a nutshell, this means it wants to force EU investors to trade Swiss stocks on EU soil only. Imagine the potential impact on shares in Nestle SA, where about 72 percent of its trading turnover is done on Zurich’s SIX market, according to data from Fidessa, a trading tech company.

Trying to take a stock market hostage is never a good idea, although in this case it’s more likely to trigger confusion than widespread disruption. Switzerland yesterday launched retaliatory measures, demanding that Swiss stocks be traded on Swiss soil. Law firms say this should create a kind of loophole, which should let EU banks and investment funds keep buying and selling shares in Zurich. Even if this works out, it will be a cumbersome fix. Longer term, investors may have doubts over liquidity and political risk on the Swiss stock market.

This sends a dismal signal on Brexit, too. Brussels recently threatened a similar punishment for the U.K. if it crashed out of the bloc without a withdrawal deal, warning that EU investment firms would have to trade British giants like Vodafone Group Plc on EU territory. Only the threat of tit-for-tat measures from U.K. regulators got the Commission to dial things down. By weaponizing this topic again just a few months before the next Brexit deadline, Brussels has sent a message to Westminster: The Swiss model so admired by Britain’s Brexiters is vulnerable to strong-arm tactics.

The fact that this is all politically driven makes it hard to guess what happens next. As bad as the EU’s behavior is, it’s possible that the pressure tactics will shake the Swiss into finalizing a deal. But the injection of politics into issues like market access is becoming an all-too regular feature in Europe and won’t help the continent’s attractiveness to investors. Last year, the chairman of the U.S. Commodity Futures Trading Commission Chairman threatened to cut off EU banks from U.S. exchanges because of new regulations that he deemed overly intrusive.

The Commission president Jean-Claude Juncker warned Switzerland last year that if a deal wasn’t wrapped up soon, things “might get rough.” He’s been true to his word. The net result feels like a loss for all concerned.

To contact the author of this story: Lionel Laurent at llaurent2@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

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