A messy political fight between Switzerland and Europe is creating headaches for regional investors and showing Britain what life could be like after Brexit.
Swiss regulators on Monday barred the trading of Swiss stocks in the European Union after negotiations stalled on the future relationship between the wealthy Alpine country and the world’s richest trading bloc.
That means investors, at least in the near term, will struggle to trade shares of companies including Novartis (NVS), Nestle (NSRGF) and Roche (RHHBF) on venues such as the London Stock Exchange and CBOE Europe, which is also based the major financial capital.
And it’s an omen of what could be in store for the United Kingdom on a much bigger scale and with much more at stake if it departs the European Union in October without a deal to protect trade in goods and services.
“They clearly want to send a message [to Britain] about access to the European market,” said Karel Lannoo, chief executive at the Centre for European Policy Studies, a think tank in Brussels.
Switzerland vs. the European Union
Switzerland and the European Union have extremely close ties, but have for years been at loggerheads over a broad deal to replace the more than 100 bilateral agreements that currently define their relationship.
Disagreements between the two parties broke new ground Monday. With Switzerland dragging its feet on ratifying the new agreement, Europe said it would no longer recognize Swiss stock markets as having the same status as those of EU members.
In return, Switzerland ordered EU exchanges to stop trading Swiss stocks. Violating the order could carry criminal liability, according to a European Commission spokesperson.
The immediate market impact was muted. The actions were clearly messaged in advance, so the risk was priced in and brokers had time to come up with alternate arrangements.
Switzerland’s benchmark SMI index rose 0.7% Monday, buoyed by broader optimism about global trade following the G20 summit in Osaka.
But Charlotte de Montpellier, an economist at ING, said the spat could lead to a “definitive deterioration” of relations between Switzerland and the European Union, which could generate bigger problems.
More than half of Switzerland’s exports go to Europe, while roughly 70% of the country’s imports come from the bloc.
Then there’s what the fight says about the aftermath of Brexit.
Britain is facing a deadline to leave the European Union of October 31, after which it would be forced to strike deals with the bloc just like Switzerland.
“One important lesson [from the Switzerland disagreement] is that the EU is not afraid to put its threats into action when it is tired of long negotiations,” de Montpellier said.
Under the Brexit agreement negotiated by Prime Minister Theresa May, which was repeatedly rejected by the UK parliament, the current banking arrangements would have been preserved at least through the end of 2020.
That would mean British banks could continue to offer loans to people in countries such as Austria or Italy without a local subsidiary, and London could keep serving as a clearing house for trades in the euro currency.
But what would happen next is murkier, and would require further talks.
Should the United Kingdom leave the European Union without a deal — as both candidates to replace May have said is a possibility — the financial relationship would change dramatically.
While the European Union could take steps to mitigate the effects of the breakup, it would need to move quickly, and such actions aren’t guaranteed, said Michael Thomas, partner at law firm Hogan Lovells.
In anticipation of the worst-case scenario, banks and other financial services firms have been busy setting up new offices in Germany, France, Ireland and other EU countries.
UK financial services firms have spent £1.3 billion ($1.6 billion) on contingency planning and relocating certain lines of business since the 2016 referendum, according to consultancy EY.
An additional £2.6 billion ($3.3 billion) has gone to building out new headquarters outside the United Kingdom, the group said. Companies have also announced plans to move £1 trillion ($1.3 trillion) in assets into the European Union.
Even if the United Kingdom and Europe can come to terms, uncertainty will linger, said Andrew Pilgrim, who runs EY’s government practice in financial services.
The Swiss case shows that the terms of market access “can be used politically as part of broader negotiations,” he said. For Britain’s financial services companies, that will be an ongoing cause of concern.