Swiss-style immigration cap will bite into UK’s wealth

By Patrick Jenkins

“The single market is not a Swiss cheese,” Viviane Reding told the Financial Times on Sunday. 

Ms Reding, vice-president of the European Union, was not making some Eurocratic comment about the place of dairy products within the common agricultural policy. This was a serious point about the fallout from 

Switzerland’s popular vote to cap immigration. 

Britain has made plenty of noise lately about eastern European immigration, but in Switzerland the numbers of immigrants – in their case largely from Italy and Germany – have been unparalleled. Annual net immigration to Switzerland is running at 1 per cent of the population in recent years, nearly four times the rate for the UK, according to the World Bank. The inflationary effect on property prices, and the capacity impact on the transport network spurred the populist backlash.

Unsettling as this all might be, it would be easy to dismiss it as the parochial workings of an obsessive democracy – Switzerland holds multiple national referendums every three months or so.

But as Ms Reding suggested, the ramifications are broad – not only for Swiss people, companies and banks, and how freely they can interact with the EU; but also for any country that might be toying with a more isolationist position in Europe – the UK, for example.

First, the Swiss fallout. Though Switzerland is not a member of the European Union, its suite of bilateral agreements with the EU gives it access to the four-dimensional single market – in people, capital, goods and services.

The Swiss vote to limit immigration undermines the first of these – covering free movement of people. But if the first is axed, the EU says it will curtail access to the other three. To complete Ms Reding’s Swiss cheese analogy: “You cannot have a single market with holes in it.”

Any Swiss company that does business in Europe will be concerned. For financial services groups, some of Switzerland’s biggest exporters, there will be particular worries. Without the free movement of both people and capital, the vast London outposts of the likes of UBS and Credit Suisse may be undermined.

The lesson for Britain is clear, too. If it exited the EU and was left with no single market access, the UK’s position as a natural springboard into the rest of the continent would be undermined. Banks, insurers and asset managers have lobbied the government aggressively over the importance to the City of London of the single market. Citigroup warned last month about “dramatic” consequences in the event of a UK retreat from the EU.

Figures from the CityUK, a lobby group, show that the EU is the biggest single market for UK exports of financial services, generating a trade surplus of £15.2bn, a third of the UK’s total financial services trade surplus.

Still, this is only a danger if the next UK government acts on the current one’s promise for a 2017 poll on EU membership – and the populace votes to exit.

For Swiss bankers in London, Paris and Frankfurt, Switzerland’s shock popular vote is already a reality.

There is some comfort in the fact that the burning of Switzerland’s bridges may not commence until 2017. The government has three years to implement the vote, and it may take longer still for the EU to rip up bilateral free movement accords. Even when it does, Swiss banks may be buffered from the impact of the breakdown of EU-Swiss relations. Restrictions on the free movement of people may have a limited effect – 70 per cent of 31,500 Swiss citizens living in the UK have dual nationality, according to government data. 

Thanks to the direction of post-crisis regulation, any restrictions to the free movement of capital would also be blunted. Domestic regulatory authorities, including those in the UK, have been pushing banks to operate as subsidiaries with trapped capital, rather than as cross-border branches.

That all adds up to Swexit – if such a term can be coined for a country breaking ties with a partner organisation of which it is not a member – being bad news for an efficient European financial services market, but perhaps not quite as bad as it might once have been.

The UK cannot afford to take comfort from this. Given how much the prosperity of the City depends on foreign capital and people, Brexit and any pre-Brexit curb on immigration rights could wreck Britain’s biggest industry, just as financial services companies are bouncing back from the crisis. David Cameron, the UK prime minister, should perhaps take his cue from Britain’s favourite cheese: there are no holes in a piece of cheddar.

Copyright The Financial Times Limited 2014.