Switzerland is bracing for EU sanctions, as Bern refuses to cooperate with Brussels as part of a bilateral overhaul of the two sides’ relationship.

The Swiss government postponed a decision on whether to succumb to EU demands for automatic regulatory alignment between Switzerland and the EU, with the European Court of Justice having final arbitration in any potential conflict.

The new regulatory framework demanded by Brussels comes within the context of the UK’s pending withdrawal from the European Union in March 2019 – a prospect that has Brussels reviewing its relationship with all non-EU members.

For over a decade, the EU has been negotiating a treaty with Switzerland to conclude 120 individual accords between the two sides as the current bilateral relations regime sets an uncomfortable precedent for the EU. Switzerland is a member of the European Free Trade Association but unlike Norway, the Swiss are not a member of the European Economic Area. That allows for Single Market access without automatic compliance with EU legislation.

New demands from Brussels have been met with staunch resistance by the Swiss People’s Party, which could derail any deal with the EU in a subsequent referendum. Negotiations are further complicated by the fact that both the EU and Switzerland are heading towards elections in 2019 and no party seems willing to compromise.

With Brexit only months away, the UK essentially wants a Swiss arrangement with the EU, plus the same sort of no freedom of movement clause that Switzerland unsuccessfully tried to negotiate with Brussels. As a result of its failed attempt to enforce its borders, Switzerland now gives precedence to Swiss residents for any job offer, irrespective of their nationality, which in practice amounts to freedom of movement.

As a final settlement has been delayed, Switzerland could face certain administrative penalties that would hinder EU investors’ access to the Swiss stock exchange, limiting market access for Swiss lenders to the EU market, severing access to EU-funded research programmes, and limiting Swiss access to the EU’s electricity market.

In June, Brussels warned that the Swiss stock exchange would be the first to suffer as market equivalence recognition will be withdrawn within a year unless Bern complies to EU demands.

In its first announced retaliatory measure, The Swiss government said it will demand from foreign trading companies that they seek formal recognition from Switzerland. The measure, however, will only go into effect if the European Commission does not extend stock market equivalence before the end of 2018.