By Michael Shields and Philip Blenkinsop
ZURICH/BRUSSELS (Reuters) - Switzerland's drive to clinch a sweeping treaty putting its ties with the European Union on firmer footing has run aground as mainstream conservative parties get cold feet ahead of Britain's divorce talks with the EU.
A new treaty could clear the way for closer ties in fields including financial services and power markets, but fear that any deal might upset Swiss voters under the country's system of direct democracy has put the project on hold.
Without a new accord with its biggest trading partner, Switzerland would rely on a patchwork of more than 100 bilateral agreements that ease access to the EU single market. Many Swiss are happy with the status quo.
But the government had made a treaty a legislative priority, and European Commission President Jean-Claude Juncker and German Chancellor Angela Merkel have said it was the price of any more trade deals.
Swiss reluctance to follow through on an accord in the window before the EU's Brexit negotiations start in earnest threatens to put relations into a deep chill that could stall progress on unresolved trade issues.
The eurosceptic Swiss People's Party (SVP), the country's largest, has opposed any treaty that lets the European Court of Justice (ECJ) settle disputes.
The far right has thundered against "foreign judges" dictating to sovereign Switzerland, and conservative centrist parties have now essentially capitulated.
"The government has concluded that in a referendum-based democracy this 'foreign judges' solution - having the European Court of Justice mediate in disputes - is not winnable at the moment," Christian Democrats (CVP) leader Gerhard Pfister said.
Pfister told Reuters his CVP colleague and Swiss President Doris Leuthard and even Juncker now agree that clinching a treaty by year's end is no longer realistic.
A European Commission spokeswoman said: "We are making good progress since the meeting between President Juncker and President Leuthard in April and are confident that if efforts continue from both sides in that sense, the agreed timetable can be met."
NOT MUCH AT STAKE?
The CVP and pro-business Liberals (FDP) each have two seats in the seven-member cabinet, so an EU treaty is dead in the water without their backing.
As their support faded, it undermined pro-Europe Foreign Minister Didier Burkhalter, who this month announced his resignation and said a new cabinet player was needed to change the political dynamics on Europe.
Still, Pfister doubted a fresh minister could nudge Switzerland out of its "time out" on Europe policy, especially as Swiss business leaders are not lobbying hard for a treaty.
"Of course it would help some politicians if business would fully support something but right from the beginning we were skeptical," said Jan Atteslander, head of foreign economic ties at business lobby Economiesuisse.
A treaty would not in itself expand business ties, but instead set out how Switzerland could fall under the aegis of EU institutions such as ECJ judgments or state aid rules in return for market access.
"This poses a problem as the Swiss do not want to be subject to these things. We have been discussing this for over three years and are now in the 17th or 18th round of talks," said a Swiss official familiar with the discussions.
The parties now settle disputes though a joint commission, which under a treaty would do so after guidance from the ECJ.
Pfister suspected the EU was keen for a quick deal with Switzerland to "pacify the Swiss flank" while turning its main attention to thorny Brexit talks with Britain.
"We will wait and see how the Brexit negotiations go and then perhaps adopt a position similar to the UK," he added.
PREVENTING TRIUMPH FOR FAR RIGHT
Pfister's remarks reflect many Swiss conservatives' thinking that the freedom of movement principle so dear to the EU - it allows the bloc's workers access to Swiss jobs, and nearly prompted a crisis last year over Switzerland's plans for immigration curbs - is bound to change over time.
This may help Switzerland, which faces unease over immigration in a country whose population is already a quarter foreign but is keen to preserve its EU market access.
One EU diplomat dismissed this as "wishful thinking", saying failure to lock in ties with the bloc now could come back to haunt the Swiss.
"People in Brussels don't like cherry-pickers. If things start to pick up in EU then cherry-pickers will not be very popular," he warned.
Swiss politics are driving the shifting mood. Other referendums looming on European issues such as limiting free movement should be settled before holding a vote on a treaty, Pfister said.
"If you do it before (Swiss) elections in 2019 the risk is great that you would lose, and that would hand the SVP a triumph that we wouldn't want to have," he said.
(Editing by Ed Osmond)