From the perspective of the EU, taking punitive action would make them look like Russia, eager to push their 'allies' about. It would be a gift to people who say the EU wants to take away countries' individual sovereignty.

According to those who oppose caps, instituting caps will cause a bunch of pain anyway. If the EU want to punish the swiss, the best thing to do would be to allow that pain, which the swiss have indisputably brought upon themselves.

I think you are right, letting them run into that knife is probably the best way. However, the counterargument also holds some sway: Switzerland is free-riding already, having many of the common market benefits of the EU without giving he loss of sovereignty that EU membership entails.

The whole EFTA agreement only works because Swizerland etc. are relatively small compared to the rest of the EU. If everybody had the EFTA deal and there was no EU, the whole thing would go to shambles within a few decades.

Actually Switzerland will most likely have to take this action itself, as the Swiss law now contradicts itself in this aspect.