Swiss caught in the wake of massive FX currents

March 19, 2015

REUTERS/Thomas Hodel

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Pity the Swiss. Despite the best efforts of the central bank, their currency is caught in the slipstream of massive foreign exchange currents. The result is slower GDP growth and frustration all round.

Make no mistake. Over the years, Switzerland has gained far more than it has lost from close ties with the European Union. The country’s industrial and financial sectors are so well integrated that for most purposes the EU can be considered the home market.

An important exception is the single currency, exclusive to the euro zone. There were huge flows into the Swiss franc during the 2008 financial crisis and the subsequent euro zone debt crisis. While Swiss bank accounts no longer offer shelter from prying taxmen, the nation’s currency was a haven from the possibility of a euro collapse.

By August 2011, the franc had risen about 60 percent against the euro from pre-crisis levels. That appreciation was tough on exporters. The Swiss National Bank’s solution was to cap the currency at 1.20 per euro. That lasted until this January, when the limit was abandoned because it was causing the SNB’s balance sheet to balloon.

The franc is now trading around 1.06 per euro, much stronger than levels which many private economists consider fair value. The result is lower growth. In December, the government’s experts forecast a 2.1 percent increase in GDP in 2015, and 2.4 percent in 2016. On March 19, the numbers were cut to 0.9 and 1.8 percent respectively, despite cheaper oil and more favourable economic news from the euro zone.

The central bank is left without a strategy. It can only tinker around the edges. The government can do nothing. Industrialists may eventually respond by cutting costs, but financial flows are faster and more powerful than wage negotiations and investment strategies.

For the big central banks, the Swiss problems are merely uninteresting collateral damage in what might as well be a currency war. In this sort of conflict, the little guys usually lose.

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