"Sober" Swiss franc strategy praised

Switzerland has to consider its franc policy carefully. Keystone

Swiss economist Thomas Straubhaar says the government and Swiss National Bank (SNB)’s sober approach to coping with strong Swiss franc pressures is the right one.

This content was published on June 28, 2011 minutes

Resorting to a proactive strategy would be counter-productive, he tells

The Swiss franc has gained 25 per cent in value against the euro and the dollar over the past four years. The cabinet is currently considering measures to offset the negative impact of the continuing strong Swiss franc on the country’s industry. The hotel industry, firms and unions are calling for help from the Swiss state. Is this the right approach?

Thomas Straubhaar: At first sight this seems quite logical. But I would urge caution as this kind of state aid is always a precarious balancing act. Direct assistance can also have side effects. It’s also hard to agree upon which businesses need help and which don’t.

Switzerland has an import industry, which benefits from the strong franc, as well as an export one. Trade associations’ comments that the strong franc is a problem for the whole of the Swiss economy is just not true.
Industry and the hotel sector both benefit, as imported goods such as energy, raw materials or luxury items have become cheaper compared with abroad. Swiss tourism also strongly targets high-spending guests, who are less affected by the exchange rates.
The second benefit of a strong franc for Switzerland is that the country has the lowest capital costs in the world. The interest rate is low and risk premiums are extremely low. A Swiss hotel owner who is modernising his business is able to secure much cheaper capital than his competitors in the rest of Europe.

As capital is so cheap Swiss firms operate in a capital-intensive manner. Productivity is therefore extremely high in Switzerland and industry is more efficient and competitive. The Swiss government and Economics Minister Johann Schneider-Ammann have remained surprisingly relaxed given the strength of the franc. Are they too passive?

T.S.: Not at all. Staying calm is the right strategy. It would be extremely perilous to intervene in the short term in the complex exchange rate mechanisms. The problem would be how to ensure accuracy and longevity, as by the time measures take effect the exchange rates could look completely different.

The tourist sector and exporters, who ask high prices for high-quality services, have to maybe accept lower margins but not necessarily a drop in turnover or demand. Should Swiss exporters focus more on the growth markets in Southeast Asia, India or South America?

T.S.: Diversification is a smart strategy. In Southeast Asia, eastern Europe and Latin America markets are growing at a tremendous rate and the public’s purchasing power is rising fast.

The countries to watch are not just China and India, but also Malaysia, Indonesia, the Philippines and Vietnam, and in Europe the eastern European countries, and especially Turkey.

The Swiss franc has risen not only against the euro, but also against the dollar and the currencies in all these countries.

Swiss businesses have recently been offering not only individual products, but also services that make up the whole value chain including taxation, finance and insurance.
The most popular example of this is the Olympic Stadium in Beijing. The Chinese implemented the project but the Swiss architects Herzog & de Meuron oversaw the whole process in a very economical way. The Basel-based Bank for International Settlements (BIS) has warned of rising inflation and new global economic and financial crises. It has called on the Swiss National Bank (SNB) to urgently raise interest rates. Why the delay?

T.S.: The situation for central banks is incredibly difficult; that of the SNB is slightly easier than that of the European Central Bank (ECB). There have already been new financial bubbles as witnessed by rising prices on stock markets and for raw materials, property and financial assets. Meanwhile the worst is still not over for many countries’ economies.

Central banks have had to raise interest rates due to these bubbles. If the SNB followed suit the Swiss franc would become more attractive and this would lead to a new re-evaluation pressure on the franc.

Compared with the SNB, the situation for the ECB is much tougher. If you look at Germany it should raise interest rates as their economy is booming and the inflation rate already clearly lies above the two per cent mark and this is continuing.

Fellow eurozone states like Greece, Ireland, Portugal and Spain are on the edge of an economic depression. If interest rates rise that would cause interest charges to explode. The restructuring of national budgets and economic recoveries would be delayed or hindered.

Central banks therefore face a terrible dilemma. The creation of bubbles is obvious, the economies are only again operating at capacity in a few countries, and there are still too many market risks. If interest rates are raised too quickly, it cannot be ruled out that the economy again falters. Social Democrat President Christian Levrat has called for the franc to be temporarily tied to the euro to help Swiss exporters. Is that a solution?

T.S.: I don’t really think so. Last winter the SNB tried to influence exchange rate policy. It bought euros in order to weaken the franc. Now it has the problem of sitting on higher euro assets and has to write them down.

Tying the franc to the euro would simply mean the SNB would have to buy euros on a daily basis to keep the Swiss franc artificially devalued. Switzerland would end up feeling like a tiny actor in the middle of the huge eurozone with very little clout.

Strong franc

The Swiss franc is a so-called “safe haven” currency, which means that investors and speculators buy it when other currencies, including the euro and the US dollar, are under pressure.

The increasing value of the Swiss franc is a source of great frustration for exporters because their goods are more expensive to sell outside Switzerland, particularly in the eurozone.

It costs around SFr1.22 to buy a euro at present. A year ago, it would have cost SFr1.48. The increase in the value of the franc over the 12 months is about 17%.

The franc has also gained inexorably in value against US dollar, that has been weighed down by slow economic growth and – above all – an increasing mountain of debt.

The dollar has been below parity against the franc for some time. A single dollar can now be bought for around 85 Swiss cents. 

The Swiss National Bank has emphasised that it does not pursue an exchange rate target, but consistently bases its monetary policy on its legal mandate.

This mandate stipulates that “the SNB is required to ensure price stability, while taking due account of economic developments”.

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Export industry

In the last 20 years Switzerland has become a major exporting country, according to a study by the Swiss bank Credit Suisse published in May 2011.

Exports of goods and services accounted for only one third of gross domestic product in 1990; by last year this had risen to 57%.


The reason for this rapid increase is globalisation.

In comparison with many other countries, the Swiss export industry emerged relatively unscathed from the 2008-2009 international economic crisis, and recovered more quickly.


One reason for this is the fact that the pharmaceuticals industry, which is relatively stable, accounts for almost one third of exports, the report says.

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