The Franc Is too Damn High

As the US and Europe continue to struggle with their debt and deficit crises, Switzerland is beginning to feel an economic downturn as well. Exports are dropping off, manufacturers are struggling, and their central bank is trying desperately to keep their currency under control.

What is the problem in Switzerland? Their currency is strong….too strong.

Due to the fall of the Euro and Dollar over the past year, the Swiss Franc, historically regarded as one of the most stable currencies in the world, has seen its value skyrocket against the two major currencies. The reason for the strength is because they have a comparably competent government:  Their debt is a mere 53% of GDP, thanks to government surpluses the past two years, and projected surpluses every year until 2015. Unemployment in the country is also a tale of its economic strength, which sits at a paltry 3%, and the nation’s GDP is expected to grow by 2% next year. As a result, the Swiss Franc has become a safe haven for investors worldwide, as more and more people are putting their money into Swiss bank accounts.

So far this week, the Franc has gained 8% on the Dollar, due in large part to the Dollar’s continued weakness. This year, the Franc has gained 32% on the Dollar and 24% on the Euro, bringing it to near parity with the multi-national currency. You’d think that with all this good economic news, Switzerland would be living it up and doing political happy-dances while its neighbors are in near panic mode.

In reality, the nation is beginning to see faults with being the go-to nation for banking. With the rising currency, exports are beginning to fall off, which is the bulk of the Swiss economy, especially in cheese and watches. In June, exports fell 8% due to slow demand from Europe. The manufacturing sector is also taking a hit, and some businesses have had to close their doors.

As a result, the Swiss National Bank (SNB) has tried to weaken the currency to stimulate the economy (this should sound familiar) by offering near zero interest rates and an increase in liquidity. The problem with this idea is that it was attempted in 2009 and 2010 under identical circumstances, and it was a miserable failure. The tide of investors looking for a safe haven cancelled out any attempt the SNB made to weaken the currency, which resulted in huge losses for the bank and calls for the resignation of its governors.

Isn’t it ironic that Switzerland’s history of fiscal sanity is actually hurting them because its main trading partners lack the same sanity? Because everybody else is stinking up the place, the Swiss are actually needing to weaken themselves to keep the exports flowing and the tourists coming. Even though the rest of the world is dragging Switzerland down, it might be wiser for the US and Europe to figure out what they’re doing right and try to copy it, rather than continue down this road of debt and inflation.

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