Currency Soars

Switzerland Raises the Drawbridge

Swiss Alps cow EU flag euro
On the currency markets, the Swiss Franc has gained in popularity.
  • Why it matters

    Why it matters

    Switzerland’s decision to abandon its currency peg against the euro could trigger a new wave of defensive currency revaluations around the world, and feed fringe movements in Germany to abandon the euro.

  • Facts


    • Switzerland on Thursday decoupled the Swiss franc from the euro, sending the euro plunging up to 40 percent.
    • The ensuing currency panic was used in Germany as a warning against attempts to abandon the euro for the deutsche mark.
    • On Friday, the euro had recovered slightly against the Swiss currency, and was down 16% since the rate change at €1.01 per Swiss franc.
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Bernd Lucke, spokesman for a small German political party that would like his country to abandon the euro, felt vindicated once again.

An opinion this week by the European Court of Justice validating the European Central Bank’s bond purchase plans gave new ammunition to the chairman of the Alternative for Germany party. On Wednesday, Mr. Lucke said the court’s support for the ECB to begin its own version of quantitative easing shows the euro is dysfunctional, and Germany could easily return to the deutsche mark.

While most Germans oppose such a move, some occasionally wax nostalgic about the less expensive days of the deutsche mark that ended almost 16 years ago. But 24 hours later, Mr. Lucke’s promise of a painless mark comeback was refuted in an indisputable manner – by the Swiss National Bank, ironically.

The Swiss central bank unexpectedly abandoned its long-standing support for a minimum exchange rate of 1.20 Swiss francs per euro, which triggered a panic in the markets. Within minutes, the Swiss franc catapulted upwards, gaining 39 percent against the euro and U.S. dollar.

The Swiss bank's decision to uncouple the Swiss franc from the euro is likely to further hammer Switzerland's own economy, which has suffered as its strong currency has discouraged tourism and made its products more expensive abroad.

The Swiss bank’s decision is likely to further hammer the country’s own economy, which has suffered as its strong currency has discouraged tourism and made its products expensive abroad. Thursday’s decision will indirectly help the euro zone, by devaluing the European currency and making Swiss imports from the 19 countries in the common currency zone, especially Germany, even more attractive.

But yesterday’s “flash crash” of the Swiss franc also underlined what could happen to Germany if it left the euro — an unlikely event but one demanded by Mr. Lucke, a bookish, persuasive economics professor from Hamburg and member of the European Parliament. On Friday, the euro had slightly recovered but was still trading down 16 percent against the Swiss franc, at €1.01 per franc.

In the event of a collapse of the euro, investors would likely withdraw money from southern European countries and invest in Germany, Europe’s strongest economy. The consequence would be a sudden and catastrophic appreciation of the German mark. Like Switzerland, Germany is seen as a safe haven for investors in an increasingly reeling global economy.

“The German currency would presumably appreciate massively, strongly pushing down exports and investment,” said Jürgen Matthes, an economist at the Cologne Institute for Economic Research. “This would not be offset by the fact that it would make imports cheaper for us.” A stronger German currency can certainly act as a “productivity whip,” forcing companies to produce more cost-effectively. But a currency appreciating so quickly would not give businesses enough time to adjust, leading to a sharp drop in exports.

On Thursday Nick Hayek, the chief executive of Swiss watch maker Swatch, summed up what he thinks the Swiss National Bank’s move will do to the Swiss economy, which would also take place if Germany ever left the euro: “What the SNB has done is a tsunami, for the export industry, for tourism and, finally, for all of Switzerland,” Mr. Hayek said.

“The pillars of the global economic system could begin to sway as a result of fluctuations in the currency markets.”

Mohamed El-Erian, Allianz Economic Adviser

The move by Swiss monetary watchdogs sent a shock wave through global markets. The Alpine country’s benchmark stock index lost 14 percent of its value, wiping off CHF 140 billion ($160 billion) in the value of its blue chips like Roche, Novartis and ABB– the biggest loss ever, and equivalent to Switzerland’s quarterly economic output.

Automatic teller machines at Postfinance, a large Swiss retail bank, stopped dispensing euros for a time. And in the foreign currency markets, the trading systems of some Swiss banks temporarily broke down amid the high trading volume.

A description of the AfD’s policies reads: “We advocate the reintroduction of national currencies and the creation of smaller and more stable monetary alliances. The reintroduction of the deutschmark cannot be a taboo.”

But what happened in the markets on Thursday proved that Mr. Lucke’s flirtation with breaking taboos is a dangerous game. At the same time, the Swiss decision to decouple its currency from the euro boosted fears of a global currency war, some economists warned.

For countries unable or unwilling to rein in government spending, exchange rates are a favored way to relieve economic pressure without having to make potentially unpopular austerity cuts.

In explaining the Swiss central bank’s decision to uncouple from the euro, Thomas Jordan, the president of the Swiss National Bank, cited diverging monetary policies among the world’s major economies.

“The differences in emphasis of the monetary policies in the key currency zones have increased markedly in recent times and are likely to become even more accentuated,” Mr. Jordan said.

Allianz adviser Mohamed El-Erian warned: “The pillars of the global economic system could begin to sway as a result of fluctuations in the currency markets.”

In the nightmare scenario painted by Mr. El-Erian, the major economic regions, the United States, Asia and Europe, engage in a devastating race to devalue their currencies. This isn’t entirely unrealistic.

The euro has been declining against the dollar for months.

The common currency has lost about 13 percent of its value against the dollar over six months.

If the European Central Bank launches a large-scale program to purchase sovereign debt, as expected, it may accelerate the decline in the value of the euro. ECB President Mario Draghi has said he is already pleased that the “conditions for a weaker exchange rate” for the euro have improved. This, he predicted, will have the desired effect of stimulating economic growth and thus inflation.

In Japan, the stimulation brought about by Abenomics — the economic policies named after Japanese Prime Minister Shinzo Abe — has substantially weakened the yen, which lost about 16 percent of its value against the dollar in 2014. That, in turn, is viewed with suspicion in Beijing.

The Chinese yuan is still stable, but a U.S. currency expert, Mike Newton, suspects that China could weaken its currency again if its economy continues to lose steam.

India, too, has pretended to be unimpressed by the fluctuation of its own currency, the rupee. The country’s central bank has now lowered its base rate, even though emerging economies are worried about capital flight. According to the Institute of International Finance, about $250 billion (€215 billion) in capital has been withdrawn from emerging markets since 2014.

This also puts their currencies under pressure.

The U.S. central bank’s response to a continued appreciation of the dollar will be key. The Federal Reserve has already grumbled about it, and John Williams, chief executive officer of the Federal Reserve Bank of San Francisco, recently hinted that the Fed’s planned rate hike could be postponed if the dollar becomes too strong.

Richard Clarida, an executive vice president with Pimco, the investment arm of German insurer Allianz, has said the euro could fall to reach parity with the dollar.

If that happens, the world’s major economic powers, like sleepwalkers, may just stumble their way into a currency war.


Daniel Schäfer is head of Handelsblatt’s finance pages and is based in Frankfurt. He has worked at news agency Reuters and between 2008 and 2014 wrote for the Financial Times. Torsten Riecke is Handelsblatt’s international correspondent, reporting on international finance and economic topics. To contact the authors: and

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