The surprise of the decision by the Swiss National Bank (SNB) to unpeg the franc from the euro and the ensuing debate about the catastrophic failure to communicate the about-face will soon subside. The Swiss, however, will be feeling the economic consequences for months, maybe years.
Switzerland is making what amounts to a fiscal declaration of independence – a step eagerly welcomed by the country’s nationalist-conservative camp. But such independence has been illusory for quite some time now. Whether Switzerland wants it or not, economically it will be completely and utterly tied to the fate of the euro. The most important customers are located there. And the top competitors.
What will happen now is simply that the Swiss central bank will pass on the adjustment costs to the economy. That is as it should be: prices should be established by markets and not by institutions. But the fact is, the currency markets have been taking things too far for years now.
The cost of financial independence for Switzerland and its businesses will turn out to be higher than would be justifiable in the real economy.
Swiss CEOs must adapt their companies to a scenario where there will be problems with E.U.-market access and permanent appreciation of the franc.
It is completely normal that the franc is stronger than the euro, because the Swiss economy is in a far better condition than the euro zone. Switzerland, with its flexible job market and budget surpluses, is also in a better position than Germany.
Switzerland will be doubly punished for its propriety because the franc is a safe-haven currency. That has been the case since the German mark disappeared. And, consequently, the franc is completely overpriced with regard to a classic currency parameter such as purchase power parity. And probably will remain thus for a long time.
That the import prices for Swiss businesses are also going down is a weak comfort. The effect will never be enough to balance the export price disadvantage.
Swiss businesses that mostly produce at home and sell abroad will be hit hard, especially Swiss watchmakers. Tourism and the banking sector will also suffer. It is already rumored that famous watchmakers like Richemont and Rolex have plans to raise their prices. However, that may not be sufficient to balance the cut in margin caused by the currency effect.
The “Swiss made” promise of quality will be a burden for the watchmakers, because they cannot shift production abroad.
The banks are also hit pretty badly. The industry, already shaken by regulation, the lifting of bank secrecy and low interest rates is supposedly bracing itself for a new wave of cost cuts. That will have a knock-on effect on jobs.
Despite this unpleasant outlook, there has been no attempt at a debate in the country, or to get closer to the European Union in some way. Switzerland seems fiercely determined to shoulder the adaptability costs. “Now more than ever,” is the defiant tone.
However, it is somewhat ironic, that precisely now, with the introduction of an independent franc rate, market access to the European Union has become more important than ever. It will be bad for Switzerland and lead to technical currency disadvantages as well as administrative hurdles for exports to the European Union.
Whether Swiss businesses can continue to export to the European Union without hindrance, has become uncertain. The cause for that is the immigration debate. If Europe insists on making no concessions to Switzerland on the matter of limiting immigration, at the end, a termination of the agreement for free movement of persons becomes a threat.
And with that, the contracts of the “Bilateral I” package will be cancelled, wherein simplifications of product approvals, among other things, are regulated.
Swiss CEOs must adapt their companies to a scenario where there will be problems with E.U.-market access and permanent appreciation of the franc. The Swiss pig-headedness will then be put to an even harder test.
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