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Switzerland Benefits From Failing Euro

The Swiss franc has always been seen as a safe haven, both in troubled times and in general. In the last 15 months it has appreciated almost 30%. This has less to do with any action by the Swiss than the deteriorating economic situation in the euro zone.

Based on necessity rather than choice, Swiss bankers have chosen to set a fixed exchange rate between the Swiss franc and the euro, pegging the franc to the euro. Though not an outright endorsement, this can be seen as recognition of the status of the euro in the European and global economy. It will slow down the tendency for dealers to bet against the euro and could stiffen the spines of EU bankers and regulators to beef up their own efforts to avert a crisis. Twisting the analogy, if a rising tide is lifting the franc, then the lifeline to the euro boat, even if it has a few leaks, may help keep it afloat too.

Switzerland is surrounded by EU countries and their inhabitants pour over the almost 1,200 mile-long Swiss border for trips and, as often as not, to stay where they can escape to a more stable economy and lower tax rates. They and their Swiss neighbors then head back on a regular basis to do their shopping in the EU, getting better and better bargains as the euro slides in relation to the Swiss franc.

The Swiss franc reached parity with the euro in August of this year. That pleased investors who had moved their money into francs but turned up the volume on the alarm bells that had been ringing in the Swiss National Bank (SNB) for some time. German magazine Der Spiegel reported that the president of SNB, Philipp Hildebrand, announced a "minimum exchange rate" of SNF .1.20 to the euro to be implemented immediately.

It is, obviously, too soon to know the effect this decision will have in Europe or, indeed, around the globe. The Swiss are hoping that it will diminish the flow of "hot money," bolster the local economies and help keep Swiss exports competitively priced.

As this was a unilateral decision by the Swiss, it is not something the European Central Bank can rely on with any degree of confidence but it will certainly influence their planning and actions to deal with the weaker European currencies. Their hope will be that it will improve confidence in the euro and reduce interest rates on the borrowings of the countries with the highest debt levels.

A good indication will be the reaction, if any, in the bond markets and by the rating agencies. Another sure sign could be easing of the difficulty facing German Chancellor Angela Merkel within her own party to pushing through a reform package to further shore up the euro.

If nothing else, it is another example of the interdependence within the global economy and the existence of its ability to force participants to face the inevitable and self-regulate, however reluctantly.

Photo Credit: Tony O'Doherty

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