Eureporter 22 January 2015
Swiss franc reaches for sky as snow falls on Davos
Denis MacShane | January 22, 2015 | 0 Comments
Whew! I got out just in time. Two weeks ago I was in Davos, skiing with former MP colleagues from Britain and Switzerland. For six decades UK and Swiss politicians and ministers, retired or active, have been meeting for a week on the slopes. All pay their way but the chairlift diplomacy that takes places helps forge one of the strongest inter-parliamentary relationships that exists between two of the most enduring democracies in the world.
Now Davos has become a whole lot more expensive. The sudden, unheralded decision by the Swiss National Bank (SNB) to unpeg the Swiss franc from the Euro has been one of the biggest upsets on the forex markets in years. Already firms have had to stop trading as they were caught on the wrong side of the suddenly rising Swiss franc.
Just as there were hopes that banks and related financial service firms were leaving the instability of the post-2008 era, the Swiss decision has produced headlines about new currency wars.
2 weeks ago €1 bought CHF 1.20 the rate decided in 2011 as Switzerland was flooded with Euros as people sought a safe haven from the Eurozone crisis. Now the euro is at par with the Swiss franc – a 20 per cent revaluation of the Alpine currency. World Economic Forum participants have already paid for their stay but from the beginning of February Davos, Zermatt and Verbier will be much more expensive.
Swiss exporters are furious as overnight the cost of a Swatch, Swiss chocolate or pharmaceuticals went up by 20 per cent. Swiss tourism will see a drop in customers especially as Russians who have been a major mainstay of the Swiss tourist business in recent years are already staying away as a result of the weak rouble.
There is panic in East Europe where mortgages in Swiss francs at low interest rates are common but overnight the monthly repayments have got more costly. Croatian banks have rejected a suggestion by the government in Zagreb to fix a rate between the franc and the Croatian kuna. The Polish government has ordered an inquiry into the zloty-franc rate as angry mortgage holders may vote out the Civic Platform government as their monthly payments rise sharply.
The SNB promised to buy euro to maintain the peg and even charged banks a fee – a negative interest rate – to deposit money with the national bank. With today’s quantative easing announcement by the European Central Bank likely to lead to a lower euro the hunt for safe currency havens was growing stronger and it became impossible for the SNB to keep buying up euros.
In a country that is home to the Mont Pélerin Society created to honour the teaching of Friedrich Hayek and Milton Friedman, it sounded odd to so crudely buck the market by deciding a value of the currency independently of those who wanted to buy it.
That said this is a massive decoupling of Switzerland from all its Euro using neighbours. Berne has just signed a tax disclosure deal with Rome and along with similar agreements with other major European countries and with Washington, the days when Swiss banking secrecy was the main reason in addition to conservative banking traditions that attracted massive post-war inflows are well and truly over.
This time last year Switzerland voted to impose a cap on the number of EU citizens who could come and work or live in Switzerland. 34 per cent of the Swiss population are first or second generation immigrants from elsewhere in Europe.
On the whole the Swiss have handled the problem of outsiders coming into the country firmly but fairly.
This is changing. If in Britain or France the EU immigrant is seen as a poorly paid worker in Switzerland it was rather the massive influx of German-speaking professionals and German money buying houses and apartments that provoked resentment.
Now Switzerland has to find a way of solving its repudiation of the core EU principle of free moment of people. Brussels and the 28 member states have made clear Switzerland cannot unilaterally dictate the terms of its relationship with the EU. If Swiss banks and firms want full market open access to the EU then the Swiss have to accept EU access to Switzerland.
Until last week, the Swiss immigrant cap decision was the subject of professional bi-lateral discussion with neither Bern nor Brussels looking for a show-down.
Now that the SNB has ended the link to the euro the temptation for many Germans and citizens of northern Europe with memories of relatively hard currencies that maintained their value may be to hedge by shifting into Swiss francs. Switzerland’s relationship with the EU will need careful handling after the SNB’s decision.
Switzerland exports half its GDP and imports 40%. Swiss exporters have become used to the €1-CHF1.20 link and will now scramble over what prices to charge for goods and services. Ten per cent of Swiss GDP is based on commodity trading and with the slump in prices of metals, oil, and other globally traded goods it is not clear how de-pegging the franc will effect this sector which has grown to be worth more to Switzerland than tourism in recent years.
Will Greeks, Portuguese, Italians and Spaniards be now temped to move their euros into Swiss francs as an insurance against more eurozone difficulties?
The abrupt way the SNB announced its decision was a throw-back to days when government decided changes in national currencies during the pre-ERM and euro era. The Swiss franc going up sharply may swell Alpine chests with pride but the move does not add stability to Europe’s financial arrangements as a Greek election and a major ECB move on monetary easing begin 2015 with headaches for the European and wider banking community.