Unpegging the Swiss France OMFIF

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Stronger Swiss franc brings advantages

End of peg will reduce current account surplus and short-term capital inflows

By Denis MacShane

The mid-January ending of the Swiss National Bank’s peg of SFr1.20 to the euro resulted in the currency initially soaring to above parity, although it has now settled down at 1.06 to the euro, a more modest Swiss franc revaluation of 13% against the initial rises of over 20%. There have been predictable complaints from exporters and hotel operators, but the country has shown strong evidence of resistance to exchange rate pressures, and the move has brought some considerable advantages.

Swiss industrial output per capita is around the highest in the world, despite the franc’s roughly 30% revaluation against the euro in the three years before the peg was introduced in 2011. The strong franc is helpful for the country’s build-up of foreign holdings, for it allow Swiss companies and asset managers to buy assets more cheaply in the euro area and further afield.

Switzerland has to find some offsetting influences to compensate for last year’s referendum decision to impose quotas on immigration from the EU. The EU made clear that the Swiss cannot benefit from full access to the single market if they reject free movement of people and the rulings of the European Court of Justice. A stronger Swiss franc leading to more euro area imports into Switzerland and fewer exports will not be unwelcome in Berlin or Brussels. Germany is resisting any targeted action to bring down its unnaturally large current account surplus of 7.5% of GDP. The Swiss surplus has averaged more than 10% of GDP in the last five years. Now that exchange rates are more realistic, it should be on the way down – showing up the Germans’ lack of movement in this area.

Imports from the euro area will be cheaper. This will help sustain living standards even if jobs and wages in Switzerland’s export and tourist industries are reduced. Destabilising short-term capital inflows from the rest of the world will now be easier to control. A decisive factor behind the ending of the peg was that, despite the country’s negative interest rates, the Swiss National Bank had to raise to unsustainable levels intervention to depress the franc, buying up around SFr100bn in foreign currency in the weeks before the peg was ended.

One big impact will be felt outside Switzerland. The European and national authorities have not been able to prevent hundreds of thousands of central and east Europeans from taking out mortgages in Swiss francs which now have become much more costly. There are said to be 60,000 mortgages in Swiss francs in Croatia alone, for a total SFr3.8bn, often contracted by pensioners or those on low pay. Allowing Swiss franc mortgages to be sold to citizens who erroneously assumed the euro-franc peg would last for ever was a mark of European irresponsibility.

It is now clear that the SNB had little choice in its January decision, which has received broad support from members of the Swiss parliament, government officials and bankers. The SNB and the Swiss parliament believe that sound politics and sound money are linked. The SNB’s governing council, although it took the decision in secret, is arguably linked to a broader spectrum of Socialist and trade union relationships than seen in most central banks.

In his 1993 doctoral thesis, SNB President Thomas Jordan expressed doubts about the idea of a single European currency. As long as the euro was reasonably strong, he went along with the stability of the peg. But in recent months, as the build-up the European Central bank quantitative easing and a weaker euro gained momentum, there was only one way for Jordan to go.

Denis MacShane is the UK’s former Minister of Europe and a member of the OMFIF Advisory Board. His book Brexit: How Britain Will Leave Europe is published by I.B. Tauris

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