6th August 2012
The nature of the economic crisis that has hit the Euro area leads to a lot of concentration and debate about the weaker nations involved. But in economics terms it is just as significant to look at the other side of the coin. And if we look for a nation seeing the reverse of what is happening in Greece,Spain,Portugal and Italy we need only take a look at the country which borders on four Euro nations, Switzerland. If we were to make a sweeping statement we would say that she is a creditor nation to their debtor status. But we also learn the consequences of a rising exchange rate and we get quite a few clues as to what might happen to Germany if she were to leave the Euro.
The driving force:currency appreciation
If we look back over the Euro era we see that the Swiss Franc has been influenced by a factor that in many respects has had nothing to do with Switzerland's real economy at all. If there was a link it was the way Switzerland ran very low levels of interest rates compared to other parts of the world and in particular Eastern Europe. This led to what became called the "Carry Trade" where foreign borrowers used Swiss Francs as the currency of choice because her interest rates were far lower. For example if we go back to the end of January 2004 we see that Swiss 3 year government bonds yielded 1.23% and that all interest rates for shorter time periods were below 1%. Whereas the base rate of the Hungarian central bank for example was 12.5% leading to potential gains by borrowing at a much cheaper rate in Swiss Francs.
So much of this foreign Swiss Franc borrowing took place that it depressed the value of the Swiss Franc (it is equivalent to selling it). Over the period from the beginning of 2003 to late 2007 it fell from 1.46 Euros to 1.68. What happened next? The credit crunch. Suddenly being exposed to exchange rate risk on your borrowing did not look such a cunning plan in a world which looked much more uncertain and fear replaced greed.
So those that could ended the trade and this was added to by Switzerland's stable reputation in a world suddenly hitting financial trouble. Against the Euro the Swiss Franc strengthened to 1.48 at the opening of 2009 so just about back to square one. But then it launched itself forwards to 1.25 at the opening of 2011 and to a peak of 1.05 in August 2011. This was in spite of considerable foreign currency intervention by the Swiss National Bank which had all the apparent effectiveness of King Canute's exercise in futility.
At this point the Swiss National Bank decided it was losing so badly -it had run up considerable losses with its failed intervention- that it would change the rules and established a cap of 1.20 versus the Euro with promises of "unlimited intervention". Since then the exchange rate has become an apparent fan of Ashford and Simpson as it hovers adjacent to 1.20.
Solid as a rock
And nothing's changed it [Oh…]"
So surely the Swiss economy has been crippled?
You might expect that the impact of the credit crunch on an economy with a large banking sector (Union Bank of Switzerland, Credit Suisse…) and an appreciating currency would be calamitous. Er well no. After growing by 5% in 2008 the economy did shrink by 2.4% in 2009 and then grew by 3.6% in 2010. Since the second quarter of 2009 Switzerland has seen continuous growth and if we bring the story up to date we see this.
"The real gross domestic product (GDP) for Switzerland grew in the 1st quarter of 2012 by 0.7% compared with the 4th quarter 2011……GDP growth was 2.0% compared with the 1st quarter 2011."
And as we look forwards the Swiss are able to really buck the trend for 2012.
"the Federal Government's Expert Group is raising its growth forecast for 2012 from the previous 0.8% to the new figure of 1.4%."
Although even they do have concerns for 2013.