How the national debt affects the exchange rate

Exchange rate - Corona virus infects the Swiss franc - how the disease affects the global economy

Corona virus infects the Swiss franc - how the disease affects the global economy

The Swiss economy has learned to live with the exchange rate. Rapid boosts in appreciation remain a threat.

Since the beginning of December, the Swiss franc has been appreciating significantly against the euro. The common currency has devalued by more than 3 percent in this short period of time. Ten weeks ago, one euro cost just under 1.10 francs, but is now available for just over 1.06 francs.

For large parts of the Swiss export industry, this represents a considerable additional burden in the tense international economic environment. This applies primarily to the industry, which calculates with relatively tight margins. This also has to cope with the current weakness in demand from German automobile manufacturers, both directly and indirectly.

In an intensifying competition, Swiss machine and plant manufacturers can hardly pass their exchange rate losses on to customers without fear of losing orders. Many therefore take the appreciation of the Swiss franc on their own head and sacrifice part of their profits in exchange for market share.

The Swiss machine, electrical and metal industries have often been confronted with such situations in recent years. The big Swiss franc shock at the beginning of 2015, when the National Bank lifted the minimum euro exchange rate and at least briefly allowed the franc to appreciate by 15 percent, is still fondly remembered in the industry.

A year after this event, their association Swissmem complained that around a third of all member companies were in the red.

The industry's warning is no longer as alarmist

At that time, however, the euro-franc rate was still at 1.10, which was much more comfortable for the companies concerned compared to the current rate. Nevertheless, the industry is complaining much less loudly than it was then.

The association speaks of a “considerable” weakening of the competitiveness of its member companies as a result of the “clear overvaluation” of the Swiss franc. He also called on the National Bank to “take all reasonable measures” to prevent further appreciation. But the warning is obviously less alarmist than it was then.

One reason for this is likely to be to be found in the hope of Swiss exporters, who expect the current appreciation dynamic to weaken as soon as the spread of the corona virus is under control. The strong influence of the virus on the exchange rate can be seen in the fact that the dollar has appreciated by more than 2 percent against the Swiss franc since the beginning of the year.

In times of crisis, the dollar, like the franc, acts as a safe haven for international investors. This should also explain why the US currency has appreciated by a good 3 percent against the euro since the virus was discovered.

Things are a little quieter in industry than a few years ago because, after the four-year euro minimum exchange rate-off period that expired in January 2015, they have adjusted to the long-term appreciation of the franc again.

In the machine, electrical and metal industries, around 30,000 jobs have been cut or relocated to cheaper locations abroad since 2015. According to Rudolf Minsch, chief economist at the business association Economiesuisse, things would be very difficult for Swiss industry at a rate of 1 franc per euro.

Prices rise much faster abroad than in Switzerland

Finally, the striking difference in inflation between the euro area and Switzerland is also helpful. As a result, prices in the euro zone rise faster on average than in Switzerland, which significantly reduces the long-term consequences of the appreciation of the franc. This is illustrated, for example, by an analysis by the ETH Zurich's economic research center for tourism.

The prices for hotels and restaurants in Austria have risen by an average of 35 percent more than in Switzerland since 2005. At the same time, the franc has appreciated by 40 percent against the euro, but in real terms Switzerland has only become 5 percent more expensive for foreign tourists than the rival destinations in the neighboring country.

However, the inflation differential has almost no effect on short-term demand behavior, which is why the National Bank must do everything in its power to curb short-term appreciation surges. Minsch also warns that the number of export companies in distress increases exponentially if the euro-franc exchange rate moves too quickly towards parity. The industry association Swissmem also seems to recognize that a better exchange rate in the short term is not available for free.

To do this, the National Bank would either have to push the key interest rate even deeper into the red or spend larger sums to defend existing exchange rate limits. Both measures would have undesirable side effects and would probably also meet with political resistance. Since January at the latest, when the USA added Switzerland to its list of potential currency manipulators, the resumption of a minimum exchange rate is no longer an option.