Switzerland’s special status in Europe is gone – the euro crisis is here
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Version 0 of 1. On Thursday afternoon the president of the Swiss National Bank (SNB) announced that he would scrap a cap in the value of the Swiss franc against the euro, triggering turmoil on the currency market. Since then Switzerland has been in a state of shock – not just the financial establishment, but also our political parties, the media and the public. We may have just witnessed the start of an entire new chapter in Swiss history. At the moment no one seems entirely capable of giving a confident prediction of precisely what the future will hold. But there is a vague consensus that Switzerland is facing a tough future. People here used to see their country as an island of tranquility in a sea of euro-crisis tears. Those days look certain to be over. What is really baffling is that absolutely no one predicted the SNB’s sudden change of strategy. When the national bank introduced the cap in September 2011, there were lengthy preparations during which political and business leaders were approached: the government, opposition, business associations and unions were all consulted well in advance. This time, however, the bank decided to fly solo. Even the business activity research unit of the Swiss Federal Institute of Technology, which usually collaborates closely with the SNB, was caught by surprise, issuing a press release that fluctuated between outrage and surprise. The fact that the central bank made this decision in such haste most likely indicates the extent of its despair over the current economic situation. It’s hard to come up for any other explanation as to why it performed a U-turn with such grave consequences for Switzerland’s people. Until now the cap was seen as the guarantor of the truce between unions, industry and finance. For some time Switzerland’s unions have been asking not just to keep the cap in place at all costs, but even to raise it to SFr1.30. Now we may see why: ditching the cap could lead to a sharp rise in unemployment; companies in the export sector will be forced to make redundancies; and tourism will suffer too, even if its overall role in the Swiss economy is less significant. When the Swiss franc approached parity with the euro after the outbreak of the eurozone crisis in 2010-11, unemployment rose briefly – now that development might become permanent. Unemployment in Switzerland sits at 3%, so a rise may seem manageable. But in a country that has enjoyed almost 20 years of near full employment, even a small rise will be perceived as a real crisis. The left-right polarisation in politics, which became virulent with the referendum on executive pay in November 2013, will only increase. Switzerland’s export-oriented industry has reacted with horror. The Swatch chief executive, Nick Hayek, said he was “lost for words”. Only a few representatives of the financial industry – such as Oswald Grübel, the former UBS chief executive – have welcomed the move. In the world of Swiss banking, there is a widespread view that a hard franc has always been good for the country, and that the central bank’s constantly growing foreign reserves present a risk that is not worth bearing. But the preference for a restrictive monetary policy comes from ideological choice rather than pragmatism: a franc that is too strong will explode the banks’ wage bills. Swiss banks’ stock prices suffered a massive drop after the SNB announcement. In the long term, the central bank’s move could spell the end of Switzerland’s special status on the continent. That the eurozone crisis would eventually catch up with an export-focused economy at the heart of Europe may not come as a massive surprise. But the SNB’s interventionist stance managed to prolong the moment of truth for so long that some thought it would never come. Now it has arrived. |