If I were to move to another country, it would be Switzerland. I see a lot of myself in the country. It is productive, wealthy, and non-committal to relationships, much like the kind of person I want to be. The thing that interests me most is its economy. It fascinates the hell out of me. Switzerland is one of those rare countries that has such a strong economy that it causes problems...for its own economy.
Most people would say that’s not possible. How can economy be so strong it causes problem for its own economy? For a more familiar example, think of the United States. Its economy is strong because of its easy access to credit, low cost of living, and ease of doing business. This also leads to over expansion, income inequality, and the risk of financial crises.
In Switzerland’s case, it is their reputation for neutrality, bank secrecy, and a wealthy middle class that gives it both benefits and problems. This is usually seen in the Foreign Exchange Market (FOREX), where the value of currency fluctuates relative to other currencies.
The Swiss franc keeps appreciating in value. That is a good thing for Swiss consumers and savers because it makes it cheaper for them to buy goods from other countries and go on vacations, which I imagine you’d want living in a place like Europe.
This creates problems for the Swiss economy though. The Swiss economy is dependent on exports. Its current account balance, which is exports minus imports, was $75.82 billion. That is responsible for 15% of its GDP.
If fewer people buy goods from Switzerland because of its currency is higher than their own, Swiss exports will go down and its GDP along with it. This puts the Swiss central bank, SNB, in a difficult position.
This past week, one of the world’s largest banks, Deutsche Bank, looked like it was on the verge of collapse. Deutsche Bank does business all over the world, including the US, but it would affect its home country Germany and the rest of Europe especially hard.
Many people in Europe are worried that the euro would decline in value with its economy in such an event. They’re also worried deposits in Deutsche Bank and the countless other European banks would vanish quickly.
So what do they do? They start buying Swiss francs and putting their cash in Swiss banks. You can see this in the FOREX markets. I read in the Wall Street Journal yesterday that the euro dropped against the franc by 1.3% this past month and 0.5% this past week.
That doesn’t sound like a large drop, but considering people who speculate in the FOREX markets can borrow $100,000 for only $1000, a 1.3% swing would mean $1030 rise or decline. That would wipe out speculators who bet the wrong way.
The Swiss central bank has tried and failed to keep their currency from appreciating. It went even as far as to charge people who deposit money with them negative interests rates. That’s right. Switzerland is one of the few places in the world where banks charge you money to loan it out.
Several years ago, they started pegging their currency to the Euro. They wanted their currency to exchange 1.29 per euro. The Swiss central bank did this by buying euros. They tried to increase the supply of Swiss francs to keep up with the increase in demand.
That’s like expecting a beaver dam to stop an ocean current. The Swiss economy is only 4% the size of the EU’s. There is no way pegging their currency would be a long-term solution.
Eventually, the SNB gave up that idea and their currency appreciated approximately 20% in one day. Remember what I said about the FOREX traders who can borrow $100,000 with only $1000 down? Someone who leveraged a full $100k could have lost $20,000 when they only had $1000. They and the brokers who loaned them the money were wiped about by this sudden swing.
That sudden currency shift caused Swiss GDP to decline in 2015. Their economy expanded so far this year, but many are worried that a collapse of Deutsche Bank would affect them again in such a way.
The funny thing is Switzerland is never truly neutral from the EU. It can’t adapt its monetary policy in a beneficial way to the EU and it relies on them for exports. In a world where every central bank is trying to inflate their currency and taxation is ‘oppressive’ (depending on who you ask), many people continue to see Switzerland, with its strong labor market and bank secrecy laws, as a reliable currency that will hold its value and a safe place to park their money.
This leads it to being such a good economy that is causes problems. They can’t grow their economy significantly until the rest of the world catches up. In the end though, that is one of the better problems an economy can have..