Opinions - 14.09.2015 - 00:00 

The franc appreciation

Lower inflation and productivity increases of the innovative Swiss export industry are making the Swiss franc stronger. The appreciation of the franc boosts Swiss people’s purchasing power as customers in Austria’s retail trade, tourism and the local export industry near the Swiss border. A contribution by Christian Keuschnigg.


15 September 2015. Some are pleased, others are shocked: after the Swiss National Bank had lifted the minimum exchange rate of CHF 1.20 against the euro, the Swiss franc abruptly appreciated to one euro. This was an appreciation by a full 17 per cent, which immediately made Swiss exports more expensive on the European markets whilst making imports and foreign travel a great deal cheaper. The economy was groaning but the Swiss became richer in one fell swoop. Owing to cheaper imports, the inflation rate is decreasing once more, which means that the real purchasing power of salaries and other types of income is widely on the increase among the population.

The retail trade is advertising cars and other imported goods with a hefty euro discount. Whatever price reductions cannot be passed on to customers in Switzerland itself are obtained by some consumers in the areas just beyond the national border. This is pleasing for the economy in the Vorarlberg, which is profiting from shopping tourism.

Whoever has outstanding loans in Swiss francs or requires Swiss goods and services without being able to replace them now suddenly pays a great deal more. Accordingly, Swiss tourism and the Swiss export industry are suffering. Their competitiveness is being hampered; they must move all the levers to retain their position. Enterprises which are engaged in international competition, in particular, frequently lower their prices and have to accept falling profit margins at least for the time being.

Regaining competitiveness

Cost-intensive links in the value creation chain are outsourced to cheaper foreign countries. Thus companies import more of the currently cheaper inputs from abroad rather than producing them at home, or they decamp completely. They try to rationalise and cut costs – right down to pay freezes, downsizing and longer working hours. This starts the race to defend their market position through even more innovation and increases in quality in order to regain their competitiveness. But that takes time.

At least temporarily, the economy as a whole will have to expect a slowdown in growth and to be afraid of a rise in unemployment. To date, however, the consequences are amazingly slight, but then the Swiss economy is one of the most innovative and robust and is obviously able to cope with the appreciation. By now, the euro has risen again slightly and thus cushioned the appreciation shock to some extent.

Franc appreciation without any interference by the National Bank

The Swiss franc would have steadily appreciated without the interference of the National Bank, too. There was no alternative to the decision to lift the minimum exchange rate. If Switzerland increases productivity and keeps inflation lower than other countries by means of innovation, then the prices for Swiss goods increase less fast than those of their foreign competitors. This requires a counterbalance in order to keep the competitiveness of Switzerland and its trading partners in an equilibrium. Appreciation is necessary in order to remove the growing export surpluses, to stabilise the accumulation of external assets at a reasonable level and to distribute the prosperity thus generated at home. Permanent trade surpluses and the constant growth of external assets are incompatible with this. That would be like saving without ever consuming.

The only disquieting thing is the abrupt change which led to exaggerated reactions and leaves the economy with no time for adjustments. The excessive appreciation is a pent-up consequence of the minimum exchange rate – and also a consequence of the euro crisis: the more uncertain developments are and the riskier the investment of assets in the Eurozone are, the more investors want to move their money into the safe haven of Switzerland. This flight from the currency drives the demand for francs and thus the exchange rate to an exaggeratedly high level. When the euro crisis is defused, the excessive appreciation of the franc will also diminish, as the last few days have shown.

Franc loans in Austria and Eastern Europe

The appreciation is accompanied by difficulties for franc loans in Austria and Eastern Europe. It destroyed the illusion of investors and their financial consultants who thought that they would be able to incur cheaper debts with loans in francs rather than euros, and it makes problems for the banks which now have to get over bigger failure rates for such loans. However, the lower prices are expressive of Switzerland’s lower inflation and its gains in productivity, which constantly call for appreciation. If the increase in the amount of loan repayment due to appreciation is added to the lower interest rates, then franc loans cannot be permanently cheaper than euro loans. But if people only look at the lower interest rates and forget that when the franc appreciates, they will suddenly have to pay back more in euros, then of course they have a problem.

After all, the franc is a rock-hard currency. It constantly appreciates because Switzerland’s economy is more innovative and prices rise less quickly than elsewhere. This is something that a minimum exchange rate policy will not change, either. Appreciation is like a productivity whip for the Swiss economy, which now has to restore its competitiveness with every possible effort and even more innovation. The next appreciation is already on the horizon. What better could happen to the Swiss? With each appreciation, they boost their purchasing power and become richer.

This is what the retail trade close to the border, and tourism and the export economy in the whole of Austria, are profiting from. Austrians who import goods or services from Switzerland or go on holiday there will find things expensive, and they will have to look at the cost/benefit ratio all the more carefully and consider alternatives. And when it comes to loans in francs, it’s better not to forget the risk of appreciation – unfortunately, they are not cheaper than other loans.

Bild: Photocase / DoBingo. Erstpublikation in «Thema Vorarlberg».

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