Banque Cantonale de Geneve : Elimination of the currency floor: one year later

Economic brief published 11 January 2016 in Weltwoche.

Jean-Pierre Roth* Elimination of the currency floor: one year later

Last year, the Swiss National Bank shocked the market by lifting its currency floor for the euro. Very negative forecasts were made about the future development of the Swiss economy. Where are we?

The Swiss franc has normalized
In the days following the SNB decision, the franc volatility was high. The value of the euro dropped even below 1 Swiss franc (CHF). Since then, markets have stabilized around 1.08 CHF for one euro. Finally, the fall of the euro has been of around 10 %, much less than initially feared. In strengthening, the franc rejoined the group of inter-national currencies it left when the floor was introduced. In January 2011 - before the introduction of the floor - the value of the US dollar and the pound sterling were CHF 0.96 and CHF 1.50 respectively. Today, they are again at the same level. Thus, the drop of the euro has equally affected the dollar and the pound than the franc. There is no special case of the Swiss franc vis-à-vis the euro.

Our foreign trade has not collapsed
Last spring, many observers saw our export sector collapsing after the floor was lifted. They were wrong. As recent data show, foreign demand for Swiss products increased in the second and third quarters and the expected orders in the industry - with the ex-ception of the watch industry affected also by others factors - are pointing upwards. In net terms, i.e. taking imports into account, foreign trade contributed positively to Swit-zerland's economic growth in 2015.

The slowdown in our economic growth is not an isolated fact
In Switzerland, economic growth in 2015 will be lower than its level of 2014. It would be a mistake, however, to attribute this slowdown solely to the elimination of the floor. This development is global and our country, widely open, had to face the weakness of its export markets, especially those of the emerging countries. Our economic growth, which was expected early 2015 to be around 2%, will be most probably around 1%. A downward revision took also place for the world economy: the IMF expected a growth of 3.4%; it will actually be around 3%.

Our structural problems have worsened
The economic sectors having been affected most by the elimination of the currency floor are those, which were previously facing structural problems. Their financial mar-gins and their adjustment capacity were limited. They are even more today. Tourism is a striking example. These sectors benefitted from a subdued market pressure when the intervention floor artificially blocked the value of the franc. Their situation has clearly deteriorated.

Two conclusions can be drawn from this short analysis. (a) The resilience of our firms is due to the pragmatism of the social partners - ready to defend existing jobs - and to the priority set by our exporters to a high value production. (b) Some sectors must ur-gently adjust their structure, which do not fit to the present global and uncertain world. Firms will disappear other, better organized, will surge.
The adjustment capacity of the private sector is our best defense against external shocks: we should do our best to maintain a flexible economic framework, as new shocks will occur. The solution does not rely on an increased SNB interventionism.