The intricate relationship between the Swiss Franc To Euro exchange rate has been significantly shaped by the Eurozone crisis, presenting both challenges and unique economic scenarios for Switzerland. While Switzerland remains outside of both the European Monetary Union and the European Union, the repercussions of the Euro crisis have undeniably permeated its borders. A striking example of this impact occurred in the summer of 2011 when the euro and Swiss franc briefly reached parity – a first since the euro’s inception. This unprecedented rise of the Swiss franc against the struggling euro was only brought to a halt by the Swiss National Bank (SNB) through the implementation of a minimum exchange rate of 1.20 francs per euro.
Despite this intervention, the Swiss franc remains considerably overvalued, a situation that has profoundly impacted not only the SNB’s financial standing but also the broader Swiss economy. The consequences of this strong franc are far-reaching, manifesting as revenue declines within the vital tourism sector, a contraction in exports, overall economic deceleration, and unfortunately, job losses. Understanding the dynamics of the Swiss Franc to Euro exchange rate is crucial for grasping the economic challenges faced by Switzerland in the wake of the Euro crisis.
This article delves into a detailed examination of the Euro crisis’s repercussions on the Swiss economy. We will provide a comprehensive overview of the economic landscape within Eurozone countries and explore potential crisis management scenarios. Furthermore, we will meticulously trace the evolution of the Swiss Franc to Euro exchange rate, dissecting the key factors that have influenced its trajectory. Crucially, we will analyze the measures undertaken by both the Swiss National Bank and the Swiss Federal Council to mitigate the strength of the Swiss franc. Ultimately, this analysis will shed light on the broader implications of a strong Swiss franc on the global economic stage.
The Euro’s Future: Crisis Indicators and Uncertainty
The stability of the euro, and consequently the Swiss Franc to Euro exchange rate, has been increasingly questioned as the Eurozone grapples with persistent economic challenges. The crisis that initially engulfed peripheral nations like Greece, Portugal, and Ireland has proven to be protracted and deeply rooted. More alarmingly, the crisis epicenter has expanded to encompass larger Eurozone economies such as Italy and Spain, evidenced by a significant surge in their interest rates. Financial markets are signaling a lack of confidence in a swift resolution, reflected in the elevated yields demanded on the government bonds of these crisis-affected nations.
Countries like Greece, Portugal, Ireland, and to a lesser extent, Italy and Spain, are perceived by financial markets as higher-risk investment destinations compared to more stable economies like Germany. This risk perception is directly translated into higher borrowing costs, as illustrated by the escalating interest rates for their ten-year government bonds (Figure 1). In January 2012, these yields reached alarming levels: exceeding 25% for Greece, 13% for Portugal, 7% for Ireland, 6% for Italy, and 5% for Spain. In stark contrast, stable Eurozone countries like Germany, France, the Netherlands, Finland, and Austria enjoyed significantly lower interest rates, with Germany paying less than 2% on ten-year government bonds in the same period. France and Austria, for instance, paid around 3%.1
Figure 1: Long-term Government Bond Yields (10 Years’ Maturity)
in per cent
Source: European Central Bank.
Market uncertainty surrounding the euro and its member states reached levels comparable to the 2008 financial crisis. In an attempt to avert a credit crunch, the European Central Bank (ECB) injected a record EUR 489 billion into Eurozone commercial banks through three-year loans in December 2011. This measure extended the average life of ECB loans dramatically, from a mere ten weeks to 21 months.2 Despite this massive injection of liquidity and a very low deposit facility interest rate of 0.25%, banks’ distrust of each other remained high. This distrust was evident in the ECB’s deposit facility funds reaching an all-time high of over EUR 500 billion in January 2012.3 Another indicator of the crisis was the price of gold, often seen as a safe-haven asset, which soared to a record USD 1,921 per ounce in September 2011. Jean-Claude Trichet, former president of the ECB, characterized the situation as “the worst global crisis since World War II”.4
The root cause of the Eurozone crisis is widely attributed to unsustainable levels of national debt. Greece, Italy, Ireland, and Portugal topped the list of indebted nations within the Eurozone, with Greece leading at 163% of GDP, followed by Italy (121%), Ireland (108%), and Portugal (102%). Spain, while also facing challenges, had a comparatively lower national debt at 70% of GDP, which was still below the Eurozone average of 88% but nearing Germany’s 82%.5
A significant contributing factor to the debt accumulation was the phenomenon of “moral hazard.” Weaker Eurozone states operated under the implicit understanding that they would receive support from stronger nations in an emergency to prevent a wider collapse. This expectation of bailouts, in the absence of stringent sanctions, incentivized riskier fiscal behavior and excessive debt accumulation. Drawing from insurance theory, “moral hazard” describes this increased propensity for risky behavior when protected from the full consequences of risk.6 In the banking sector, this translated to banks undertaking riskier investments, anticipating government bailouts in times of crisis. Economist Hyman Minsky famously stated, “If a bank is too big to fail, it is too big.” 7 The interconnectedness of global financial institutions amplified this risk, leading the IMF to coin the term “too connected to fail”.8
To mitigate potential domino effects and stabilize the Eurozone, the European Financial Stability Facility (EFSF) was intended to be replaced by the permanent European Stability Mechanism (ESM), accelerated to mid-2012 from the originally planned mid-2013. The ESM was established with a total capital of EUR 700 billion, consisting of EUR 80 billion in paid-in capital and EUR 620 billion in callable capital from Eurozone member states.9 Contributions to the ESM were based on each country’s share in the ECB’s capital, reflecting their proportion of the EU’s total population and GDP. The ECB updates these contributions every five years and upon new EU member entries. With 17 Eurozone states contributing to the ESM, Germany’s share was set at 27.1%. Decision-making within the ESM shifted to a qualified majority of 85% of votes by share of ECB capital for urgent financial assistance decisions deemed critical for the Eurozone’s economic and financial sustainability by the ECB and European Commission. This voting structure effectively granted veto power to the three largest Eurozone economies: Germany (27.1%), France (20.4%), and Italy (17.9%).10
In response to escalating market turmoil, Eurozone leaders convened 14 emergency summits in 2010 and 2011. The 13th summit in Brussels in late October 2011 marked a turning point with agreements on a debt conversion involving a 50% nominal discount on Greek debt held by private investors and the establishment of a European fiscal union with enhanced economic surveillance of recipient states.
The 14th Euro summit in early December 2011 saw the adoption of national debt brakes, inspired by the German debt limit, scheduled to take effect in 2016. These debt brakes stipulated that annual structural budget deficits should not exceed 0.5% of each state’s GDP, a less stringent rule than Germany’s 0.35% GDP limit.11 The European Commission was tasked with monitoring compliance and given greater enforcement powers, with the European Court of Justice overseeing adherence to debt brake rules. An intergovernmental treaty, excluding the United Kingdom and the Czech Republic, established automatic sanctions for states violating debt limits, preventable only by a qualified majority decision in the Council of Ministers. This marked a shift from previous practices where rule-breakers judged each other. Ironically, Germany, the proponent of the Stability and Growth Pact, along with France, were the first to breach it in 2002, subsequently leading to a significant relaxation of the rules.12 The sheer frequency of Euro summits – 14 in 22 months, averaging a new resolution every seven weeks – raised concerns about their credibility and effectiveness.13
Navigating the Sovereign Debt Crisis: Possible Solutions
Addressing the sovereign debt crisis and its impact on the Swiss Franc to Euro exchange rate necessitates considering various resolution pathways. Key scenarios include debt restructuring, Eurozone withdrawal, and the creation of a European fiscal union.
Debt Restructuring
Debt restructuring involves a reduction of debt, requiring creditors to accept losses on their claims. Unlike corporate or individual insolvency, sovereign insolvency lacks a clear legal framework, demanding extensive cooperation among all stakeholders. The immediate benefit of debt restructuring is a swift reduction in the debt burden. For instance, the 50% debt cut agreed upon for private Greek creditors aimed to reduce Greece’s national debt from 163% to 120% of GDP by 2020. However, the primary challenge lies in the losses incurred by creditors, predominantly banks and institutional investors. Many European banks required government support to prevent failures and systemic risks. The overall cost of these support measures is contingent on market reactions. If debt restructuring is perceived as an isolated case, the financial repercussions would be less severe than if it sets a precedent for future sovereign debt restructurings. In December 2011, Eurozone leaders decided against future private creditor involvement to avoid market distortions.
Eurozone Withdrawal
Another proposed solution involves crisis-ridden countries withdrawing from the Eurozone. The immediate consequence for a withdrawing state would be a significant devaluation of its new currency, potentially by up to 70%. This devaluation could initially enhance a country’s international competitiveness, benefiting exporting companies. However, it would also trigger massive capital flight to stable currency havens, potentially collapsing the national banking system. Essential services like salary and pension payments could be disrupted, and food supplies jeopardized, potentially leading to social unrest and threats to democratic stability. Therefore, Eurozone withdrawal for weaker states is neither a desirable nor a realistic solution.14
Withdrawal is equally unadvisable for stronger Eurozone economies. It would lead to a substantial upward revaluation of the new currency, severely impacting export earnings and increasing unemployment. Switzerland, for example, experienced significant challenges due to the Swiss franc’s extreme revaluation, driven by its safe-haven status during crises. The Swiss Franc to Euro exchange rate plummeted from CHF 1.50 per euro in January 2010 to near parity in August 2011.15 Reintroducing the German mark or creating a “northern euro” would likely result in even greater revaluation pressure than experienced by the Swiss franc, given the larger market size and liquidity. Furthermore, Germany would be in a worse position than Switzerland, lacking the option to peg its currency to its major trading partners.16
European Fiscal Union
In the 1990s, prior to the euro’s launch, the German Bundesbank advocated the “coronation theory,” asserting that a common currency should be the culmination of a political union.17 A unified monetary policy necessitates a coordinated fiscal policy for long-term sustainability. This implies Eurozone member states relinquishing budgetary autonomy to the European Union, a significant loss of national sovereignty, as control over public finances is considered a cornerstone of state sovereignty. Larger member states like Germany and France would likely face significant domestic resistance to such a move. Udo Di Fabio, a judge at the German Constitutional Court, aptly described budgetary power as the “crown jewel of parliament”.18
A proposal by former ECB chief economist Jürgen Stark and others suggests stricter rules for the Stability and Growth Pact, requiring EU approval for national budget deficits to prevent excessive debt. This could potentially lead to financial receivership for states with excessive deficits, severely curtailing national budgetary autonomy.19
Jürgen Habermas 20 highlights the EU’s lack of power to harmonize diverging national economies and advocates for a political union. However, such a union is unlikely to emerge uniformly but rather through differentiated integration, with a core group of states willing to integrate more deeply in specific policy areas (e.g., euro or Schengen) without excluding other members. This “core Europe” concept appears to be the most viable model.21
Therefore, the most economically sound path forward is to accelerate the implementation of a fiscal union. A political union is essential to ensure democratic legitimacy. The crisis, in this context, serves as a catalyst for deeper European integration.
Swiss Franc to Euro Exchange Rate Dynamics
The European debt crisis’s reach extended beyond the Eurozone, significantly impacting Switzerland, given the European Union’s status as its primary trading partner. Nearly 60% of Swiss merchandise exports in 2010 were destined for the EU, with Germany alone accounting for 20% of total Swiss exports.22 The impact on Switzerland is most evident in the fluctuations of exchange rates. Over the preceding two years, the Swiss franc experienced a substantial appreciation against the euro. On August 9, 2011, the Swiss Franc to Euro exchange rate reached a historic low of CHF 1.0070 per euro. However, following the SNB’s announcement on September 6th of its commitment to defend a minimum exchange rate of CHF 1.20, the exchange rate stabilized between CHF 1.21 and 1.24 (Figure 2).
Examining the real exchange rate offers a more nuanced perspective on currency developments. Even in real terms, the Swiss franc demonstrated a significant appreciation against the euro in recent quarters. Determining whether the Swiss franc is truly overvalued requires assessing what constitutes a “fair” exchange rate. Purchasing power parity theory suggests a fair exchange rate around 1.35 francs per euro.23 However, significant purchasing power disparities exist within the Eurozone; a fair exchange rate with Germany would be lower than one with Greece, for example.24 Nevertheless, it is clear that at just over 1.20 to the euro, the Swiss franc remained overvalued.
Figure 2: Swiss Franc to Euro Nominal Exchange Rate
Source: European Central Bank.
Factors Driving the Swiss Franc’s Strength
The economic uncertainty stemming from the European debt crisis is undoubtedly the primary driver behind the Swiss franc’s strength and its sharp appreciation against the euro. Large budget deficits and high debt levels in Eurozone countries eroded confidence in financial markets, prompting investors to seek refuge in the Swiss franc. This phenomenon underscores the “safe-haven” effect of the Swiss franc during times of crisis.25 In such periods, fundamental economic indicators become less influential for investors compared to the scarcity of secure investment alternatives.26
However, the safe-haven effect alone cannot fully explain the Swiss franc’s strength. Several structural factors contribute to the franc’s long-term appreciation against the euro.27 Firstly, the Swiss franc’s nominal strength persists as long as the EU’s inflation rate significantly exceeds Switzerland’s. Secondly, Switzerland’s robust export sector consistently generates trade balance surpluses, increasing global demand for Swiss francs to settle payments for Swiss exports. Furthermore, Switzerland boasts stable, long-term macroeconomic conditions, characterized by sound public finances and moderate taxation. These factors continue to attract financial and real-capital investors, particularly while the economic outlook for the Eurozone remains uncertain.
Measures to Moderate the Swiss Franc
Addressing the challenges posed by the strong Swiss franc, particularly its impact on the Swiss Franc to Euro exchange rate, requires a multifaceted approach involving both the SNB’s monetary policy and government fiscal measures.
The SNB initiated liquidity measures on August 3, 2011, to counter the Swiss franc’s overvaluation.28 It lowered the target range for the three-month Libor to 0.0–0.25%, aiming for a rate close to 0.0%. Additionally, it aimed to increase sight deposits of domestic banks at the SNB from CHF 30 billion to CHF 80 billion, a limit continuously raised in subsequent weeks, eventually exceeding CHF 250 billion. To provide such high liquidity to the Swiss franc financial market, the SNB employed instruments like foreign exchange swaps and repo agreements.29 The M3 money supply increased by approximately CHF 35 billion between January and August 2011 alone. On September 6th, the SNB established a minimum exchange rate of CHF 1.20 per euro. In its statement, the SNB declared its aim for “a substantial and sustained weakening of the Swiss franc” and its intolerance of a EUR/CHF exchange rate below 1.20. It further stated its readiness to “purchase foreign exchange in unlimited quantities” and to take “further measures” if economic outlook and deflationary risks warranted.30 This minimum exchange rate was broadly accepted by Swiss businesses, politicians, and academics31, although some considered it too low.32 The SNB has since successfully defended this target exchange rate, reaffirming it in its December 2011 monetary situation assessment. The SNB reiterated its commitment to “enforce the minimum exchange rate of CHF 1.20 per euro with the utmost determination,” noting that “even at the current rate, the Swiss franc is still high and should continue to weaken over time.”33
Beyond the SNB’s actions, the Swiss government also responded to the strong franc. While unable to directly influence the franc’s strength, the government aimed to mitigate its economic impact. In late summer 2011, the Swiss Federal Council announced support measures totaling CHF 870 million. Over half of these funds were allocated to unemployment insurance, approximately CHF 210 million for knowledge and technology transfer initiatives, and CHF 100 million to support the hospitality industry through the Swiss Society for Hotel Credit (Schweizerische Gesellschaft für Hotelkredit).34 However, it is widely acknowledged that such fiscal interventions offer only short-term relief. Sustainable improvements to macroeconomic conditions, such as reducing bureaucracy, are crucial for enhancing long-term economic attractiveness and offsetting losses caused by exchange rate fluctuations.35
Economic Consequences of the Strong Swiss Franc in Switzerland
The robust Swiss franc, particularly its exchange rate against the euro, has had and will continue to have significant repercussions on the Swiss economy, impacting official statistics and corporate financial statements. Many economic adjustments, such as job dismissals, manifest with a time lag, and a swift weakening of the Swiss franc was not anticipated.
Impacts on Businesses and the National Economy
The export sector bears the brunt of the strong Swiss franc’s external value.36 However, the negative effects are unevenly distributed. Export-oriented companies lacking niche market positions, specialization, or access to cheaper foreign inputs, such as those in the paper industry, face significant challenges. These companies are compelled to lower prices to remain competitive in international markets, leading to shrinking profit margins unless they can reduce costs. Company relocations, workforce reductions, or decreased input costs directly impact the broader economy.
The tourism sector is particularly vulnerable. Eurozone visitors constitute one-third of Switzerland’s tourist arrivals, primarily for leisure and recreation. Currency-induced price increases significantly influence tourist destination choices.37 Besides tourism, the financial sector also experiences negative consequences from the strong Swiss franc.38 While the safe-haven effect attracts foreign capital to Switzerland, a substantial portion of revenue is generated in foreign currencies, while costs are predominantly in Swiss francs.
Companies focused on the domestic market and exporters operating in specialized niche markets or sourcing inputs from the Eurozone are less severely affected. Many companies have adopted strategies like extending working hours without pay increases, paying cross-border commuters from Eurozone countries in euros, or invoicing foreign customers in Swiss francs when market conditions allow.39 Furthermore, the SNB’s liquidity measures in summer 2011 significantly reduced short- and long-term interest rates.40 Short-term interest rates even turned negative, as investors prioritized capital preservation over returns. The widening interest rate differential compared to Eurozone countries provided Swiss companies with access to comparatively low-interest loans, partially mitigating the strong franc’s impact.
A survey of 164 Swiss companies revealed that 58% were negatively impacted by the Swiss franc’s revaluation. Industries such as chemical, pharmaceutical, metal, mechanical engineering, textile and clothing, electronics, and precision instruments experienced the most significant adverse effects.41 These impacts are reflected in official economic statistics.
Figure 3: Export Development¹
¹ Seasonally adjusted quarterly figures, at prices of the previous year.
Source: State Secretariat for Economic Affairs (SECO).
The Swiss economy experienced a marked slowdown in the third quarter of 2011, with real GDP growth of only 0.2%. Growth was supported by private and public consumption and construction, while exports (-1.2%) and capital expenditure (-2.3%) contracted for the first time.42 Tourism exports had been declining for a year, while goods and remaining service exports declined later and less severely than initially feared (Figure 3).43 However, the export decline would likely have been worse without the SNB’s intervention.44 The minimum exchange rate provided companies with greater planning certainty, significantly reducing risks compared to the pre-September 6, 2011 period of the euro’s free fall against the Swiss franc.
The strong Swiss franc also began to affect the job market. Seasonally adjusted unemployment figures rose slightly for the first time in two years.45 Economists anticipated further unemployment increases in the coming year due to the strong franc.
Consequently, economic research institutes revised down GDP growth forecasts for 2012. SECO projected 0.5% growth, while the KOF Swiss Economic Institute expected only 0.2%.
Consumer Effects
Swiss consumers benefited from the strong Swiss franc, particularly when traveling to Eurozone countries. Border region residents also capitalized on the exchange rate, with shopping tourism to the Eurozone booming. However, the extent to which consumers of domestic goods and services benefited depended on whether price reductions were passed on. In 2007, the SNB investigated the pass-through of exchange rate fluctuations to import and consumer prices.46 SECO’s analysis indicated that a Swiss franc revaluation led to import price reductions after approximately four quarters with a 40% probability.47 However, savings were not consistently passed on to consumers, varying by goods category. Over one year, price differences between Switzerland and Germany increased by 15 percentage points, mirroring the exchange rate change. Surprisingly, this increase also occurred in goods with high import content, suggesting limited consumer benefit from import price reductions.48 This finding reinforced discussions about Switzerland as a “high-price island.”49 As noted, “The strong Swiss franc has merely accentuated a structural problem.”50
Implications for the Swiss National Bank
The strong Swiss franc and the SNB’s monetary policy responses significantly impacted the SNB’s balance sheet.
In the first half of 2011, the SNB reported a loss of CHF 10.8 billion, primarily due to foreign currency position losses of CHF 10 billion resulting from exchange rate valuation changes.51 This loss significantly reduced the SNB’s equity, causing concern. Thomas J. Jordan, then vice chairman of the SNB, reassured stakeholders of the SNB’s operational capacity even with negative equity:
… the SNB cannot be compared with commercial banks or other private enterprises. For one thing, a central bank cannot become illiquid. This means that a central bank’s capacity to act is not constrained if its equity turns temporarily negative. Moreover, unlike other enterprises, it is not forced to implement recovery measures or go into administration. For another, central banks enjoy a funding advantage … owing to their banknote-issuing privilege, and, in the long term, they are able to rebuild their equity after suffering losses.52
However, the SNB rebounded, reporting a consolidated profit of CHF 5.8 billion in the third quarter of 2011, driven by a weakening Swiss franc due to the minimum exchange rate and high gold prices. Expenditures for defending the exchange rate target remained relatively low.
The minimum exchange rate introduction had limited adverse consequences because market participants largely viewed the chosen rate as below equilibrium and because the SNB could afford to defend it amidst low inflationary pressures.53
The market’s positive response to the minimum exchange rate demonstrated the SNB’s credibility. However, the Euro crisis remained unresolved, and the SNB’s unconventional monetary policy led to a bloated balance sheet, increasing volatility. The balance sheet total rose from just under CHF 270 billion at the end of 2010 to over CHF 381 billion in September 2011. Foreign exchange reserves increased by approximately CHF 100 billion to CHF 305 billion during this period54, largely due to pre-minimum exchange rate foreign currency measures (e.g., swaps). Euro investments constituted the majority of these reserves at almost CHF 155 billion, exceeding the historical average of 51%.55 By November 2011, the SNB reduced its currency holdings to CHF 262 billion. Acknowledging currency-induced uncertainty, the SNB reduced its annual profit distribution to federal and canton governments from CHF 2.5 billion to CHF 1 billion.
Conclusion
The Euro crisis has had a tangible impact on the Swiss economy, primarily through the fluctuating Swiss Franc to Euro exchange rate. Export-oriented industries have been particularly challenged by the strong Swiss franc, which has eroded their price competitiveness. The domestic economy has also felt the reverberations of the strong franc. The SNB’s initial response involved liquidity-enhancing measures, culminating in the introduction of a minimum exchange rate of 1.20 francs per euro. The SNB has successfully maintained this minimum rate with relatively limited intervention, as market participants generally perceive it to be below the equilibrium rate. However, this also implies continued economic headwinds for many sectors. Compounding these challenges is a global slowdown in demand. Despite expansionary monetary policy, the SNB’s inflation forecasts indicate no significant inflationary risks for Switzerland56, suggesting its capacity to maintain the minimum exchange rate. Nevertheless, the Euro crisis remains a significant factor for Switzerland. The Swiss economy’s well-being and the success of Swiss monetary policy are unusually intertwined with the euro’s fate. As concluded, “If the eurozone manages to solve its problems, the safe-haven effect will lose its importance and the Swiss franc … will become weaker. If there are, on the other hand, major problems ahead, the minimum exchange rate will become truly expensive.”57
Silvia Simon, University of Applied Sciences HTW, Chur, Switzerland.Karl Heinz Hausner, Federal University of Applied Administrative Sciences, Mannheim, Germany.
