The Swiss franc - Still a safe haven currency in the new millenium? - BFI Consulting AG
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The Swiss franc –
Still a safe haven currency
in the new millenium?
By Frank R. Suess
BFI Consulting AG
November of 1999T ABLE OF CONTENTS
1 INTRODUCTION .............................................................................................................................3
2 WHAT IS A SAFE HAVEN CURRENCY? .........................................................................................4
2.1 SWISS MONETARY POLICY AND THE ROLE OF THE SWISS NATIONAL BANK .............................................5
2.2 THE SWISS FRANC DURING TIMES OF CRISIS .....................................................................................5
3 A FEW SWISS FACTS & FIGURES .................................................................................................8
3.1 BACKGROUND .............................................................................................................................8
3.2 SWISS S NAPSHOT AT THE END OF THE C ENTURY ..............................................................................9
4 KEY ISSUES FOR SWITZERLAND AND ITS CURRENCY.............................................................. 12
4.1 THE SWISS VOTE FOR „NON-E UROPE“ .......................................................................................... 12
4.2 INTRODUCTION OF THE EUROPEAN M ONETARY UNION (EMU): ......................................................... 16
4.3 SWISS FRANC G OLD-B ACKING ..................................................................................................... 17
5 CONCLUSIONS ............................................................................................................................ 19
6 APPENDIX A: SWISS ECONOMIC INDICATORS........................................................................... 20
6.1 R EAL GDP 1986 TO 1999.......................................................................................................... 20
6.2 D IRECT INVESTMENTS ................................................................................................................ 20
6.3 EMPLOYMENT F IGURES 1985 – 1999 ........................................................................................... 21
6.4 PER CAPITA AGGREGATES .......................................................................................................... 21
7 APPENDIX B: INTERNATIONAL COMPARISONS ......................................................................... 22
7.1 R EAL GDP 1990 TO 1998.......................................................................................................... 22
7.2 TRADE BALANCES 1990 TO 1998................................................................................................. 22
7.3 CONSUMER PRICE INDICES 1990 TO 1998..................................................................................... 22
7.4 UNEMPLOYMENT 1990 TO 1998 .................................................................................................. 23
BIBLIOGRAPHY.................................................................................................................................. 24
This report is published by BFI Consulting AG and offered to subscribers of BFI’s Mountain Vision Newsletter as a supplement. The
report is provided on request at a price of US$ 21. Checks to be made payable to Mountain Vision, P.O. Box 4075, Walnut Creek, CA.
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preparation of the report, BFI Consulting does not guarantee and cannot be held responsible for the accuracy of any statistic,
statement or representation made. We recommend that you consult qualified professional advisors to determine the applicability of this
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personalized legal or investment advice. Investing in currencies is speculative in nature, particularly when done on the basis of short-
term objectives.
BFI Consulting AG, Zurichstrasse 108, 8123 Ebmatingen, Switzerland, tel. +41 1 980 4254, fax +41 1 980 4255
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-2-1 INTRODUCTION
International investors have traditionally included the Swiss franc (CHF)1 in their investment
portfolios as a tool of diversification and a currency for times of turmoil. The strength of the Swiss
franc is largely based on a long history of economic prosperity and political stability in Switzerland.
Just as a share of stock represents ownership of assets in a company, holding a foreign currency
represents ownership of the productive power of a nation.
In the long run, a healthy economy translates into a healthy currency. Longer term projections
of a currency must be founded on the analysis of the underlying economic fundamentals of a
country. In order to understand the fundamentals of Switzerland and draw conclusions from them,
this report will review the economic developments and key issues for Switzerland in the 90‘s in
order to answer the principle question of this report: „Will the Swiss franc remain a safe haven
currency in the years to come?“
Several issues have cast a dim shadow on the Swiss Alps, the most prevalent one of course
being the Swiss decision of remaining independent by not joining the European Union. Further,
the introduction of the European Monetary Union (EMU) and the change in the Swiss gold
reserves policy represent considerable challenges.
This paper aims at reviewing these primary challenges and the changes encountered during
the 90‘s. The changes in Switzerland, Europe and the world are far-reaching and some of them
are of a nature not yet completely understood. For instance, the prolonged boom of the U.S.
economy and the so-called new economic paradigm still provide us with a few riddles to be
solved. However, since I yet need to be convinced by some of the arguments for the new
economic paradigm as well as the logic of a stock market gone insane, I will stick to the proven
fundamental analysis I understand without rejecting the opportunity to learn in times of transition.
With this in mind, I will outline the fundamental economic situation of Switzerland and
implications of not joining the EU in a factual manner. The current challenges the Swiss are facing
need to be scrutinized carefully in order to determine whether the country of milk and chocolate
will carry its economic competitiveness and strong currency into the future.
1
CHF is the official abbreviation for Swiss francs to be used throughout this report.
-3-2 WHAT IS A S AFE HAVEN CURRENCY?
Before delving into the principle question of this report, I do feel compelled to clarify what a
safe haven currency is. I have repeatedly noticed in the past that the expectations investors have
of a safe haven currency and the benchmarks by which they measure its performance are very
diverse.
A common misconception is that a safe haven currency is „strong at all times“. This
perception is based on the assumption that the country of a safe haven currency is immune to the
economic developments of the nations surrounding it and the markets with which it interacts. It
might also be assumed that the primary objective of the monetary policies of the respective
country is a strong currency. Both assumptions are, of course, false.
In the context of the Swiss franc, these perceptions have been fostered by the Swiss franc’s
historic strengthening against other major currencies such as the US dollar. The following graph is
typically applied to illustrate the „fall of the dollar“ or „the historic strengthening and gold-backing
of the Swiss franc“. While the reality of the graph cannot be denied – the dollar has depreciated
substantially and continuously after the extinction of Bretton Woods – it does not automatically
imply a never-ending continued strengthening of the Swiss franc, or the ultimate decay of the
dollar.
4.500
4.000
3.500
3.000
2.500
2.000
1.500
1.000
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
Figure 1: The US dollar value relative to the Swiss franc from 1971 to 1999
As a small and open economy, Switzerland is highly integrated in international economic
relations. The Swiss franc, just as any other currency, is not isolated from the effects of
-4-international economic cycles. Furthermore, the primary mission of the Swiss National Bank (SNB)
in charge of Switzerland’s monetary policies is not simply a strong currency. Their job is more
difficult than that. A strong currency per se may be a tactical and temporary goal at best. The
primary and strategic objective is overall economic prosperity.
2.1 SWISS MONETARY POLICY AND THE ROLE OF THE SWISS NATIONAL BANK
The SNB has the task of conducting a monetary policy in the interest of the country as a
whole. It must contribute to creating a framework which promotes a balanced economic
development, meaning adequate real growth, low unemployment and modest inflation. It should
be said that the SNB has a proven track record of excellence. The quality of their work and their
representatives is undisputed throughout the world. Hans Meyer, the chairman of the Governing
Board of the SNB recently summed up the essence of his job as follows:
2
„Ensuring price stability is the primary tactical goal of current Swiss monetary policy. Our
definition of price stability is a consumer price index below 2%. This is obviously not an end in
itself, but a means to an end. An economic system which relies on the forces of the free market
must be able to count on price stability for its smooth functioning. In particular, price stability
prevents undesirable distortions in the social area.
Economic teaching and experience leave no doubt as to the connection between the money
supply and price stability. As economists tend to say: money matters. Whether the supply of
money is adequate depends on its relation to real economic development. Monetary policy is
therefore able to make its best possible contribution if it succeeds in bringing the supply of money
basically in line with real growth in the long term.
Three main problems have to be contended with in the conduct of monetary policy: the
difficulty of assessing the economic situation, the limited knowledge of the way a modern
economy works and foreign influences, over which we have little control“.
2.2 THE SWISS FRANC DURING TIMES OF CRISIS
Immunity to economic trends and high valuation at all times are not the factors which
characterize a safe haven currency. It is how a currency reacts in times of crisis. In contrast to
other currencies, a safe haven currency such as the Swiss franc offers a hedge for „bad times“. It
is, therefore, necessary to analyze a currency’s reaction in turbulent markets, i.e. its „safe haven
pattern“. For this purpose let me cite the EMS crisis of 1992.
In September of 1992, England and Italy were suspended from the EMS. Heavy speculative
pressures on the sterling and the lira around the 16th of September culminated in their
suspension. Naturally, this situation resulted in frantic currency trading and a highly volatile
2
Source: “A View from Switzerland”, by Hans Meyer, Chairman of the Governing Board of the Swiss
National Bank
-5-market. Under such circumstances the reaction of the more risk-averse investor is to dive for
cover in hard currencies and safe havens. Therefore, as a result of higher demand, those
currencies increase in value.
As portrayed in Figure 2, around the 16th of September of 1992 the Swiss franc increased
rapidly in value relative to other weaker European currencies such as the Italian Lira. The safe
haven aspect, however, is particularly portrayed in its pronounced appreciation relative to the
generally strong French franc and German mark (D-Mark).
D-Mark French Franc
1.16 4
Value of SFr. relative to DM
Value of SFr. relative to FF
1.15 3.95
1.14 3.9
1.13 3.85
1.12 3.8
1.11 3.75
1.1 3.7
31. Aug
02. Sep
04. Sep
06. Sep
08. Sep
10. Sep
12. Sep
14. Sep
16. Sep
18. Sep
20. Sep
22. Sep
Figure 2: Value of Swiss franc relative to FF and DM during ERM crisis 1992
10
9.5
One-month Eurocurrency Interest
9
8.5
Swiss Franc
8
D-Mark
7.5
7
6.5
6
20. Aug
22. Aug
24. Aug
26. Aug
28. Aug
30. Aug
01. Sep
03. Sep
05. Sep
07. Sep
09. Sep
11. Sep
13. Sep
15. Sep
17. Sep
19. Sep
21. Sep
Figure 3: Eurocurrency Interest of DM and CHF during ERM crisis 1992
-6-As would be expected, based on the logic of uncovered interest parity, Swiss interest rates
decreased simultaneously. A certain degree of market anticipation of the ERM "blow-up" might be
interpreted by the fact that the Swiss interest rates started falling shortly before Black Monday, as
did those of Germany (Figure 3).
In summary, a safe haven currency is not characterized by „eternal appreciation“. It does,
however, have a value preservation aspect to it in times of market uncertainty and turmoil. The
pattern portrayed above is the kind of pattern a safe haven currency will display repeatedly in
times of crisis. In order to display this pattern, the markets must believe in the fundamental
strength of the country’s economy. Therefore, it is essential for investors in the process of
selecting a currency for the purpose of diversification and risk management to know the economic
strength and competitiveness of the respective currency’s country.
-7-3 A FEW SWISS F ACTS & F IGURES
3.1 BACKGROUND
Switzerland is the oldest democracy in the world. The Swiss Confederation was founded in
1291. Today, Switzerland has a total of 26 Cantons and a population of over 7 million (including
approximately 1.5 million foreign nationals residing or working in Switzerland). Nestled in the heart
of Europe, the country is located between Germany, Austria, Italy and France with an area of only
41,293 km 2.
Figure 4: Switzerland at the heart of Europe
The Swiss are a nation of considerable diversity. 48% of the population are Roman Catholics
and 44% Protestants. Four official languages are spoken - approximately 65% speak German,
while French is spoken by 19%, Italian by 8% and Romantsch, a language that sounds like a mix
of Latin and Swiss German, by 1% of the population.
Despite its small size and diversity, Switzerland has been recognized for many years as the
world's bastion of financial strength. On the basis of a direct participatory form of government, the
Swiss people vote on important federal and local issues. The Swiss have in practice – not just in
theory – a government directed by the people.
The Swiss have guarded their national independence through a strict policy of neutrality and
military strength. All able bodied Swiss men between the age of 20 and 50 are trained for specific
military jobs. Within 48 hours the Swiss can mobilize an army of 625‘000 soldiers, 800 battle
tanks, 300 jet fighters, and missiles and artillery from hundreds of defensive positions and
underground fortresses. This makes for the largest (mostly civilian) army in Western Europe.
While it is neither a member of the United Nations or NATO, nor a member of the European
Union, Switzerland does play an important role in world politics as a site for international
diplomatic negotiations and as the base for numerous humanitarian bodies such as the
International Red Cross, the International Labor Organization and the World Health Organization.
-8-The most important factor contributing to the strength of the Swiss economy is the level of
education. Professional skills and high-quality training are and will remain the country's most
important capital. It is noteworthy that in proportion to its population, Switzerland has the highest
share of Nobel prizes.
3.2 SWISS SNAPSHOT AT THE END OF THE CENTURY
The Swiss will remember the 90‘s as a time of important economic and social challenges. The
increasing economic interdependence between neighboring countries has given rise to
opportunities as well as risks. While a need for open-mindedness, innovation and international
perspective is required of the Swiss people in order to adjust to and succeed in a rapidly changing
world, a long tradition of sovereignty, independence and direct democracy will not be sacrificed in
a hurry. In particular, the creation of the European Union has added substantially to social and
political tensions.
During the post-war period the economic development of Switzerland was characterized by
remarkably steady real growth. Especially during the first decades following the Second World
War, pent-up demand created extraordinary economic momentum. Output improved continuously,
not only in terms of quantity but quality as well, leading to unprecedented growth and prosperity.
There is, unfortunately, a less positive side to this development. Today, Switzerland is confronted
with problems of a mature society. Satisfaction with what has been achieved makes one forget all
too easily what was needed to advance so far and what will be needed to maintain – if not
increase – a certain level of prosperity.
% Rate of Unemployment
6
Percent unemployed
5
4
3
2
1
0
90
96
95
85
86
87
88
89
91
92
93
94
97
98
99
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
Year
Figure 5: Swiss unemployment rates from 1985 to 1999
The Swiss economy, along with the rest of Europe has faced a difficult recession over a large
part of the 90‘s. After many years of high income, stability, constant growth, and practically zero
-9-unemployment, the Swiss for the first time faced a budget deficit and growing unemployment as
portrayed in Figure 5. During the latter part of the 90‘s, prospects for economic recovery have
been improving, however.
While the recession of the 90‘s did weigh heavy on the shoulders of the Swiss, particularly a
level of unemployment, which was unfamiliar to the Swiss, international comparisons (see
following table) do show that at least in terms of unemployment Switzerland did fair relatively well
throughout the 90‘s. Various additional statistics and indicators are documented in the Appendix.
Unemployed as a percentage of total productive population; seasonally adjusted; OECD values:
1
Year USA Japan Germany UK France Italy EU Switzerland
1990 5.6 2.1 n.a. 7.1 9 9.1 8.1 0.5
1991 6.8 2.1 n.a. 8.9 9.5 8.8 8.4 1.1
1992 7.5 2.2 n.a. 10 10.4 9 9.1 2.5
1993 6.9 2.5 7.9 10.5 11.7 10.3 10.7 4.5
1994 6.1 2.9 8.9 9.6 12.3 11.4 11.1 4.7
1995 5.6 3.2 8.2 8.7 11.7 11.9 10.7 4.2
1996 5.4 3.4 8.9 8.2 12.4 12 10.8 4.7
1997 4.9 3.4 9.9 7 12.3 12.1 10.6 5.2
1998 4.5 4.1 9.4 6.3 11.7 12.3 10 3.9
1
including former Eastern German states (neue Bundesländer)
3.2.1 INTERNATIONAL PERSPECTIVE
In order to portray the economic situation and outlook of Switzerland, we need to understand
current international parameters:
The international economic situation had started to improve in 1997. Several small East Asian
countries overcame the recession and in Japan the strong decline in business activity came to a
standstill. In Europe, although economic growth remained restrained, confidence in the economy
has grown perceptibly. European indicators started to point in a more promising direction. These
improvements were slowed down eventually, however, by the various crises of last year, including
the problems in Asia as well as Russia’s debt moratorium and the devaluation of the Rubel.
Furthermore, fears of Y2K-related difficulties 3 added to the (in our opinion) temporary slow-down
of Europe.
The main pillar of the world economy during this period continued to be the robust domestic
demand in the United States. At the turn of 1998 / 1999 the United States, with a 28% share of
gross world production, contributed 85% to world economic growth. US GDP grew at 6% at the
time, while EU growth was at only 1%.
3
The issue of Y2K will not be discussed in this report. In my opinion (and I hope this blunt statement will not
come to haunt me), potential difficulties generated by the Y2K issue will be modest and temporary at most.
In view of the investments funneled into fixing the problems related to Y2K, I expect little disruption. My
personal view is that the topic is being “oversold” for a variety of reasons.
- 10 -During the first half of 1999, the US contribution to growth receded to 50%, which reflects the
strengthening of the rest of the world. In general, experts agree that this trend will continue with a
decline of the US dollar over the next 18 months, partly as a result of a stronger EURO and less
dependency on the U.S. economic „locomotive“. As higher interest rates in the U.S. are
implemented as a result of inflationary pressures, a slow-down of America relative to Europe is
expected. At the same time, the less overvalued stock markets of Europe will attract funds from
the currently overheated markets of the U.S. offering solid opportunities for investment in
European equity at the outset of a pronounced European up-swing.
3.2.2 SWISS OUTLOOK
In Switzerland, after the above-mentioned temporary set-back of last year, economic activity
began to stabilize in the second quarter of 1999. Real gross domestic product increased by 1.1%
over the previous year. While private consumption and investment in plant and equipment lost
some of their momentum, building investment increased substantially following the strong decline
in the first quarter. Overall, stronger stimuli emanated from the export of goods and services.
Unemployment continued to fall, albeit at a slower rate than in 1998. In June, for the first time
since August 1992, it dropped below 100‘000. The number of job seekers also receded. The
following Table summarizes the key growth figures from 1986 to 1999.
Swiss domestic production at market prices, in million Swiss francs, reference CPI of 1990:
Year Export of goods Total Demand Minus import of Real GDP % growth
and services goods and
services
1986 96'952 375'718 93'507 282'211 1.6%
1987 99'176 383'589 99'302 284'287 0.7%
1988 105'665 397'587 104'456 293'131 3.1%
1989 112'659 416'443 110'589 305'854 4.3%
1990 115'048 430'718 113'415 317'303 3.7%
1991 112'688 426'321 111'557 314'764 -0.8%
1992 116'051 421'192 106'826 314'366 -0.1%
1993 117'766 419'742 106'890 312'852 -0.5%
1994 119'835 429'874 115'356 314'518 0.5%
1995 121'769 437'383 121'279 316'104 0.5%
1996 124'783 441'701 124'589 317'112 0.3%
1997 135'986 457'084 134'656 322'428 1.7%
1998 142'176 476'412 147'346 329'066 2.1%
1
1999 117'644 490'256 153'372 336'884 2.4%
1
estimate per November 1999
Swiss economic indicators point unanimously toward better times. The „bad weather trough“
appears to be part of the past. Once again it was strong exports which gave the initial boost for
improvement. In order to keep exports strong, the Swiss franc should remain in a close bandwidth
of the EURO. Accordingly, I expect it to strengthen against the US dollar over the next few years.
- 11 -4 KEY ISSUES FOR SWITZERLAND AND ITS CURRENCY
Several issues, economic and political, have created challenges for the safe haven status of
the Swiss franc. Amongst these issues, the following stand out as most relevant :
- The Swiss vote for „Non-Europe“: On December 6 of 1992, the Swiss decided by popular
vote not to join the European Economic Area (EEA) linking the European Union (EU) and
member countries of the European Free Trade Association (EFTA). Some were quick to point
out that the no-vote was the culprit of the hard recession of the 90‘s. They warned of Swiss
isolation and decay.
- Introduction of the European Monetary Union (EMU): At the beginning of 1999 the EMU
was introduced. Expectations varied greatly in regard to the effect and success of the EURO
as a single European currency. Some expected the Swiss franc to rapidly lose its
independence and its role as a safe haven currency.
- Loss of constitutional gold-backing: On April 18, 1999, Swiss voters gave their qualified
approval to a new constitution which contains a provision effectively ending the statutory gold
backing of the Swiss franc. Some 59% of voters approved the overhaul of the 125 year old
constitution.
4.1 THE SWISS VOTE FOR „NON-E UROPE“
A portion of the Swiss people fear that as a result of not joining the EU, Switzerland might be
"locked out of the European Union”. To be an outcast would be a severe blow to Switzerland,
which derives more than half of its US$ 240 billion economy from international trade. EU
proponents in Switzerland have been quick to blame the no-voters for the economic hardship
encountered during a large part of the 90’s. Before the referendum was voted on they warned that
saying no was "economic suicide". They predicted that a No vote would spark an immediate run
against the Swiss franc.
The run against the Swiss franc did not occur, but the Swiss franc had in fact weakened
somewhat relative to other strong currencies after December 1992, caused partly by the
(temporary) euphoria elsewhere over the planned European Monetary Union, which has in the
meanwhile been realized with a reasonable degree of success.
Has staying out of the EU initiated the economic decay of Switzerland? Is not being a EU
member going to result in isolation and annihilation? In order to answer these questions I will
discuss what appear to be the three main arguments of EU supporters - namely lack of
international competitiveness, discrimination by EU countries and missing the "European growth
train".
- 12 -4.1.1 DISCRIMINATION BY EU C OUNTRIES
The fear of discrimination by EU members was discussed intensely before the vote and
appeared to be the most prevalent concern of the Swiss. It was asserted that European countries
might not deal with Switzerland and the EU regulation might even boycott Swiss products and
companies despite its repeated statements promising otherwise.
However, I would like to use the very fact of high Swiss integration with Europe and the rest
of the world as a counter-argument. In 1998, 63,3% of Swiss exports went to EU countries, while
79,9% of Swiss imports came from EU countries. This made Switzerland the second biggest
buyer from the EU, after the United States. Practically all medium-sized and large Swiss firms
have established branches, subsidiaries or manufacturing facilities in EU territory. In 1998, 48%
of all Swiss institutional capital investments abroad (which amounted to 33 billion Swiss francs)
were made in the EU. Swiss branches and subsidiaries in the EU employed a total of 763‘000
people in 1998. As a comparison, Austria only created about 60,000 work places in the EU.
Therefore, Switzerland, despite not being a member of the EU, is already strongly integrated
in the European market - more so than a large number of EU members. It is not only the Swiss
who are interested in access to the EU - they are interested to deal with Switzerland as well.
Furthermore, the free trade agreement which exists since 1972 and removes duties and quotas on
all Swiss products, will stay in force despite non-membership. Bilateral agreements which have
been negotiated over the last few years are expected to be accepted by the Swiss people in
spring of 2000. These agreements will harmonize and facilitate many aspects of Swiss dealings
with EU countries without foregoing the fundamental elements of independence and direct
democracy. Finally, the positive current account result achieved throughout the 90‘s does not
signal any factual discrimination whatsoever.
4.1.2 MISSING THE "EUROPEAN GROWTH TRAIN"
The opening of borders enabling the free movement of goods, labor and capital within a large
market of 380 million people is expected to give the EU a large boost in economic growth. Some
Swiss fear that the path of independence will exclude the Swiss economy from this boost. Several
studies exist to predict the wealth effect of joining the EU.
One widely recognized projection has calculated a 4% to 6% one-time increase in GDP over
a period of 10 years, a growth effect that appears rather modest to me and doesn't seem to justify
the racket. This result stems from a study conducted by Prof. Heinz Hauser (Hochschule St.
Gallen) on request of the Federal Council. The conclusions drawn in his study are a result of two
main impacts:
First a structural sector effect of 1.5% to 2% is estimated. The increased competition would
be expected to raise the pressures in Switzerland for a change in market structures. Less
- 13 -productive sectors would be replaced by more productive and competitive ones. For example
sectors such as agriculture and construction will be replaced by high-tech industries and service
companies. Secondly, efficiency gains of 2.5% to 4% are predicted due to the removal of border
control costs, as well as specialization and concentration effects.
The problem with this result, of course, is that it is based, as usual, on a vast amount of
hypotheses and assumptions. It is necessary to mention that the model used is essentially
environmentally blind. Damages and costs of environmental pollution and increased land and
resources utilization, which will result from increased economic activity, are not factored in. This is
similar to the results shown in the Chechini report, which calculates economic growth rates for the
EC. That report does not take any environmental and social costs into consideration.
Projections for GDP growth in Switzerland vary from approximately 1.5% to 2.9% annually
over the next few years. This would result in a total of 12% to 28% total increase of GDP during
the next ten years. The variance between maximum and minimum projections is, therefore,
approximately 16%. In comparison to this, the economic growth effect calculated by Prof. Hauser
is 4% to 6%, i.e. three times smaller!
This huge variance margin basically tells me that no one is really able to predict the positive
(or negative) effects of an EU membership. Also, I do not see why the structural effects mentioned
cannot be achieved by adequate internal adjustments of regulations as mentioned above. With
more competitive policies the same structural changes could be achieved in Switzerland as would
be the case with EU membership. Steps in this direction have already been taken by abolishing
the stamp duty and adjusting cartel regulations. Pressures to adjust in this manner are present
with or without EU membership. Finally, a large portion of potential disadvantages will be
eliminated by acceptance of the bilateral agreements between Switzerland and the EU.
4.1.3 LACK OF INTERNATIONAL COMPETITIVENESS
The question whether Switzerland is internationally competitive has played a central role in
the debate. Biased optimism and pessimism seem to be taking turns in the media and
commonplace arguments. From reading the Swiss newspapers one could conclude that
international competitiveness is based solely on low wage levels and a maximum amount of
competition.
However, from what I could determine in my research, international competitiveness is a very
abstract and flexible term that seems to appear in as many ways as there are economics
professors and politicians. The fact that international competitiveness does not hinge on wage
levels and the level of competition alone becomes clear when studying a model of economic
competitiveness by Professor Silvio Borner, of the Basle University. This model incorporates a
much more complex set of factors.
- 14 -I find Borner's model somewhat too complicated for my purposes here. However, it makes
clear that apart from wage level and competition, such things as technological advance, the
educational system, broad based innovation, advanced environmental standards, product
security, quality and many more factors play a role in determining the competitive strengths and
weaknesses of a country's economy. In fact, all of these factors stand testimony to the excellence
and continued vigilance of the Swiss economy. Let me select only a few for discussion:
Rate of saving: From the Solow model4 we know that the standard of living in an economy is
determined mainly by the rate of saving, which in turn determines the size of a country's capital
stock and, thus, its level of output. Switzerland, similar to Japan, is known for a high rate of
saving. This, of course, is reflected in the fact that Switzerland has the highest per capita
disposable income of industrialized nations at CHF 34‘847 in 1998. Total per capita GDP was at
CHF 44‘505.
Technological Progress: According to the Solow model prolonged growth of output per
worker depends on technological progress and the rate of population growth. Population growth is
low in Switzerland as in most industrialized countries. However, a study conducted by the
"Konjunkturforschungsstelle (KOF) der ETH Zurich" 5 concludes that Switzerland's technological
competitiveness and innovation remains very much intact. It states that Swiss companies are at
least as innovative as their European competitors, equal to those in Germany and superior to
France, Italy and Austria. In some sectors Switzerland is falling behind, while taking the lead in
others. Particularly in the sectors of biotech, pharmaceuticals, production automation and various
niches of high-tech Switzerland takes the lead.
International credit-rating: An important indicator of international competitiveness is the
international credit-rating of a country which depicts the credit-worthiness of a country in terms of
liquidity, dependability of payments and risk. Switzerland was rated number one in the ranking of
the World Economic Forum in 1998.
Trade balances: As mentioned earlier, Switzerland has succeeded in creating current
account surpluses year after year. Even in times of a weak economy in Germany and during the
US recession of the 80‘s (two of the major trading partners of Switzerland), exports have
exceeded imports. In fact, as mentioned earlier, Switzerland experienced an export boom in 1997,
which has to some extent been a catalyst for the Swiss economy to make its way out of recession.
4
Note that the Solow model is based on the assumption of a closed economy (opposed to a more realistic
open economy) and on the related paradigm that S=I, where S is national saving and I is national
investment. In an open economy this does not hold completely. Nevertheless, a nation’s rate of saving is
crucial to its long-term prosperity in an open economy scenario as well.
5
‘ETH Zürich’ stands for Eidgenössische Technische Hochschule Zürich, or translated polytechnical
University of Zurich.
- 15 -Level of industry subsidies: Swiss industry receives the lowest amount of subsidies in an
international comparison, and second to Japan, Switzerland has the lowest percentage of
government expenditures. The periodically criticized involvement of the Swiss government in
industry and the resulting decreased independence and initiative of business is not founded in any
statistical data. Government subsidies to production industries are very small in Switzerland.
Compared internationally, the Swiss industry has to survive with the least "government crutches".
In contrast, most EU countries - despite the fact that EU regulations forbid subsidies to production
industries - have high subsidy rates. You could say that the industries of EU countries are not EU-
compatible.
On the whole, the international competitiveness of Switzerland seems well maintained despite
the high level of wages and non-membership of the EU. In the ranking of the "World
Competitiveness Report" of the World Economic Forum the Swiss economy was listed among the
most competitive economies in the world in 1998. Of course, there are other ranking systems in
regard to competitiveness as well as that of the World Economic Forum. In all of these
Switzerland is found among the top players.
It should be said, at this point, that there are industries in the Swiss domestic market, which
are not internationally competitive. Among these are the agriculture, construction and retail
sectors. However, a fundamental restructuring of the Swiss economy was initiated by the
pressures of the 90‘s recession. This positive development, albeit the social and human difficulties
accompanying it, is changing the landscape of Swiss business and leading to a most welcome
rejuvenation.
4.2 INTRODUCTION OF THE EUROPEAN MONETARY UNION (EMU):
Creating the Union at the beginning of 1999 meant a big step forward for the process of
European integration. With the European Monetary Union, the participating Western European
countries are trying to put their currency relations on a new footing in line with the changing
environment. If the European Monetary Union can be implemented according to plan, this will
vastly improve the preconditions for a balanced economic development in Europe. Freedom of
movement for persons will be facilitated along with the free flow of goods, services and capital.
Ultimately, success will depend on whether the participating countries can muster the discipline
essential for sustained and convergent stability-oriented policies.
In view of the challenges that lie ahead, one must bear in mind that with the fixing of
exchange rates, individual countries have forfeited a key element of flexibility and independence
of monetary policy. In the past, imbalances in economic development were compensated by
flexible exchange rates. Losing this possibility is significant. It has yet to be seen how future
economic performance divergence amongst EU members will be accommodated by the new
system. Potentially, one could foresee that substantial social and political tension as fundamental
- 16 -discrepancies will evolve. Prior to the introduction of the EURO, expectations and implications for
the Swiss franc were discussed widely. On the one hand, it was feared that a weak EURO could
lead to a pronounced appreciation of the Swiss franc, thus harming exports. On the other hand,
the Swiss franc was portrayed as a potential clone of the EURO, doomed for obsoletion as it
would increasingly lose independence and status as a world currency.
Neither of these scenarios have materialized. The EURO’s initial weakness did not effect an
immediate rally on the Swiss franc. The Swiss franc has not become a clone of the EURO. To
understand the development and make a projection for the future it is essential to understand the
strategy and actions of the Swiss National Bank during the first months of EURO-Land.
During the first months of the EURO, volatility relative to the US$ remained at historically
normal levels. Accordingly, the strategy of the SNB was to focus on exchange rates and keep
them in a healthy bandwidth with the EURO. However, volatility of the EURO /US$ exchange rate
has increased over the last few months. It was now interesting to observe how the SNB shifted
their attention from exchange rate stability to price stability, also because the dependence on
export is less paramount for a healthy Swiss economy as domestic demand has picked up.
Since the monetary concepts of the European Central Bank are largely in conformity with the
Swiss, the chances are good that a sustained convergence of stability-oriented policies and, as a
consequence, basically stable exchange relations between Switzerland and the new European
currency area will come into effect. Should difficulties arise when the present goals are
implemented this would be likely to result in an upward pressure on the Swiss franc. The National
Bank would, of course, have the possibility of relaxing monetary policy to counteract such a trend.
This might, however, conflict with the National Bank‘s orientation towards price stability.
Over the last few months the Swiss franc has started to decouple increasingly from the
EURO. It is not a clone of the EURO. On the contrary, the Swiss franc and its people will retain
their independence and sovereignty.
4.3 SWISS FRANC GOLD-B ACKING
On April 18, 1999, the Swiss voted for an overhaul of the country’s 125 year old constitution.
59% of the voters approved the new constitution and thereby implicitly accepted a provision
ending the statutory gold backing of the Swiss franc. The new constitution (Article 99, paragraph
3) states that the Swiss National Bank (SNB) shall hold sufficient reserves as required in order to
fulfil its mandate of economic and monetary stability. A portion of the reserves are to be held in
gold. However, the exact portion is no longer mandated, rather it is at the discretion of the SNB.
Furthermore, the new article does allow for a more realistic valuation of the gold reserves.
The new regulation will become legally binding unless a referendum is initiated within the next
five months. In April of 2000, it would then be possible for the Central Bank to start gold sales at
- 17 -market prices. The Central Bank has calculated that a total of 1300 tons could be sold and used
for other purposes without negatively affecting its monetary policy. Therefore, the question arises
how this „new freedom of action“ will be used by the SNB and how it may consequently affect the
Swiss franc. Before elaborating on these questions, I would like to mention a few facts and figures
on the subject at hand:
Monetary reserves are indispensable for a central bank in fulfilling its tasks. This is
particularly true in the case of a small, open economy with a significant financial sector. Currency
reserves consist primarily of freely disposable foreign exchange reserves and gold holdings.
Under the old constitution, every Swiss franc in circulation had to be backed by a minimum of 40%
in gold reserves priced at an official CHF 142.90 (as per Nov. 99 US$ 95.25) per troy ounce.
Thus, the gold reserves of CHF 12 billion held by the Swiss National Bank were enough to cover
the 40% benchmark. Of course, the market price of gold, has been well above the official fixed
price of only CHF 142.90. At market rates the gold reserves held today offer more than full-
backing.
So, what will the Swiss National Bank do with the gold? The SNB has stated that it
plans to sell half of their gold reserves or 1’300 tons over a period of at least 10 years. At this time,
however, it is difficult to determine when Swiss gold sales will start and how much will actually be
sold. Firstly, Switzerland has an agreement with 14 European Central Banks. This agreement
imposes a limit whereby a total of only 2000 tons in total can be sold by the participating banks
within a period of 5 years. Furthermore, there are differing opinions on how potential revenues
from the gold sales should be used. In any case, the Swiss monetary authorities are acutely
aware of the psychological support and confidence in the Swiss franc by its gold-backing.
Assuming gold sales are approved, the amount of gold reserves per Swiss franc will decline
slowly. The SNB could conceivably issue gold-backed bonds or lend gold for revenue purposes.
Will the gold sales have an affect on the Swiss franc’s strength? The strength of the
Swiss franc is based on a multitude of factors as discussed above. Whether gold reserve sales
will have an effect is difficult to say. If it does have an effect at all, I expect it to be a small and
temporary one based on psychological factors in the currency markets. Even with only half of its
current gold reserves, Switzerland will be amongst the top ranks of gold-holders.
At the end of 1998 Switzerland's currency reserves totaled CHF 68.5 billion, of which CHF
53.2 billion were held in foreign currencies, CHF 12 billion in gold (officially fixed price) and CHF
3.3 billion in other kinds of reserves. At that time, Switzerland had the fourth largest gold holding in
the world, after the Euro countries, the IMF, and the US. Other European countries that are
comparable in size, such as Austria or Belgium, hold only a fraction of the reserves held by
Switzerland. And, as long as Switzerland continues – as in the past – to generate positive
balances in trade and other transactions, it will be able to keep adding to its reserves.
- 18 -5 CONCLUSIONS
At the turn of the millenium, Switzerland is economically and socially in good condition.
Following years of frequently painful adjustments to a changing environment, preconditions for a
balanced development are favorable. The quality and scope of these adjustments bear witness to
the flexibility of the Swiss economy and society. The years ahead will continue to be characterized
by constant change. In the interest of overall economic and social stability, innovative power and
flexibility will need to be prevalent. In a mature society such as Switzerland, this represents a
particular challenge. Whether the Swiss will succeed shall be seen. The future will tell. The
fundamentals do appear to point in that direction.
Will not being a member of the EU lead to isolation and ultimately to economic decay?
No! The decision of whether to join the EU is not an economic one, but purely political. By means
of the bilateral agreements and based on the already high level of economic integration with
Europe and the rest of the world, Switzerland is nowhere near isolation. Eight years of „Non-
Europe“ have changed nothing about this fact.
Will the Swiss franc remain a safe haven and strong currency in the new millenium? I
believe so. Longer term projections of a currency, in my opinion, must be based on the underlying
economic fundamentals of a country. My research as discussed above does not depict a Swiss
economy headed for bankruptcy. On the contrary, the impression I got from "nosing around" in
economic data and literature is that the fundamentals of the Swiss economy do not quite fit any
type of gloom and doom at the present time in the country of milk, chocolate and the Swatch
watch. The recession of the 90‘s stemmed largely from an overall world recession and the Swiss
did not go on record as an outstanding exception.
Based on the fundamentals, would I invest in the Swiss franc today? Absolutely. As
with an investment in a company (and contrary to various views you may encounter in context of
the new economy), the analysis of a currency and the decision to make a medium to long-term
commitment to a currency must be based on the fundamentals. I am confident that the Swiss will
remain an economic force. They have a long history of economic and political excellence as well
as an education system and a strong capital base to back it up. The Swiss franc has kept its safe
haven status throughout the 90's despite not joining the EU and it will carry its strength into the
new millenium.
- 19 -6 APPENDIX A: S WISS ECONOMIC INDICATORS
6.1 REAL GDP 1986 TO 1999
Domestic Production at market prices, in million Swiss francs, reference CPI of 1990
Year Export of goods Total Demand Minus import of Real GDP % growth
and services goods and
services
1986 96'952 375'718 93'507 282'211 1.6%
1987 99'176 383'589 99'302 284'287 0.7%
1988 105'665 397'587 104'456 293'131 3.1%
1989 112'659 416'443 110'589 305'854 4.3%
1990 115'048 430'718 113'415 317'303 3.7%
1991 112'688 426'321 111'557 314'764 -0.8%
1992 116'051 421'192 106'826 314'366 -0.1%
1993 117'766 419'742 106'890 312'852 -0.5%
1994 119'835 429'874 115'356 314'518 0.5%
1995 121'769 437'383 121'279 316'104 0.5%
1996 124'783 441'701 124'589 317'112 0.3%
1997 135'986 457'084 134'656 322'428 1.7%
1998 142'176 476'412 147'346 329'066 2.1%
1
1999 117'644 490'256 153'372 336'884 2.4%
1
estimate per November 1999
6.2 DIRECT INVESTMENTS
Institutional capital investment abroad 1995 to 1998 (Capital export)
In million Swiss francs (CHF)
1995 1996 1997 1998
CHF % CHF % CHF % CHF %
EU 6'210 43.0% 12'522 62.7% 13'129 50.2% 6'433 31.2%
North America 5'978 41.4% 3'709 18.6% 7'988 30.6% 5'258 25.5%
Middle- / Eastern Europe 901 6.2% 361 1.8% 321 1.2% 1'155 5.6%
Asia -242 -1.7% 1'146 5.7% 2'192 8.4% 4'023 19.5%
Latin America 186 1.3% 260 1.3% -207 -0.8% 1'088 5.3%
Third World countries 487 3.4% 1'057 5.3% 1'837 7.0% 2'127 10.3%
Other 918 6.4% 909 4.6% 873 3.3% 542 2.6%
Total 14'438 100.0% 19'964 100.0% 26'133 100.0% 20'626 100.0%
Foreign Institutional capital investment in Switzerland 1995 to 1998 (Capital import)
In million Swiss francs (CHF)
1995 1996 1997 1998
CHF % CHF % CHF % CHF %
EU 2'509 95.4% 2'233 58.7% 5'883 80.7% 3'355 48.4%
North America 363 13.8% 1'476 38.8% 1'481 20.3% 2'677 38.6%
Middle- / Eastern Europe 30 1.1% 6 0.2% 21 0.3% 4 0.1%
PacRim & Latin America 16 0.6% 21 0.6% -65 -0.9% -10 -0.1%
Third World countries 14 0.5% -6 -0.2% 67 0.9% 1'162 16.8%
Other -303 -11.5% 75 2.0% -96 -1.3% -255 -3.7%
Total 2'629 100.0% 3'805 100.0% 7'291 100.0% 6'933 100.0%
- 20 -Personnel of Swiss institutions abroad 1995 to 1998 (Capital import)
At year-end
1995 1996 1997 1998
CHF CHF CHF CHF
EU 619'316 703'624 698'666 762'826
North America 257'472 245'891 238'624 263'340
Middle- / Eastern Europe 42'667 61'266 66'525 74'482
Asia 77'658 85'784 92'253 96'338
Latin America 104'628 111'420 112'960 118'763
Third World countries 102'188 120'021 142'046 164'226
Other 191'718 103'223 103'620 105'315
Total 1'395'647 1'431'229 1'454'694 1'585'290
6.3 EMPLOYMENT FIGURES 1985 – 1999
Year Total % Rate of
Unemployed Unemployment
1985 30'345 1
1986 25'714 0.8
1987 24'673 0.8
1988 22'249 0.7
1989 17'452 0.6
1990 18'133 0.5
1991 39'222 1.1
1992 92'308 2.5
1993 163'135 4.5
1994 171'038 4.7
1995 153'316 4.2
1996 168'630 4.7
1997 188'304 5.2
1998 139'660 3.9
1
1999 89'981 2.5
1
as of Oct. 99
6.4 PER CAPITA AGGREGATES
Year GDP Disposable Household GDP Total
Income spending Productivity
Per capita in Swiss francs (nominal) Per employed person in Swiss franc
(real)
1990 38171 29116 26425 … …
1991 39633 31433 28143 … …
1992 40213 32331 29073 … …
1993 41056 33185 29586 … …
1994 41507 33014 30010 … …
1995 42486 33678 30512 112580 97947
1996 43040 33900 30931 113812 98654
1997 44505 34847 31476 117132 101636
1998 … … … … …
- 21 -7 APPENDIX B: INTERNATIONAL COMPARISONS
7.1 REAL GDP 1990 TO 1998
Real, seasonally adjusted, change vs. preceding year in percent %
1
Year USA Japan Germany UK France Italy Switzerland
1990 1.2 5.1 5.9 0.6 2.6 2.1 3.7
1991 -0.9 3.8 3.1 1.5 1 1.1 -0.8
1992 2.7 1 -0.9 0.1 1.5 0.6 -0.1
1993 2.3 0.3 -1.1 2.3 1 -1.2 -0.5
1994 3.5 0.6 2.3 4.4 1.9 2.2 0.5
1995 2.3 1.5 1.8 2.8 1.7 2.9 0.5
1996 3.4 5.1 0.8 2.6 1.1 0.9 0.3
1997 3.9 1.4 1.4 3.5 2 1.5 1.7
1998 3.9 -2.8 2.2 2.2 3.3 1.3 2.1
1
including former Eastern German states (neue Bundesländer)
7.2 TRADE BALANCES 1990 TO 1998
Balance in billion US dollars
1
Year USA Japan Germany UK France Italy Switzerland
1990 -79.3 44.1 48.3 -33.9 -9.9 -16.5 8.6
1991 4.3 68.2 -17.7 -15.0 -6.5 -24.5 10.6
1992 -50.6 112.6 -19.1 -18.2 3.9 -29.2 15.0
1993 -85.3 131.6 -13.9 -16.0 9.0 7.8 19.4
1994 -121.7 130.3 -20.9 -2.0 7.4 13.2 17.5
1995 -113.6 111.0 -18.9 -6.0 10.8 25.1 21.3
1996 -129.3 65.9 -5.6 -0.7 20.6 40.0 22.0
1997 -143.9 94.4 -1.5 10.8 39.5 32.4 25.9
1998 -220.6 120.7 -3.4 0.2 40.2 20.0 23.9
1
including transactions of former Eastern German states (neue Bundesländer)
7.3 CONSUMER PRICE INDICES 1990 TO 1998
Percent % change relative to preceding year
1
Year USA Japan Germany UK France Italy EU Switzerland
1990 5.4 3.1 n.a. 9.5 3.5 6.5 5.8 5.4
1991 4.2 3.3 4 5.9 3.2 6.3 5.2 5.9
1992 3 1.7 5.1 3.7 2.4 5.3 4.5 4
1993 3 1.2 4.4 1.6 2.1 4.6 3.6 3.3
1994 2.6 0.7 2.8 2.5 1.7 4.1 3.1 0.9
1995 2.8 -0.1 1.7 3.4 1.8 5.2 3.1 1.8
1996 2.9 0.1 1.4 2.4 2 4 2.5 0.8
1997 2.3 1.7 1.9 3.1 1.2 2 2 0.5
1998 1.5 0.6 0.9 3.4 0.8 2 1.7 0
1
including former Eastern German states (neue Bundesländer)
- 22 -7.4 UNEMPLOYMENT 1990 TO 1998
Unemployed in percent of total productive population; seasonally adjusted; OECD values
1
Year USA Japan Germany UK France Italy EU Switzerland
1990 5.6 2.1 n.a. 7.1 9 9.1 8.1 0.5
1991 6.8 2.1 n.a. 8.9 9.5 8.8 8.4 1.1
1992 7.5 2.2 n.a. 10 10.4 9 9.1 2.5
1993 6.9 2.5 7.9 10.5 11.7 10.3 10.7 4.5
1994 6.1 2.9 8.9 9.6 12.3 11.4 11.1 4.7
1995 5.6 3.2 8.2 8.7 11.7 11.9 10.7 4.2
1996 5.4 3.4 8.9 8.2 12.4 12 10.8 4.7
1997 4.9 3.4 9.9 7 12.3 12.1 10.6 5.2
1998 4.5 4.1 9.4 6.3 11.7 12.3 10 3.9
1
including former Eastern German states (neue Bundesländer)
- 23 -BIBLIOGRAPHY
1. Statistical Monthly Bulletin, SNB 11/99, Swiss National Bank, November 1999
2. Country Report, The Economist Intelligence Unit, Switzerland No 3 1999
3. The Swiss franc in an international environment, Prof. Bruno Gehrig, Member of the
Governing Board of the Swiss National Bank, April 1999
4. A View from Switzerland, Hans Meyer, Chairman of the Governing Board of the Swiss
National Bank, October 1999
5. Swiss Gold Policy, World Gold Council web site, www.gold.org, November 1999
6. Macroeconomics, N. Gregory Mankiw, Worth Publishers, 1992
7. Europa Entscheid, Rudolf H. Strahm, Werd Verlag 1992
8. Konjunktur-Prognosen 2000, Alois Bischofberger, Chief Economist of Credit Suisse Group,
October 1999
9. International Financial Statistics, October 1999
10. Annual Report 1998, Swiss National Bank
11. www.oanda.com
12. www.cspb.com
13. www.olsen.ch
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