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ECONOMY

EXPLAINED: Why does Switzerland want to keep the Swiss franc weak?

Strong currency may seem like a positive thing for a country’s economy. So why does the Swiss National Bank want to keep the value of franc from rising?

EXPLAINED: Why does Switzerland want to keep the Swiss franc weak?
Michele Limina/AFP

Last week, the US Treasury placed Switzerland on its ‘monitoring list’ of trading partners “that merit close attention to their currency practices”. 

This measure was driven by the Swiss National Bank’s (SNB) attempts to weaken the franc.

Why is the Swiss franc so strong?

One reason is Switzerland’s stable and resilient economy, which has managed to resist the many crises that have weakened other countries’ financial markets.

In fact, during the 2008 global recession, investors from all over the world stashed their money in Switzerland for safekeeping. Because of this influx of money, the value of franc rose dramatically — from around 0.7 francs per euro to near parity.

Another important factor is Switzerland’s relatively low national debt, which, together with the European debt crisis, has boosted the franc.

Why would a strong franc hurt Swiss economy?

Switzerland relies heavily on exports —  particularly pharmaceuticals, machinery, instruments, and watches. Over 40 percent of the country’s production is sent to its main trading partners in the European Union

It is fair to say that exports are the backbone of Switzerland’s prosperity and economic growth. But when the franc rises, it makes Swiss products less competitive — that is, too expensive — in eurozone markets.

What has government done in the past to keep the franc’s value from soaring?

In 2011, the SNB had capped the franc at 1.2 euros, devaluing the Swiss currency by 8 percent. The central bank took this drastic step by printing billions of francs and using them to buy foreign money, pushing its foreign currency reserves to record highs.

However, in 2015, the SNB abandoned the cap, saying it was no longer justified. The franc’s value immediately soared by around 30 percent. 

What else is Switzerland doing to keep its currency from gaining strength?

Just when the SNB removed the currency cap, the bank had also lowered interest rates, pushing them into the negative territory at -0.75 percent.

This move was intended to deter foreigners from parking their money in Swiss banks, as they had done after the 2008 economic crisis, by making the franc unattractive to investors.

However, this defence mechanism proved to be a double-edged sword: while it may have kept the franc from gaining in value, it also drastically reduced the yield from Swiss pension funds and savings accounts.

READ MORE: What's the best way to save or invest money in Switzerland?

 

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ECONOMY

Why Switzerland continues to attract foreign companies despite the coronavirus pandemic

Despite the pandemic, 220 foreign businesses set up their offices in Switzerland in 2020.

Why Switzerland continues to attract foreign companies despite the coronavirus pandemic
Switzerland is a magnet for foreign companies. Photo by Valeriano de Domenico/AFP

While this number is 9 percent lower than in the previous year, these companies have created 11 percent more new jobs — a total of 1,168 — than in 2019. Most of the new jobs were created by companies from China, the United States and Germany.

About 3,600 more positions are expected to be offered by these enterprises in the next three years, according to data from SRF, Switzerland’s public broadcaster.

In fact, Switzerland is one of the very few countries that have been able to attract international companies to its shores in 2020, a notoriously bad year for the global economy.

READ MORE: Why Switzerland’s economy is on the up despite the coronavirus pandemic

Experts believe this is due to the country’s strengths, including political, economic and financial conditions.

“Even in a time of crisis, Switzerland scored thanks to its stability, predictability and security”, said Patrik Wermelinger, member of the executive board of Switzerland Global Enterprise (SGE), which promotes the country abroad on behalf of the federal government and the cantons.

There are also other reasons that had prompted foreign companies to come to Switzerland in 2020, despite the economic uncertainty and travel restrictions.

“Protection of legal rights, freedom, and personal responsibility are stronger in Switzerland than in many other countries, even in times of pandemic”, said SGE’s co-president Walter Schönholzer.

Switzerland’s attractiveness is also boosted by studies showing the country’s economy remains the strongest in the world.

Even though the health crisis plunged Switzerland’s economic activity into a “historic” 8.2-percent slump in the second quarter of  2020, the country still boasts the world’s most resilient economy, according to research by an insurance and reinsurance company Swiss Re. 

The International Monetary Fund (IMF) expects a 3.5-percent rebound in Switzerland’s gross domestic product (GDP) in 2021.

It said Switzerland’s economy absorbed the shock of the pandemic better than other European countries and it “has navigated the Covid-19 pandemic well”.

IMF added that Switzerland’s “early, strong, and sustained public health and economic policy response has helped contain the contraction of activity relative to other European countries”.

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