SHARE
COPY LINK
For members

MONEY

EXPLAINED: What does euro-franc parity mean for Switzerland?

With the value of the European currency declining due primarily to the war in Ukraine, the euro reached parity with the Swiss franc. Is this good or bad news for Swiss consumers and Switzerland?

This banknote is worth even more now against the euro. Photo by Michele Limina/AFP
This banknote is worth even more now against the euro. Photo by Michele Limina/AFP

For the first time in seven years, the Swiss franc and the euro hit parity on Sunday. 

The European currency fell by four percent since Russia invaded Ukraine on February 24th, while the Swiss franc has risen by 0.9 percent during this period.

READ MORE: Parity with the euro: Why the Swiss franc is now so strong

The fact that the franc is so strong is nothing new in itself: it is largely thanks to 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.

This may sound like very good news, but in fact the parity has consequences for Switzerland.

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 specific impact can we expect from the parity?

News platform Watson has listed some of the major repercussions of the weakening euro / stronger franc. This is an overview of the likely consequences:

The industry in general

The rapid appreciation of the Swiss franc is having a huge impact on the export-oriented industrial sector. Both the large association of the machine, electrical and metal industry (Swissmem) and Swissmechanic, the organisation of the smaller industrial suppliers, will be impacted by the new exchange rate.

“The opportunity to invest in innovation and digitisation is decreasing accordingly”, a Swissmem spokesperson pointed out.

The association assumes that the companies will try to pass part of the cost increase, which will also affect raw materials, energy and primary products, on to the customers.

For Swissmechanic, there are problems on the horizon as well.

“Our companies have steadily increased their efficiency in recent years, but the point will be reached when they can no longer do so”.

Restaurant and tourism sector

This branch, which has not yet recovered from enormous losses sustained during the pandemic, is facing a new blow  — higher costs, which means more expensive meals for the consumers.

“At the moment we can live with the current franc exchange rate to some extent, but there are limits”, according to Casimir Platzer, head of the industry association Gastrosuisse.

Will Swiss restaurants be impacted by stronger franc? Photo by Pixabay

The same dynamic applies to the tourism industry, which was also significantly impacted by the health crisis.

Martin Nydegger, director of the marketing organisation Switzerland Tourism, speaks of “an accumulation of problems that together represent a real challenge”.

Because of the war in Ukraine and lingering fears of Covid,  visitors from the USA and Asia are still staying away from Switzerland. Added to these problems is the exchange rate parity, which “is another hurdle that we have to overcome”, Nydegger said.

Will Swiss hotels now have to lower prices?

“The Swiss hotel industry is still extremely competitive”, according to Andreas Züllig, president of the Hotelleriesuisse industry association.

The current parity has been apparent for some time, he said, and the sector has been able to adjust and adapt its pricing, benefiting from the fact that prices in neighbouring countries had risen much faster than in Switzerland in recent years.

Will cross-border shopping become even cheaper?

Many people living close to the border frequently shop in France, Italy or Germany, where prices for everyday goods are much lower.

Will weakening euro make this activity even more lucrative for Swiss shoppers?

Shopping abroad will certainly remain cheaper than in Switzerland but Dagmar Jenni, head of the Swiss Retail Federation, said it is unlikely many more people from Switzerland will make the trip across the border(s) just to shop.

Also, the grass in not necessarily greener (and prices lower) on the other side, she said, pointing out that in Germany prices are rising much faster than in Switzerland.

Plenty of Swiss residents take shopping trips from from Switzerland to Germany. Photo by SEBASTIEN BOZON / AFP)

READ MORE: EXPLAINED: Why is Switzerland so expensive?

What about salaries and employment?

For Daniel Lampart, chief economist at the Swiss Confederation of Trade Unions, the weaker euro could have consequences for both wages and jobs.

He points out that companies in Germany would pay significantly lower wages than they did two or three years ago.

“The weakness of the euro gives them an additional advantage, while Swiss industry is at a disadvantage”, he said.

What needs to be done to offset the euro-Swiss franc parity?

Some in the industry are calling for the Swiss National Bank (SNB) to intervene as it had done in 2011, when the SNB had capped the franc at 1.2 euros, devaluing the Swiss currency by 8 percent.

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

Others, however, are largely, unconcerned. “The increase is pretty muted, indicating that the SNB hasn’t intervened much over the past few days,” Maxime Botteron, and economist with Credit Suisse, told news outlet Swiss Info. 

“It has a lot to do with the fact that the franc’s appreciation is against the euro and other currencies.”

What else has Switzerland done to keep its currency from gaining strength?

Just when the SNB removed the currency cap in 2011, 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: EXPLAINED: How does the Swiss pension system work – and how much will I receive?
 

Member comments

Log in here to leave a comment.
Become a Member to leave a comment.

OPINION & ANALYSIS

OPINION: Why Switzerland needs to scrap its fabled 1,000 franc notes

If the Americans can get by with $100 bills, the British manage with £50 and EU citizens now mostly €200, why do the Swiss need such a large denomination? The answer is, they don’t, writes Clare O'Dea, as she explains why it should be binned.

OPINION: Why Switzerland needs to scrap its fabled 1,000 franc notes

The existence of the 1,000-franc note, so blatantly open to misuse, is justified with platitudes about the Swiss liking cash.

Apparently the 1,000-franc note is quite pretty but I can’t say for sure as I’ve never seen or touched one. With the exception of Singapore and Brunei, no other country sees fit to issue such a large-denomination note for the simple reason that it’s not needed for legitimate business.

Financial secrecy is obviously a big part of the appeal of the 1,000-franc note. To say otherwise is not really credible. Cash in this condensed form is anonymous, untraceable, easily transportable, easily concealed.

As Bradley Birkenfeld said in a 2015 CNBC interview, “I mean you could put half a million in your pocket, no problem”. Remember that name? Birkenfeld was the (in)famous UBS whistleblower who exposed the bank’s shady practices to the US authorities in 2007, triggering the dismantling of Swiss banking secrecy.

The Swiss National Bank (SNB) explains that the big note is used as a “store of value” to a considerable degree. What does that mean? The SNB’s own research shows that most people keep less than 1,000 francs in cash at home. Are we talking about storing value under the mattress or in a safe deposit box?  Who does that and for what reason?

Look, I’m sure there are people with 1,000 notes squirrelled around the place who run their finances in a totally clean and honest way. The latest SNB survey on payment methods found that half of the population had been in possession of at least one 1,000-franc note over the previous two years. The note is especially popular among men over the age of 55

But inevitably there are tax evaders, money launderers and other criminals who find the big notes come in very handy. The €500 note was scrapped after 17 years mainly because of its popularity with criminal gangs in the EU and beyond, to the extent that it had become an embarrassment.

The €500 note is still legal tender but no new notes have been issued in the euro zone since 2019, following the decision by the European Central Bank. The move came after serious concerns were expressed by academics, international police agencies and EU finance ministers.

When production of the €500 note officially ceased, the largest denomination note accounted for 20 per cent of the value of all euro notes in circulation. Doesn’t it seem odd that 60 per cent of the value of all francs in circulation are in 1,000-franc notes? That’s 9.4 per cent of all physical notes. Something doesn’t add up.

I have heard people argue that 1,000-franc notes are popular for big expenses, like buying a car or jewellery. Or for paying big bills over the counter at the post office (this I have seen). Rumour has it that farmers like to buy livestock with the purple polymer and paper mix. Each to his own.

But these financial practices are fast becoming dated and are anyway not common enough to explain the volume of 1,000 notes in circulation. Yes, it’s official: cash is no longer king in Switzerland.

As recently as 2017, some 70 per cent of non-recurring payments were made in cash, purchases like clothes, the supermarket shopping, or restaurant meals, according to the SNB survey on payment methods. This had reduced to 43 per cent by 2020, the last time the survey was carried out.

The most recent data on payment behaviour comes from the Swiss Payment Monitor, a joint research project between the University of St. Gallen and the ZHAW Zurich University of Applied Sciences, which reported in August of this year.

The study found that the debit card remains the most frequently used form of payment for face-to-face business (34.8 per cent), followed by cash (33.2). Credit cards are less popular at 16.5 per cent. Meanwhile mobile payments are growing in popularity, increasing share from 1.5 per cent of transactions to 11.2 per cent over the past five years. 

What this boils down to is that people are perfectly adept at paying electronically in all kinds of ways and the role of the 1,000-note in retail or person-to-person purchases is far from essential.

While we’re on the subject of money, this month saw the release of the Credit Suisse Global Wealth Report, in which Switzerland emerged as the world’s richest country. The average wealth of adult residents in this country is 672,508 francs, up 5.4 per cent from the previous year. Assets include stocks and shares, pensions savings, and property.

In case you’re feeling left out, the median wealth per adult in Switzerland is 165,266 francs. That means half of the population possesses less than this amount. The figures are skewed upwards by a smallish number of mega rich individuals, with a little help from the 1.1 million millionaires in Switzerland. My guess is that these two groups have the most use for the 1,000-franc notes.

Reading between the lines, I sense some national pride in the attachment to this world-beating high denomination note. Swiss people like to hold cash – that’s our way. We also like our privacy – so what!

Not to spoil the fun, but all cultures need to be aware that just because they’ve always done something a certain way does not mean the practice has merit and is worth preserving. I recommend taking a long, hard look at the legitimacy of the fabled 1,000-franc note.

SHOW COMMENTS