A Swiss franc now buys more than a euro. Martin Ruetschi

The Swiss franc hit a historic high against the euro. Even though it is trading at an unprecedented price of CHF 0.95 per euro, the strong franc no longer poses a threat to the Swiss economy. What has changed in the last ten years?

This content was published on October 1, 2022 – 10:30

On September 6, 2011, at 10 a.m., Philipp Hildebrand, then President of the Swiss National Bank (SNB), made an important announcement to the media: “With immediate effect, the SNB will no longer tolerate a euro-franc exchange rate below 1 CHF. 20.” If the franc trades below CHF 1.20, it will be too strong and will inflict enormous long-term damage on the Swiss economy.

The times have changed. For many years, the euro-franc exchange rate has been below this benchmark, and the last time we checked it was as low as CHF 0.95 per euro. Economists no longer seem worried about the damage this could cause to the Swiss economy. How come?

Strong appreciation against the euro

Let’s go back to the early 2010s. When the SNB’s minimum exchange rate was in effect, the euro typically hovered around CHF 1.20 and didn’t go much beyond that. This meant that the cost of holidays in other European countries remained more or less the same for the Swiss, while people in the euro zone did not see a price increase for popular export items such as watches. Swiss.

This changed when the minimum exchange rate was abolished in January 2015 and the euro-franc exchange rate fell below CHF 1.10. The Swiss finally got a better deal and were able to enjoy their city trips to Barcelona at a cheaper price. Likewise, people in Berlin, for example, had to dig deeper to buy a Swiss watch. Such were the effects of the appreciation of the Swiss franc.

Since September 2011, the Swiss franc has appreciated by around 20% against the euro. At first glance, the franc appears to be strong, but all that glitters is not the gold.

A basket of currencies

It should be kept in mind that Swiss watches are not only sold in the Eurozone, but all over the world. This means that the strength of the franc does not only depend on the euro-franc exchange rate, but also on other currencies such as the US dollar, for example. Overall, how strong is the franc against all other major currencies?

Economists can answer this question by calculating the so-called “trade-weighted” rate. It is the price we pay for a basket that is not filled with the usual items such as spaghetti and eggs, but with various currencies such as the euro or the US dollar.

In order to better understand the idea behind the trade-weighted exchange rate, let’s take the example of spaghetti and eggs a little further: if you want to cook spaghetti carbonara, no matter how much you paid for spaghetti and eggs individually. What matters is how much dinner costs in total.

The same logic applies to the trade-weighted rate. Whether the euro is weak or the US dollar strong is irrelevant for the Swiss economy. What matters is how the rates of all foreign currencies move, which is exactly what the trade-weighted exchange rate measures.

If you look at the evolution of the trade-weighted exchange rate, you will notice that the overall appreciation of the Swiss franc has been around 18% since September 2011. This is slightly less than the appreciation of the franc per against the euro, but this reinforces the myth that the Swiss currency is still strong.

High Inflation Needs Another Correction

However, the story of the supposedly strong franc is not over yet. In addition to exchange rates, price levels abroad also determine the ease with which Swiss companies can sell their products abroad. In the best of cases, prices abroad are rising faster than in Switzerland, and this trend has been accelerated by rising inflation rates in the eurozone and the United States, which are several times higher than in Switzerland. ‘in Swiss.

This means that for Switzerland, the level of the trade-weighted exchange rate does not matter. The high inflation rate abroad will make it increasingly easy for Switzerland to export its products.

Economists can determine the effective value of the exchange rate by correcting the trade-weighted exchange rate for the difference between inflation rates in Switzerland and abroad. This gives us a clear picture of the real strength of the franc, and the calculations show that overall the franc is weaker than it was in 2011.

It is therefore not surprising that the debate around a strong Swiss franc has more or less died down. Compared to before, it is rather weak and the history of the strong Swiss franc seems to be a myth.

Fabio Canetg holds a doctorate in monetary policy from the University of Bern and the Toulouse School of Economics. He is a MAS lecturer at the University of Bern. As a journalist, he works for SRF Arena, Republik Magazin and swissinfo.ch and hosts the monetary policy podcast “GeldcastExternal link”.

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