At times, the euro was not worth 96 centimes in foreign exchange trading. A strong franc is difficult for Switzerland as a country that lives from its exports abroad. But there is no outcry from the economy, and the Swiss National Bank SNB does not seem to be fighting the strong franc at the moment. Why is that?
If a country has less inflation than its trading partners, an appreciation is not a problem at all.
Looking only at the euro-franc exchange rate does not go far enough. The franc has depreciated by seven percent, says Matthias Geissbühler, head of investment at the Raiffeisen Group. “But the US dollar has appreciated by more than five percent.” So the Swiss franc has not recently strengthened against all currencies.
Exchange rate offsets high inflation in Eurozone
Tobias Straumann, economic historian at the University of Zurich, sees a second reason why the strong franc is less of a problem than one might think: “If a country has less inflation than its trading partners, then an appreciation is not a problem at all. Then it’s just a matter of balancing out the differences.”
Swiss companies are better able to pass on higher prices to the euro area because inflation is much higher there.
This is exactly what is currently happening with the euro-franc exchange rate. Inflation in the euro zone is currently almost three times higher than in Switzerland. The exchange rate compensates for this difference, which suits Swiss exporters, as Geissbühler says: “Swiss companies can also pass on prices better to the euro area because inflation is much higher there.” Price increases are easier to enforce because they are not so important in Europe.
A Swiss screw manufacturer, for example, can currently pass on higher costs for purchasing materials to customers more easily because it knows that its German competitors will have to raise their prices much more due to inflation there. This defuses the problem of the constantly falling euro-franc exchange rate.