Switzerland Takes a Stand Against QE

Perhaps pressured by its voters, Switzerland shocked speculators today by unpegging the Swiss Franc from the Euro leading to a dramatic rise in the Franc’s value.

This is a win for Switzerland. Savings, real wages, and real spending power will now increase in value. While a weaker currency makes Swiss exports cheaper, Switzerland could, instead of buying Euro paper, protect a few specific industries via trade protections while declining to protect other industries favoured by trading partners.

There is a risk the Swiss will now hoard Francs rather than invest in their economy, but such a situation would correct itself eventually. Foreigners buying Swiss Francs instead of gold as a safehaven could be a major benefit in the short-term if uncontrolled QE continues around the world. Francs are more liquid than gold and could become popular.

When a bank buys Euro paper to lower its currency’s value, it is spending its own citizens’ money. A primary argument for higher exports is an improved economy-of-scale. However, there is a limit to how much of a benefit economy-of-scale provides.

If real Swiss wages rise to uncompetitive levels due to deflation, there is nevertheless some inherent value in the quality work the Swiss are known for. And I doubt most Swiss would mind the resulting pay increase for workers and reduction in their wealth gap (Swatch executives might have to take a pay cut if exports and overall production by Swatch are reduced).

Note the difference between nominal wage and real wage. A strong Franc makes foreign (e.g. EU) goods cheaper to buy while increasing the price of domestic goods to foreigners.