A panic flight into the franc means that prices of European goods drop dramatically for the Swiss. It's like a huge global discount sale exclusively for the Swiss, because of their strong currency. However, thanks to ancient mercantilist thinking which sees a strong currency as bad, it appears the Swiss National Bank has intervened and driven down the value of the franc by printing more of them and spoiling the big discount for the average Swiss resident.
In recent days, there were two massive euro buying programs with the buyer using Swiss francs. This smells a lot like central bank activity. It drove the franc down substantially.
And then we have this from the president of the Swiss National Bank, Phillip Hillebrand, when he was interviewed by the Neue Zuricher Zeitung, May 8, 2010:
We will not allow that the euro zone problems and an excessive rise in the franc to lead to deflation in Switzerland. That defines our policy with regards to the exchange rate. The bank will act in a decisive manner if needed
Ancient mercantilist thinking? What nonsense!
ReplyDeleteA too strong Swiss franc devastates the Swiss economy, killing tourism and exports. Exports account for 50% of the Swiss economy, as compared to 7% of the US economy.
It is ancient merchantilist thinking.
ReplyDeleteIf exports and tourism are 50% of the economy why should they get the benefit while the other 50% get screwed?
Merchantilism benefits only sections of the population, a truly free market benefits all.
You really don't get it.
ReplyDeleteIt's exports and tourism that get killed, not that benefit.
Mercantilism is about setting the exchange rate and using other policy levers to subsidize exports at the cost of the economy as a whole.
Switzerland is a unique case in that it's the only real country whose exchange rate is not only driven by imports and exports but also at times by the banking sector and its history of having a solid currency and being a safe haven. It has huge bank deposits in local currency as a ratio to GDP, almost certainly the highest worldwide, perhaps excepting midget states.
A sudden and relatively dramatic shift in exchange rates driven by inflows into Swiss banks or the Swiss franc, which other countries with relatively small exports would easily survive could make say 50-60% of the economy uncompetitive overnight.
The idea behind Mercantilism was to use exports to accumulate specie (gold, or, in other words foreign assets); the SNB is faced with the problem that inflows of foreign assets could potentially cause mass unemployment and *prevent* exports.
I get it just fine.
ReplyDelete"Mercantilism is about setting the exchange rate and using other policy levers to subsidize exports at the cost of the economy as a whole."
Which is exactly why it's bad.
"A sudden and relatively dramatic shift in exchange rates driven by inflows into Swiss banks or the Swiss franc, which other countries with relatively small exports would easily survive could make say 50-60% of the economy uncompetitive overnight."
If these industries are so dependent on help of a weak currency, one has to ask why they exist in such proportions in the first place.
"If these industries are so dependent on help of a weak currency, one has to ask why they exist in such proportions in the first place."
ReplyDeleteTo ask this question is to admit one's ignorance of Switzerland's exceptional situation.
These industries are not "so dependent on help of a weak currency" but exist in a country that accounts for ~.5% of global GDP but which accomodates a quarter of the world's privately held savings, and which experiences a huge flight to quality / stability in times of crisis.
In 1973 the influx of capital was such that the banks had to impose significant negative interest rates (i.e. you paid the bank to accept your deposits) to manage the foreign inflows they could no longer handle; a bank run in reverse.
In most countries, weakening the currency is done as a favor to the exporting industries. In Switzerland's case, where those monetary policy affects and is affected by colossal foreign deposits to an extent otherwise unknown, and in which a third of output - enough to have a significant bearing on xrs - is exported to the surrounding monetary union, it's the financial sector, however, that understands that there are limits to the degree that the populace will stand for monetary policy being set for the sole benefit of the financial sector, which benefits from a hard Franc. It appears to me that the SNB may deem it wiser and more politically palatable to intervene on the forex market before it imposes capital controls and / or ask the financial sector to dissuade its customers from making deposits. The Swiss really do not need to be castigated for "exploiting the Eurozone's woes."
As I understand it Mercantilism, as the term was historically understood, describes policies that involve the support of exports in relatively large countries with relatively small export sectors (can one credibly accuse Monaco of Mercantilism?), which usually, if not always, involve tariffs, import restrictions, and regulatory hurdles. The economists for whom free trade is the highest dogma rarely mention that the aim of Mercantilism in the historical context in which it arose was to accumulate specie (gold) with which the (French) kings could then fund their foreign wars. No war without an ample war chest.
Switzerland is due to (finally) abolish virtually all of its remaining restrictions on imports of goods from the EU on July 1 http://www.nzz.ch/nachrichten/schweiz/patentgesetz_parallelimporte_in_kraft_1.2645042.html.
This is hardly a policy pursied by a "Mercantilist" country.