A few days ago it was briefly mentioned on American news, that the Swiss had surprised the business world by de-linking their currency from the Euro.
Upon hearing this, most average Americans would say, “so what?”, and go about their day. Though not always obvious, it does and it will matter to the average American.
However, a brief history lesson first. For many reasons that will not be mentioned here, the Swiss people have always been an independent sort. They chose as a people and government to not join the European movement of one currency and one government. As a result, Switzerland remains one of the few, if not the only, European country
that has remained generally autonomous from the other countries of Europe – at least on a budgetary and economic level.
Though try as they might to be independent, the Swiss are very dependent on the rest of Europe for trade – almost half of all exports are to other European countries. Not to mention the historical habit of Europeans to use Swiss banks and the Franc to save their monies. When the Euro was introduced several years ago, many savers and citizens of European countries who did not trust or believe in the Euro, moved their monies to Swiss banks and the Swiss Franc.
And just like the demand for a limited number of bottles of cool water at a hot desert music festival, the value of the Swiss Franc continued to increase in relation to the Euro. And since Swiss exports are valued in Swiss Francs, an increase in the value of the Franc means a very expensive exported chocolate bar!
To keep the Swiss Franc from becoming too valuable a currency ( and its exports too expensive for the masses) the Central Bank of Switzerland tied or pegged the value of a Swiss Franc to the value of the Euro. This value was pegged at 1.20 Francs to 1 Euro and has lasted for three years. However, as economic problems (Greece, Spain, etc.) in Europe continued, it became increasingly difficult for the Swiss to keep their currency tied to the Euro.
As a result, last week, the Swiss announced that their currency would no longer be tied to the Euro and would, once again, trade freely in the worlds currency markets. This action was a surprise to most people and economists as the Swiss Central Bank had just reiterated its continued support and ties to the Euro just a few days before.
So why is this action by the Swiss important to an average American? It is important for both economic and social (trust) reasons;
Government officials often know more than they say – so everything they say should be taken with a bit of skepticism. Americans should also take what the Federal Reserve says with a grain of salt as well.
The Swiss are saying they no longer trust the value of the Euro and/or expect it to continue to fall in relation to other currencies. America also trades heavily with Europe and has a stake in its stability – both economically and politically.
As the Euro falls in value compared to the Franc and U.S. Dollar, U.S. exports to Europe will become more expensive for Europeans to buy. However, imports into the U.S. from Europe will become less expensive.
A rising American Dollar may make some proud, but a rising Dollar will make U.S. products more expensive overseas. This could slow-down the very fragile economy recovery now underway.
As strange as it may seem to Americans, many Europeans borrowed money and home mortgages in Swiss Francs – not Euros. As a result of the increase in the value of the Franc, the debts for these borrowers also increased as well (over 30% as of today.) It’s estimated that over 30% of the mortgages in Poland are valued in Swiss Francs.
Lastly, Americans need and should want a stable and secure Europe – not only for trade, but for social and political reasons. Increased monetary chaos and large currency fluctuations are a detriment to Americans in ways that are not always clear – but it does matter.