10 years after the franc shock – Have the worst fears come true?

We take a look back at 15 January. We look at the immediate consequences and expected effects of the franc shock. We also ask ourselves where Switzerland stands today in this context.

 

FRANC SHOCK

On 15 January 2015, the Swiss National Bank (SNB) lifted the minimum exchange rate of CHF 1.20 per euro introduced in September 2011 overnight. As a countermeasure, interest rates were lowered to -0.75 % – but without success, as the market reaction was severe. Even the announcement of further interventions on the foreign exchange market, if necessary, did not lead to the hoped-for calming of market participants. The SNB introduced the minimum exchange rate in 2011 to prevent the already overvalued Swiss franc from appreciating further. It was also intended to give the domestic economy time to adapt to the new situation. This extraordinary measure led to the SNB‘s foreign exchange reserves rising from around CHF 47 billion to almost CHF 500 billion by the time the minimum exchange rate was lifted. Speculators, in particular hedge funds, also played a role in this, betting against the SNB and forcing it to spend ever larger amounts to maintain the minimum exchange rate. Ultimately, the political pressure may also have become too great, as the foreign exchange reserves reached almost 70 % of Swiss GDP.

 

IMMEDIATE CONSEQUENCES

Within a few minutes, the Swiss franc‘s exchange rate against the euro plummeted from 1.20 to below 0.85 in some cases, and Swiss shares lost more than 10 % in value. Although the franc stabilised between 1.05 and 1.08 in the following months, this was only due to continued intervention by the SNB to prevent an even stronger appreciation. This had serious consequences for the Swiss economy: Export products suddenly became 10-15% more expensive than their European competitors. Tourism also suffered from the sudden appreciation, as Switzerland became even more expensive for foreign tourists. The winners of this development, on the other hand, were retailers in neighbouring countries, who benefited from a rush of Swiss shoppers. European car manufacturers also recorded significant sales growth in Switzerland. Switzerland only narrowly escaped a recession in 2015, with economic growth halving to 0.8% compared to the previous year. The State Secretariat for Economic Affairs (SECO) spoke of a painful adjustment to the strength of the Swiss franc. The chief economist of the Swiss Federation of Trade Unions estimated that Swiss GDP has fallen by CHF 20 billion a year since the Swiss franc appreciated against the euro in 2008.

 

EXPECTATIONS

A few months after the ‘franc shock’, the German IFO Institute analysed the possible medium-term consequences. An economic downturn was expected in the short term, but the institute saw long-term advantages of a strong currency: higher consumer purchasing power, cheaper imports of raw materials and primary products and a promotion of specialisation in high-quality technologies. According to the study, a strong currency strengthens the competitiveness and innovative power of the Swiss economy in the long term by forcing necessary adjustments.

 

WHERE ARE WE TODAY?

The Swiss franc is currently trading at 0.94 per euro. The franc thus continued its strength. Since 2018, the franc has gained more than 20% against the euro and even against a strong US dollar, the franc has strengthened by more than 6%. In autumn 2024, more than 400 companies were surveyed by UBS on their economic and exchange rate expectations. According to UBS, 60% of them are exporters or generate more than 10% of their turnover through exports. Around 80% of the companies surveyed are dependent on imports. The respondents expect the euro exchange rate to be CHF 0.92 and the USD CHF 0.85 at the end of 2025. 46% of them are hedging currency risks against the euro and 40% are relying on natural hedging by matching income and expenditure in euros as closely as possible. From an investor‘s perspective, the low interest rate environment probably weighs far more heavily on yields compared to the strong franc. On the one hand, because this has meant that no positive interest income (after taxes and costs) has been generated for years.

Secondly, every investment abroad, i.e. an investment whose currency is not the franc, raises the question for an investor as to whether the currency should be hedged against the franc or not. In a market environment in which the USA in particular, with its equity market, is becoming increasingly important, almost no Swiss investor can avoid it. At the same time, currency hedging costs, which are primarily made up of interest rate differences, are at an all-time high. If a Swiss investor wants to hedge his USD investments, this currently costs him more than 4% p.a. The EUR hedging costs against the franc are also currently well over 2% p.a. And it looks as if the hedging costs will not become significantly more favourable in the coming years. This is not what economists are saying, but is currently priced into the futures contracts (swap rates) on the market. This means that Swiss investors are likely to continue to face strong headwinds from currency hedging for years to come.

Since 2015, the SNB has had to remain ‘active’ in the market in order to keep the Swiss franc artificially weaker. The SNB‘s foreign exchange reserves have risen sharply since 2015. Ten years ago, the SNB had slightly less than CHF 500 billion in foreign currencies on its balance sheet, whereas today it has more than CHF 730 billion – only slightly less than Swiss GDP in 2023. Of course, the foreign exchange reserves would be even larger if the minimum exchange rate had not been discontinued. Nevertheless, the price at which the SNB manipulates the currency market should be scrutinised. After all, the cantons are dependent on the SNB‘s profit distributions. Such a huge foreign exchange position can also quickly become an undesirable risk and thus result in lower distributions to the cantons.

The World Intellectual Property Organisation (WIPO) publishes the prestigious Global Innovation Index every year. In 2024, Switzerland was the most innovative country out of over 133 countries – for the 14th time in a row. Even Sweden, the USA and Singapore came in behind the small Alpine country. Surprisingly, 15 countries in the top 25 are from Europe. It measures investment in science and innovation, technological advances, technology adoption and socio-economic impact. There are 7 main categories:

1. Institutions
2. Human capital and research
3. Infrastructure
4. Market sophistication
5. Business sophistication
6. Knowledge and technology output
7. Creative Outputs

Switzerland performs in the top 7 in all main criteria. However, it performs best in the area of ‘knowledge and technology output’. This includes patents, scientific articles, high-tech developments, intellectual property and software expenditure.

Globally, scientific publications have declined slightly in the last two years, but remain above the long-term average. The growth of investments in research and development is also declining and is at its lowest growth rate (around 8.3% nominal) since 2010 – global companies are responsible for around 70%. In absolute terms, however, investment in research and development continues to rise. In 2023, companies invested around USD 1,200 billion, which corresponds to around 5.7% of sales – this has remained constant since 2019. The tech giants and pharmaceutical companies in particular are driving these investments. In Switzerland, Novartis in particular increased spending on research and development, while Roche and Nestle kept spending relatively constant.

 

CONCLUSION

The strength of the Swiss franc meant that Swiss companies had to invest in automation and specialisation at an early stage. This was the only way to compensate for the currency disadvantage. They were therefore forced to innovate. However, Switzerland‘s innovative strength is not only due to the strength of the Swiss franc. Switzerland and its companies have always been very innovative – according to WIPO, Switzerland has been the most innovative country since the start of the survey. The lower and middle classes in Switzerland – if you can call them that – also benefit from a strong franc. Travelling abroad is therefore affordable for the Swiss. The average Swiss gross income is $95,000 per year, putting it in third place worldwide. According to OECD data, the average household income is also in third place.

This wealth, thanks in part to a strong economy, leads to structurally low unemployment. Inflation is also kept low by the strength of the franc, making imported goods cheaper. Ultimately, this creates further pressure for a strong Swiss franc and promotes an environment of structurally low interest rates. Although this eases the burden on households through low mortgage interest rates, for example, pension schemes are burdened by the low interest rate environment. The low interest rate environment reduces the returns of pension funds and leads to riskier investment strategies. In addition, the strong franc increases the problem of redistribution. The conversion rate is being kept artificially high by politicians and is leading to a redistribution from younger to older insured persons, which jeopardises generational equity.