What will be the long term impact of the newly defined minimum exchange rate target from francs to euro?

Question

Switzerland's central bank stepped in to stop investors driving up the franc on Tuesday, sending the euro up nearly 9 percent and stifling a tentative European stock recovery from sharp losses a day earlier.

Soon after the announcement, the euro was trading at just above the 1.20 Swiss franc target after earlier being at around 1.10 francs. The euro also rose against the dollar and was trading at $1.4173

That's the summary of the current events, taken from Reuters. Which effect will this have long term for the euro zone? Will this worsen the European financial crisis or is this not an important factor? Should this announcement trigger any actions from common European people concerning their wealth?

Answer 1

The total size of the eurozone economy is $13 trillion, whereas Switzerland'd GDP is about $0.5 trillion, so the eurozone is about 26 times larger. As such, I would not expect this move to have a large effect on the eurozone economy. On the margins, this may decrease somewhat eurozone exports to Switzerland and increase imports from Switzerland, so this would be a slight negative for eurozone growth. Switzerland accounts for 5.2% of the EU's imports, and these imports will now be slightly cheaper, which puts some deflationary pressure on the EU, particularly in the Swiss-specialized industries of chemicals, medicinal products, machinery, instruments and time pieces. But overall, 5.2% is a rather small proportion.

Bottom line, most common eurozone countries' people should probably not fret too much about this announcement.

What it means for Switzerland and Swiss citizens, however, is a totally different (and much more interesting) question.

Answer 2

The idea behind this move is to avoid or mitigate long-term deflationary pressure and to boost the competitiveness of Swiss exporters. This is primarily a Swiss-based initiative that does not appear likely to have a major impact on the broader Eurozone. However, some pressure will be felt by other currencies as investors look to purchase - ie. this is not a great scenario for other countries wanting to keep their currencies weak.

In terms of personal wealth - if you hold Swiss f then you are impacted. However, 1.2 is still very strong (most analysts cite 1.3 as more realistic) so there seems little need for a reaction of any kind at the personal level at this time, although diversity - as ever - is good.

It should also be noted that changing the peg is a possibility, and that the 1.3 does seem to be the more realistic level. If you hold large amounts of Swiss f then this might cause you to look at your forex holdings. For the man in the street, probably not an issue.

Answer 3

The Swiss franc has appreciated quite a bit recently against the Euro as the European Central Bank (ECB) continues to print money to buy government bonds issues by Greek, Portugal, Spain and now Italy. Some euro holders have flocked to the Swiss franc in an effort to preserve the savings from the massive Euro money printing. This has increased the value of the Swiss franc. In response, the Swiss National Bank (SNB) has tried to intervene multiple times in the currency market to keep the value of the Swiss franc low. It does this by printing Swiss francs and using the newly printed francs to buy Euros. The SNB interventions have failed to suppress the Swiss franc and its value has continued to rise. The SNB has finally said they will print whatever it takes to maintain a desired peg to the Euro. This had the desired effect of driving down the value of the franc.

Which effect will this have long term for the euro zone?

It is now clear that all major central bankers are in a currency devaluation war in which they are all trying to outprint each other. The SNB was the last central bank to join the printing party. I think this will lead to major inflation in all currencies as we have not seen the end of money printing.

Will this worsen the European financial crisis or is this not an important factor?

I'm not sure this will have much affect on the ongoing European crisis since most of the European government debt is in euros.

Should this announcement trigger any actions from common European people concerning their wealth?

If a European is concerned with preserving their wealth I would think they would begin to start diverting some of their savings into a harder currency. Europeans have experienced rapidly depreciating currencies more than people on any other continent. I would think they would be the most experienced at preserving wealth from central bank shenanigans.