Switzerland Finally Surrenders – Paul-Martin Foss

TND Guest Contributor:  Paul-Martin Foss |

The biggest news in the markets yesterday was that the Swiss National Bank (SNB) ended its currency peg of 1.20 Swiss francs to the euro. Not having told anyone before making its decision, the Swiss franc subsequently appreciated sharply, up 39 percent at one point during the day. While it’s good that the SNB is no longer pegging its currency to the euro and thus no longer actively devaluing their currency, it’s a policy that should have been done all along. What this entire episode demonstrates is that when push comes to shove, markets are more powerful than central banks.

The Swiss peg was an attempt to keep the Swiss franc from appreciating against the euro. Since Switzerland’s economy exports a great deal, appreciation of the franc would have made Swiss exports more expensive in Europe and hurt certain Swiss industries. Rather than let their exporters take their lumps, the SNB attempted to defend the 1.20 peg. Remember too, that during last year’s Swiss gold referendum, the SNB vigorously attacked the referendum as a restraint on its conduct of monetary policy and ability to maintain the peg. Undoubtedly the SNB must have know back then that the peg was ultimately indefensible.

Eliminating the peg unleashed a frenzy in international markets. Swiss stocks crashed, the franc appreciated rapidly, and a whole host of businesses, investors, and speculators stood to lose hundreds of millions of dollars worth of investments as a result of this unexpected action. The elimination of the peg, however, was inevitable. Given the European Central Bank’s (ECB) determination to engage in quantitative easing, the Swiss peg would have forced the SNB to continue printing francs and buying up euros in order to maintain that peg. Continued euro devaluation would have forced the SNB to devalue in lockstep with the ECB, which would have been an expensive policy to maintain. At the end of the day, the SNB had to raise the white flag and admit that it couldn’t continue to print francs to maintain the peg.

It now remains to be seen how much damage has been done by the three-plus years of the peg. Businesses that had expected the peg to remain in place will have to readjust and there will inevitably be some short-term suffering. In the long run, however, Switzerland should be better off, at least as long as the SNB maintains a hands-off position.

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About  Paul-Martin Foss:

Paul-Martin Foss is the founder, President, and Executive Director of the Carl Menger Center for the Study of Money and Banking, an Arlington, VA-based think tank dedicated to educating the American people on the importance of sound money and sound banking.

Prior to founding the Menger Center, Mr. Foss worked in the U.S. House of Representatives for seven years, including six years as Congressman Ron Paul’s legislative assistant for monetary policy and financial services, and one year as Deputy Legislative Director for Congressman Thomas Massie.

As Congressman Paul’s legislative assistant, he assisted the Congressman in his duties as Chairman of the Subcommittee on Domestic Monetary Policy by helping to develop hearing topics, agendas, and briefing Congressmen and their staffs on monetary policy topics. Mr. Foss also was responsible for the management of Dr. Paul’s monetary policy and financial services legislation, including the “Audit the Fed” and “End the Fed” bills, and was co-editor of Ron Paul’s Monetary Policy Anthology, a multi-thousand page compilation of hearing transcripts, lecture transcripts, and other documents related to Dr. Paul’s chairmanship.

Mr. Foss received his Bachelor’s degree from The University of the South (Sewanee), and Master’s degrees from the London School of Economics and Georgetown University’s Edmund A. Walsh School of Foreign Service.

This article appeared on the Carl Menger Center for the Study of Money and Banking and is reprinted with permission, “Creative Commons 4.0.”