EURO Currency: when the bored Economist is prevailing on common sense and perfectly working ECU

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Euro for Swiss Becomes Focus as Franc Cedes Ground

By Klaus Wille and Tom Mulier - Mar 30, 2011 9:14 AM

Philipp Hildebrand, chairman of the Swiss National Bank (SNB). Photographer: Adrian Moser/Bloomberg

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March 24 (Bloomberg) -- Jean-Claude Biver, chief executive officer of Hublot, the Swiss watch brand, talks about the appreciation of the Swiss franc and its impact on sales. He speaks from Basel, Switzerland, with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

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March 30 (Bloomberg) -- Bloomberg's Olivia Sterns reports from Basel, Switzerland, on the impact of rising demand for luxury watches on Swiss manufacturers. Patek Philippe SA Chairman Thierry Stern speaks in this report. (Source: Bloomberg)

Thierry Stern, chairman of Swiss watchmaker Patek Philippe SA, says his home nation may be better off adopting the euro as the franc’s appreciation hurts exports.

“It’s a nightmare for everybody,” Stern said during a March 24 interview in Basel. “We have to adapt. Something will come. I don’t know when, but one day it will happen.”

Swiss exports are lagging behind German goods sold abroad as companies from watchmaker Swatch Group AG (UHR) to chemicals supplier Lonza Group AG (LONN) struggle with the franc’s ascent against the euro and dollar. While both nations benefit from global demand for their products, the euro’s weakness has helped bolster sales and economic growth in Germany......

The franc gained 10 percent over the past year against the euro as investors sought a haven from the European debt crisis. Thecurrency markets help explain why analysts are estimating that the Swiss economy will expand 1.95 percent this year, trailing the predicted 2.6 percent growth rate for Germany.

Swiss central bank President Philipp Hildebrand said as recently as March 18 that the franc’s advance is among the “considerable risks” to the economy. Exports, which account for about half of the nation’s gross domestic product, rose 7.1 percent in the fourth quarter from a year earlier. In Germany, sales abroad jumped 15 percent in the same period.

Euro Membership

“Swiss exporters would be much better off now if the franc hadn’t appreciated that much over the past two years,” saidAlexander Koch, an economist at UniCredit Group in Munich. “They would be as successful as their German counterparts as both countries’ export sectors are similarly positioned.”

The Swiss remain opposed to adopting the single currency, and just one of five government-coalition parties supports opening membership talks with the EU. The government was forced to negotiate a set of bilateral treaties with the EU after voters rejected a proposal in 1992 for membership in the European Economic Area. That has allowed the nation of 7.8 million to enjoy some of the advantages of membership without giving up any sovereignty.

Joining the euro region is “out of question for the foreseeable future,” said Georg Lutz, a political scientist at the University of Lausanne. “No party would suggest that as they know that voters want to stick to the franc.”

‘Catastrophic’ Gains

Swatch Chief Executive Officer Nick Hayek, whose Biel, Switzerland-based company generates 25 percent of its total sales in European countries excluding its home market, has called the strength of the franc “catastrophic.” Lonza, a supplier of chemicals to drug companies, said March 21 that the franc’s ascent reduced full-year earnings by 28 million francs ($30 million) before interest and taxes.

While the Swiss National Bank tried to stem the franc’s gains in the 15 months through June 2010 by purchasing foreign currencies, it has since ended those intervention attempts. SNB Governing Board member Jean-Pierre Danthine said March 24 that influencing exchange rates is only “temporarily” feasible.

Forty-seven percent of Swiss companies said the currency is weighing on orders, according to an SNB survey conducted in January and February. Swiss freight company Kuehne + Nagel International AG has considered changing the currency in which it reports financial results to euros from francs, Chief Financial Officer Gerard van Kesteren said in a March 24 telephone interview.

Lost Revenue

“Last year, the translation from foreign currencies cost us around 6 percent of our revenue,” he said. “We have to compensate for that with more business and accelerated growth.”

Only the U.S. dollar performed worse than the euro in the past 12 months, according to Bloomberg Correlation-Weighted Indexes, which measure the performance of the world’s 10 most- widely traded currencies against each other. The euro dropped 3.3 percent as Greece and Ireland required financial rescues from the EU and International Monetary Fund.

The franc traded at 1.3000 against the euro at 9:12 a.m. in Zurich, down from 1.2986 yesterday. Versus the dollar, it was little changed at 92 centimes. The median of at least 30 analyst estimates in Bloomberg surveys is for the currency to weaken to 1.35 per euro by year-end, and to 97 centimes per dollar.

Swiss stocks are trailing their counterparts in Western Europe. The benchmark Swiss Market Index (SMI) has fallen 0.6 percent this year, compared with a 1.4 percent gain of Germany’s DAX Index and the 5.7 percent increase of France’s CAC 40 Index.

Health Program

Norbert Walter, former chief economist of Deutsche Bank AG, told Aarau, Switzerland-based Aargauer Zeitung newspaper in January that there’s no quick solution for Swiss exporters.

“Only the all-encompassing fix might help, namely joining the euro,” he said.

“Swiss exporters had to constantly adapt to the franc’s appreciation by becoming more efficient,” said Alexis Bill Koerber, an economist at BAK Basel Economics research institute. “In that sense, the franc has been a health program. We are a victim of our own success.”

Switzerland’s economy expanded at an average annual rate of about 1.6 percent in the decade through 2010, compared with 0.9 percent for Germany. The SNB raised its 2011 estimate for Swiss gross domestic product growth on March 17 to 2 percent from a previous forecast of 1.5 percent.

“Generally, you enter a monetary union if you have a credibility problem,” said Rudolf Minsch, chief economist at Zurich-based business group Economiesuisse, which represents about 30,000 Swiss companies. “But with the euro area, it’s the other way round. Compared to that, the franc’s strength is a minor issue.”