Switzerland's Too Strong For Its Own Good : Planet Money "The Swiss dream of isolating themselves from trouble is just an impossible dream."
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Switzerland's Too Strong For Its Own Good

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Switzerland's Too Strong For Its Own Good

Switzerland's Too Strong For Its Own Good

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WILLE HEMGARDTEN: (Speaking German) ...PLANET MONEY.

(SOUNDBITE OF SONG, "GIMME SYMPATHY")

METRIC: (Singing) Get hot, get too close to the flame. Wild, open space...

ROBERT SMITH, HOST:

Hello, and welcome to PLANET MONEY. I'm Robert Smith.

CAITLIN KENNEY, HOST:

And I'm Caitlin Kenney. Today is Friday, August 19. And that was Wille Hemgardten (ph) you heard at the top, welcoming you to the podcast. On the show today, we're going to be taking you to Wille's home country of Switzerland to find out what happens when you've got something everyone around the world wants, something they're willing to pay a lot of money for - but you don't want to sell it.

SMITH: In fact, the Swiss will do anything they can to stop people from buying this. We'll tell you what it is in just a minute. But first, the PLANET MONEY Indicator with Jacob Goldstein.

JACOB GOLDSTEIN, HOST:

Today's PLANET MONEY Indicator - 500 million. A European bank took out a one-week $500 million loan from the European Central Bank this week. The ECB said this happened, but its policy is not to disclose which bank took out the loan. Still, this is an important warning sign. It's very rare for banks to take out this kind of loan. It's been months since anybody's done it. And banks basically only borrow in this way, only take out this kind of loan from the central bank, when they need money and cannot borrow it on the open market, typically from other big financial institutions. And of course, if a bank cannot borrow money on the open market, that's a sign that banks are getting nervous about lending money to one another.

SMITH: Yeah, because normally when a bank needs money overnight or something like that, they would get the money from other banks because they're sitting around with tons of money or from other kinds of financial institutions. And we're always watching this, if banks start refusing to lend money to each other. I mean, that's basically what we saw in 2008 during the financial crisis.

GOLDSTEIN: Exactly. When that happens, essentially, the financial system locks up very fast. And to be clear - to be very clear - we are nowhere near financial crisis levels of interbank freak-out here. Banks are still lending money to each other. There's no sign that the system is locking up like it did in the fall of 2008. But there is this fear out there, which is European banks hold lots of European sovereign debt. And people are worried that Europe's sovereign debt troubles will come back and bite the banks. And so you know, there is this $500 million loan we saw. And there's the fact that the stocks of lots of big European banks went way down this week. And essentially, these things add up to a bunch of warning signs that people are indeed quite nervous about European banks right now and that we really need to keep an eye on them.

SMITH: Thanks, Jacob.

KENNEY: Thanks, Jacob.

GOLDSTEIN: Thanks, guys.

KENNEY: OK, on with the show. As Jacob just so nicely put it, the global economy right now - it's a hot mess. You only have to look at the stock market and debt discussions or this thing he told us today about the European bank and you can see that there's a lot of fear, a lot of panic out there. And when people start to freak out, weird things start to happen.

SMITH: Bizarre things. Today we're going to tell you the story of how one of the healthiest economies in the world is getting dragged down into the muck with the rest of us. We're talking about Switzerland. And the problems that the Swiss are facing tell us how we've entered this bizarro economic world where black is white and up is down. Switzerland's facing trouble - not because they screwed up anywhere, not because they're a weak economy but because they've run their economy too well.

KENNEY: They've run it so well that everyone around the world wants to get in on the action. They're like, hey, how do I get some of that? And the way they do that is by buying the currency, the Swiss franc. And because so many people want to buy it, it's become worth more and more compared to other currencies. The franc has gained 30 percent versus the dollar just over the past year.

SMITH: Which sounds like an awesome thing - right? - especially if you're a Swiss tourist in New York getting everything on sale. But for Switzerland right now, this is basically a nightmare. And they're desperately trying to do everything they can to make this stop.

KENNEY: To understand why it's a bad thing, you first need to understand why people want it in the first place. I mean, what's so special about Switzerland besides cheese and clocks?

SMITH: Hot chocolate...

KENNEY: Right.

SMITH: ...The Matterhorn.

(LAUGHTER)

KENNEY: OK. But seriously, obviously there's something going on here. People want their currency. And why is that? I put this question to Charles Wyplosz. He's a professor of economics at the Graduate Institute of International Studies in Geneva. He says one reason is that people are worrying about the U.S. economy in a way they didn't used to. And part of the reason for that is because of the S&P's recent downgrade.

CHARLES WYPLOSZ: Once you believe that the U.S. that is not debt is not tripling anymore - which I don't - but when some people in the markets believe that, you look around the world and you say, what else can I buy? You look around. You look around. You don't want to go into Germany these days because the German government could be sinking in the trouble. The yen is a bit appealing, but the debt of the Japanese government is the biggest debt in the world. So what's left? Well, gold and tiny Switzerland.

SMITH: Yes, gold and tiny Switzerland. You realize that basically Switzerland is the gold bullion of nations. And think about it; it sits right in the middle of Europe, but it isn't tied to the euro. It can't be hurt by Greece or Portugal.

KENNEY: And it has hundreds of years of stability behind it. And just look at their banks. Swiss banks are famous for safety and discretion.

SMITH: And the economy of Switzerland is currently wunderbar. Good pronunciation, huh? It's growing. The unemployment's 3 percent.

WYPLOSZ: There's nothing wrong with Switzerland. And there's no other place in the world, really, you can go to. So that's why the Swiss franc has been exploding. In a way, the Swiss are victims of their impeccable management of their economy.

SMITH: Victims - because while it's great to be loved, while it's great to have money pour into your country, Switzerland isn't very big. It can't handle that much money.

KENNEY: Now, this is not to say that people have stopped buying U.S. Treasury bonds or actual gold. But enough money has shifted to Switzerland to radically change the value of their currency, the Swiss franc. It's basic supply and demand. And it works with currency just like with any other product. The more people want to buy something, the higher the price goes. The more people want Swiss francs, the higher the price.

SMITH: It's what we call a strong currency. And normally when you hear the word strong, you know, it's a good thing - right? - strong military, strong cup of coffee.

KENNEY: Nice strong cocktail before we record this podcast.

SMITH: But just one.

KENNEY: (Laughter) But remember; we are in bizarro world. The strong Swiss franc is the worst thing that can happen to the country right now. The main problem - exports.

SMITH: The reason Switzerland has a good economy in the first place is that they make stuff the rest of the world wants - and not just chocolates and watches like we joke, but they also have pharmaceuticals and financial services. More than half of the Swiss economy is based on exports. And when you sell products to other countries, you want a weak currency because it makes your stuff cheap.

KENNEY: And having a super strong currency means your stuff is more expensive. Ivo Zimmermann is a spokesman for the country's largest industrial association. It's called Swissmem, and it represents 1,000 mechanical and electrical engineering companies. He says the strong Swiss franc has a huge impact on business.

IVO ZIMMERMANN: The only thing that really helps the industry now, the export industry, is a weaker Swiss franc. That's the only thing that really helps.

SMITH: Now, let me tell you how this whole currency thing is supposed to work. Normally, a country gets a strong currency because everyone wants to buy their products. So they export a lot, and then slowly, say, the Swiss franc would go up. And then the world adapts. If the exports get too expensive, people stop buying, and the franc goes back down. It's a self-regulating system.

KENNEY: But in a crazy world like we're living in now, everything is moving too fast. Money from around the world is pouring into Switzerland at record rates. And it ain't the chocolate. It's fear. It's panic. The currency isn't slowly floating up. It's skyrocketing - up almost a third in one year.

ZIMMERMANN: Having a strong currency is not something that unusual for Swiss industry. The difference of the current problem is that the speed is enormous. And this just didn't allow companies to adapt to the situation. When you have a trend over a year, you know, you can adapt to the situation. But when it happens that quickly, you know, for a company it's impossible to, let's say, do innovations in that short period which could compensate the disadvantage.

KENNEY: And you can see this disadvantage already in the bottom line of companies. Swatch, the largest watchmaker in the world, says it lost $387 million because of currency issues. That's a 12 percent drop from last year.

SMITH: And because this money is flowing so quickly, a lot of the benefits that usually come with a strong currency aren't happening.

KENNEY: For instance, if a currency gets stronger, imports into the country should be getting cheaper. Raw materials should be getting cheaper, and prices should be going down for the average Swiss. But they're not. We talked to Wille Hemgardten, who welcomed you to the podcast, about this. He's a 24-year-old student who has lived in Switzerland his whole life. He says prices haven't changed - not even a little bit.

HEMGARDTEN: No, no, not at all.

SMITH: But every single day, the Swiss franc seems to get stronger and stronger. In theory, prices should be dropping in your stores.

HEMGARDTEN: Yeah. Supposedly, yeah. But that's not what happens. The products, more or less, stay the same.

SMITH: But that means that somebody's making a lot of money off you.

HEMGARDTEN: Yeah, exactly. That's what's happening. So like, if I go clothes shopping, I probably wouldn't go now, like, to Switzerland. I probably would go over the border and buy something there because it's just a lot cheaper than here.

SMITH: In Germany?

HEMGARDTEN: Yeah, in Germany. For me, it's like about 120 kilometers to Germany.

SMITH: So the local merchants must be upset. Can you see them standing outside their shops and, I don't know, raising a fist to the sky toward Germany?

(LAUGHTER)

HEMGARDTEN: Well, not exactly like that. I mean, there are a lot of people saying, like, the proper Swiss people, they wouldn't go, well, next door and buying the stuff in Germany. But they're not happy.

SMITH: This is part of the bizarro world of the currency. It's - things are so unpredictable right now for the Swiss that importers aren't willing to lower prices for fear that they're just going to have to jack them up again in a couple weeks.

KENNEY: And people are getting really angry about this. One of the country's biggest supermarket chains took nearly a hundred products off their shelves because the importers wouldn't lower their prices. Wille says there are big empty shelves where the imported products used to be. And there's empty stores all over Switzerland.

HEMGARDTEN: There's Rheintal that's like a valley which is connected to Germany. There's one big - it's a center of different stores. And like, on a Saturday or something, the whole parking space is more or less empty because all the people just go over the border and buy their stuff in Germany.

KENNEY: So here we've got the crazy global panic punishing poor Switzerland for being a good economy and being well-run. Investors are basically ruining the thing that they loved about Switzerland, that it was stable and predictable. Now you have outraged customers and exporters and empty shelves.

SMITH: So what can Switzerland do about this problem? What can they do to weaken their currency? Well, it turns out they do not have many options. But here's what they're trying. I mean, the first thing you go to, as we talked about before - supply and demand. Now, the Swiss can raise the money supply, put out more Swiss francs. If the world's flooded with francs, in theory, the price should go down, just like what happened with Beanie Babies or those little Silly Bandz that were popular last summer.

KENNEY: But this is tricky. I mean, they can't just fire up the printing presses. That would create inflation and then hurt the very people they're trying to help. So what the central bank is doing now is moderately increasing the money supply. They're buying up Swiss bonds and forcing the banks to take more money. But so far, it's not having much of an effect. The demand for the Swiss franc is just too high.

SMITH: OK. So supply management isn't working. The other thing the Swiss can do is to try to slow demand, to make their currency more unattractive. They've been lowering the interest rates in the country. So if I buy Swiss francs and I put them in a Swiss bank or purchase Swiss bonds, I will barely get any interest on my money. The interest rate is close to zero. And it's like a big sign that says, hey, everybody, go someplace else and make more money. In fact, try Brazil. You can get 12 percent there.

KENNEY: But that's not working either. People are just not getting the hint. Investors, the Swiss just aren't that into you.

SMITH: Seriously. But they're so desperate in Switzerland that there's been talk of negative interest rates, where Switzerland would basically charge you money for the privilege of buying their bonds. I mean, seriously, negative interest.

KENNEY: But remember - one of Switzerland's biggest moneymakers is its financial services. If they start doing crazy things like this and moving interest rates around, that's going to drive business away.

SMITH: There is not a good option for the Swiss right now. Charles Wyplosz, the professor of economics in Geneva, says Switzerland is simply too small to stand up to this flood of world money.

WYPLOSZ: There is a huge storm in the world. And how high can they build dikes to prevent water from flowing in? I don't think they can. They are trying - I think they are likely pretending that they tried because public opinion is worked out. Exporter lobbies are pushing very, very hard. So they do things that seems like the thing to be done. But I think nobody believes that it's going to work.

KENNEY: But Wyplosz says there is one other option, considered a last resort for Switzerland, a big screw-you to all the currency traders out there. And they could do that by pegging the currency rate to the euro. Essentially, they would declare that 1 euro is worth 1.1 Swiss francs no matter what.

SMITH: And this seems crazy. Right? I mean, when you think of countries that peg their currency, you think of third-world countries who don't trust themselves enough to manage their own economy. And here some people are calling for Switzerland to peg its currency, not to a stronger currency but to a weaker one, to the euro.

KENNEY: All right, so let's talk about the implications of this. I'll be Switzerland.

SMITH: And I'll be the rest of the world.

KENNEY: One euro is worth 1.1 Swiss francs.

SMITH: Really, just because you say it is?

KENNEY: Yeah.

SMITH: Well, I happen to know that the Swiss franc is trading higher in private markets. So you are offering a discount. I will buy 100 million francs at that low price.

KENNEY: OK. Here you go.

SMITH: Really, a hundred million more then? Fork it over.

KENNEY: Sure, no problem.

SMITH: Another hundred million?

KENNEY: Sure.

SMITH: A billion francs. I will buy a billion francs.

KENNEY: Oh, God - that's just so many francs. I mean, when is this going to end? I...

SMITH: You've no - come on, you have to fork it over. If you say that 1 euro is worth 1.1 Swiss francs, then you have to sell Swiss francs at that price no matter how much I'm asking for.

KENNEY: Yeah. But if I do that, I'm just worried. I'm worried about inflation.

SMITH: If you do not sell it to me at that price, then the peg is over. You've lost.

KENNEY: Yeah, I guess you're right.

SMITH: See, this is why Wyplosz thinks the Swiss cannot pull this off.

WYPLOSZ: The settlement goes and say, I will provide you whatever you need to keep the exchange rate at 1.1. And what I am saying is that this, whatever you need, can be totally gigantic given the small size of the Swiss economy and the huge size of the world financial market. The Swiss settlement might have to absorb twice, three times, four times its own money supply before it has any effect on the market.

KENNEY: Wow. That seems very scary.

WYPLOSZ: Yes. Yes. That's why the Swiss are so worried.

SMITH: Poor little Switzerland is at the mercy of the world right now. They can't fight the global flow of money anymore. Now, this doesn't mean it will end badly for them. I mean, so far, the Swiss economy is still doing OK. Companies, even Swatch that we talked about earlier, they're making a profit still. Maybe the hope for Switzerland is that the rest of the world gets a little bit healthier, and all of a sudden people start moving money back to the euro and the dollar.

KENNEY: Keep dreaming.

SMITH: Yeah, that's probably not going to happen.

KENNEY: (Laughter) We need to talk about the worst-case scenario.

SMITH: OK.

KENNEY: And this is the real fear right now. Maybe the rest of the world doesn't get better. Maybe money keeps going into Switzerland, and now the Swiss franc keeps going up. It goes up 10 percent more, 20 percent more, 30 percent more.

SMITH: And remember, this is the worst-case scenario here. But should it happen, Swiss exports would become crazy expensive to the rest of the world. The rest of the world stops buying; factories slow down; unemployment rises. All of a sudden, Switzerland is in a recession. And guess what. Then, finally, people start fleeing the Swiss franc, and now they're just like the rest of us.

KENNEY: Charles Wyplosz, the economist, thinks it's unavoidable.

WYPLOSZ: The Swiss are proud of being politically neutral. But there is no economic neutrality. In a big part, their good economic health is directly due to the fact they are completely integrated in the world economy and that they are exporting all over the world. So the fairness is that if your customers are in deep, deep trouble, it would be probably not quite natural, then, that you stay in top, impeccable situation when everybody around you is in deep trouble. I mean, the Swiss dream of isolating themselves from trouble is just an impossible dream. They are part of the whole thing.

SOUNDBITE OF SONG, "GIMME SYMPATHY")

METRIC: (Singing) Don't go. Stay with the all unknown. Stay away from the hooks.

KENNEY: Before we go, I'd like to say a special thank you to everyone who responded to our Facebook and Twitter requests for help with this story.

SMITH: We have far more listeners in Switzerland than I ever dreamed.

(LAUGHTER)

KENNEY: Yeah. So thank you to everyone who responded to us. We really appreciate it. And, as always, we want to know what you thought of today's show. You can email us - planetmoney@npr.org, or you can hit us up on Facebook and Twitter.

SMITH: I'm Robert Smith.

KENNEY: And I'm Caitlin Kenney. Thanks for listening.

SOUNDBITE OF SONG, "GIMME SYMPATHY")

METRIC: (Singing) Give me sympathy. After all of this is gone, who would you rather be, The Beatles or The Rolling Stones? Oh seriously, you're going to make mistakes. You're young.

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