Shocked by the Swiss Franc? Blame Europe
Beware of the black swan.
Anyone feeling wrong-footed by the Swiss central bank's surprise decision to stop holding down the price of its currency should consider placing part of the blame elsewhere -- on the abject failure of Europe's leaders to revive their sinking economy.
Global financial markets went into gyrations today after the Swiss National Bank announced that it would end its more than three-year effort to keep the value of the franc from rising above about 0.83 euro. The franc immediately jumped to about 0.96 euro, dealing a blow to the country's export and tourism industries, to traders who had bet against the currency and to foreigners who owe money in francs.
Switzerland's move is a kind of capitulation. With the European Central Bank on the verge of extraordinary stimulus measures that will probably weaken the euro, Swiss central bankers realized that the franc -- long a haven for investors fleeing the euro -- will come under renewed upward pressure. A voluntary appreciation now, they believe, will be less disruptive than one that's forced on them later.
Tiny Switzerland's travails underline the bigger issue: Europe's inability to restore economic growth. After the 2008 financial crisis and amid the subsequent European debt crisis, Europe's leaders -- Germany's policy makers, especially -- have erred repeatedly. They have forced too much austerity on the weakest members of the currency union, while the strongest have pared back investments needed to boost growth. They have been far too slow in forcing banks to recognize losses, raise capital and get back to business as usual. They have opposed much-needed monetary stimulus. As a result, the euro area has endured serial recessions and is now teetering on the brink of deflation.
It's widely believed that the ECB is finally about to start quantitative easing, announcing what could be as much as a trillion euros in bond purchases. A possible legal obstacle fell away this week. Whether or not QE works, it will put new pressure on foreign-exchange markets, as the outlook for interest rates in euros increasingly diverges from the rest. Switzerland is not alone in feeling the repercussions. The U.S. dollar has gained some 14 percent against major currencies since mid-2014 -- a shift that some economists worry could spell trouble for non-U.S. companies that have trillions in outstanding dollar-denominated debt.
Europe's leaders -- and particularly German Chancellor Angela Merkel -- can still make a difference by boosting investment, offering relief to embattled countries such as Greece and letting the ECB do its job. They should do this for the sake of their own economies. If they fail, the damage won't be confined to the EU.
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