In 1999 Thomas Jordan wrote why Switzerland should never peg to the euro. The main reason was that interest rates and borrowing rates would go up and would eliminate the competitive advantage of Swiss firms. The text is in German.
(if the file does not show up in the PDF viewer, here the direct link)
Our core thesis is in line with Jordan’s 1999 view:
Important!
Our Core Thesis: European leaders have successfully implemented austerity, disallowed notorious wage increases in the periphery and nearly introduced deflation. Inflation differences between the euro zone and Switzerland will decrease to zero, Swiss CPI inflation might even be higher in some years. The CHF real eff. FX rate overvaluation talk disregards completely the continuous immigration into Switzerland. Therefore EUR/CHF will remain close to 1.20. Risk-off flows will not leave Switzerland, but they will be converted into risk-on flows (stocks and real estate) thanks to immigration, higher Swiss GDP growth and relatively weak Swiss wage hikes. In particular, in the housing sector these flows will build up wrong resource allocations. In some years stronger global growth and high German wage increases will boost inflation in Germany and partially in Switzerland but Southern Europe will still struggle. By tradition, Germans will move funds into Switzerland in order to protect them from inflation and the ECB. At that moment the SNB will need to hike interest rates - possibly before the ECB. The Swiss "Soros moment" will arrive and the EUR/CHF will fall under 1.20.
The consequence for monetary policy will be:
- Either the SNB fights inflation and the Swiss real estate bubble, and allows a CHF appreciation. This implies selling FX reserves below the price of EUR/CHF 1.20 and/or accumulating more and more reserves.
- Switzerland accepts higher inflation and consequently gives up its competitive advantage in lower inflation and lower borrowing rates. The latter scenario was excluded by the SNB's Thomas Jordan already in 1999 when he pledged against a euro membership. The SNB mandate explicitly disallows inflation.
The first scenario, that the EUR/CHF falls under 1.20 is the only feasible solution. Whether the SNB suffers a big loss depends on the
income on seigniorage it can generate as opposed to FX rate losses. Hence SNB's monetary policy will switch to a
managed currency appreciation like
the Singapore or Chinese central banks already do for years.
In
regular posts we show how the Swiss CPI comes closer and closer to euro zone inflation. One day, maybe in 10 or 20 years, the Swiss franc will depreciate more strongly, but this will be only after the bust of the Swiss real estate bubble.
In the following post we explain that the Swiss financing of the European bubbles and the artificially weak franc until 2008 were the reasons why Jordan had to change his mind:
Because They Knew What They Were Doing: The Parallels between European and SNB Leaders
Thomas J. Jordan (born 1963) is a Swiss economist and banking supervisor. He is the chairman of the governing board of the Swiss National Bank, a member of the board of directors of the Bank for International Settlements, and a member of the steering committee of the Financial Stability Board.
For The Guardian and many FX traders, Thomas Jordan is ‘the most hated man in foreign exchange’
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