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Most Germans would still prefer to have the strong mark than the flawed euro.
Opinion
Macroscope
by David Brown
Macroscope
by David Brown

Flight from the euro sees Swiss franc become the new deutschemark

German investors yearning for the stability of their old currency pile into the franc, but the flows pose headaches for Swiss policymakers

When world financial markets dissolve into chaos and contagion threatens, investors do the natural thing - they run for cover.

It is a reflex reaction to seek safety in secure, risk-free investments. For hot money flows seeking sanctuary that means the ultra-safe Swiss franc is king.

For many years, European investors put their trust in the once mighty deutschemark as the best bolthole in times of crisis. But the euro's inception in 1999 brought this to a dramatic close. The German mark's replacement by the euro left a big gap in the market. But it did provide risk-averse investors with one clear alternative - to diversify into Swiss francs.

The Swiss franc bears all the right hallmarks - good currency stability, a secure source of savings and an excellent track record as a safe haven hedge for capital in flight. The Swiss franc has not only become one of the leading safe haven currencies but also something more symbolic for traditionally conservative German investors. By proxy it has become the "new German mark" - the currency bolthole of choice for German investors seeking a high degree of protection.

The flow of funds from Germany into Switzerland has been especially acute in recent years. Europe's financial crisis highlighted deep structural flaws in the euro zone's make-up. Confidence in the euro has been shaken to the core and investors have dumped euros in droves. Buying Swiss francs as a hedge against the risk of a catastrophic euro-zone collapse seemed a very credible bet.

German aversion towards the euro has run very deep. The common perception of the European Union is of a vast, unaccountable, bloated bureaucracy that deprived Germans of their beloved mark and gave them the struggling euro instead.

The desire for a strong and stable currency, good protection for their hard-earned savings and a return to Germany's post-war "economic miracle" has always been high on the domestic political agenda.

The -mark had a good track record and earned the nation's confidence. The jury is still out on the euro.

With euro-zone policymakers finally managing to put a cap on the economic crisis in the past few years, a break-up of the euro seems less likely - for now. But it has done nothing to heal continuing antipathy in Germany towards the euro.

Most Germans would still prefer to have the strong mark than the flawed euro. No wonder German investors have looked to the Swiss franc as the next best thing.

But the franc's success as a safe haven hedge has posed a major headache for Swiss policymakers. Europe's financial meltdown has attracted huge international demand for the franc, undermining Switzerland's trade competitiveness as the Swiss currency soared on the foreign exchanges.

Intervention in the currency markets by the Swiss National Bank seemed to make little difference in slowing the currency down.

When the euro collapsed to parity against the Swiss franc, the SNB finally drew a line in the sand. In September 2011, the central bank imposed a blanket ceiling on the franc at 1.20 to the euro to stop any further damage to the Swiss economy.

It was slamming the stable gate after the horse had bolted. The Swiss franc has ended 40 per cent stronger than it was at the start of the credit crisis. The strong franc has been a millstone around the economy's neck. It has hamstrung faster recovery and thrust the economy into deflation.

What the Swiss economy desperately needs now is faster growth, more inflation and a turnaround in capital inflows to turn the tables on the strong Swiss franc.

With Switzerland's key economic neighbour Germany starting to show early signs of slowing economic momentum, it is even more important for the Swiss economy to crank up a gear. That can only come via a weaker franc, especially with Swiss rates already running on zero.

Recent euro rumblings stemming from Portugal are the last thing that Switzerland needs right now - especially if investors start piling back into Swiss franc safe haven plays again.

This article appeared in the South China Morning Post print edition as: Euro exodus sees Swiss franc become the new deutschemark
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