Swiss National Bank abandons Euro cap

The country braces for the impact of the decision to abandon the minimum cap of 1.20 francs against the euro

In September 2011, the Swiss National Bank set a goal of keeping its currency from rising above 1.20 francs to the euro. This decision was made during the euro zone’s debt crisis, as times of financial stress caused the Swiss franc to appreciate sharply against the euro. Due to this, investors have long regarded the Swiss franc as a ‘safe haven’ for their assets, as they knew their money would be relatively safe.

This cap was set for three and a half years until on 15th January 2015 the cap was removed, as the Swiss National Bank (SNB) said that it was no longer justified. Decisions within central banking tend to be slow, well-documented and predictable – a tradition which was broken by this announcement.

The SNB’s decision was based on fears of hyperinflation, quantitive easing and depreciation – all of which were worries based on being linked to the euro. However, despite these moves, the decision to remove the minimum cap was not a popular one and caused international panic for business owners, investors and global financial powers.

The move resulted in the euro buying 1.20 francs, to just 0.8052, though later this recovered slightly to 1.04. Following these fluctuations, many experts have voiced their concerns and believe that the change will result in a struggle for Swiss companies to maintain their previous export levels. One such company is the Swiss watchmakers, Swatch, which saw its share price slump by 15%. Of the cap abandonment, Swatch’s Chief Executive, Nick Hayek, calls this decision ‘a tsunami’ for Switzerland’s economy.

It has also been estimated that the move will cost close to 5bn Swiss francs – approximately 0.7% of Swiss economic output. The flailing stock market is a result of the difficulty that Swiss companies will now face when selling their products or services to European consumers. However, Swiss Finance Minister, Eveline Widmer-Schlumpf says,

I do not question the move. Swiss businesses will handle the situation.”

She also voiced that it was too early to envisage business tax cuts to counteract the initial effects of the cap, but that this is a decision which may be considered in the future – something for all tax professionals within Europe to be aware of.

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