By Frank Conway.
For the Swiss, it must been a mix of Lamont and lament. Norman Lamont of course was the UK chancellor for the exchequer at the time Britain crashed out of the ERM. And for those lamenting the SNB decision to abandon the currency peg ship, that includes Swiss tourism, Swiss chocolate (the authors favourite food) and those unfortunate enough to hold Swiss franc denominated mortgages (outside of Switzerland) and whose monthly repayments are about to skyrocket.
The rise of nearly 30pc against the euro has been compared to an earthquake in the FX markets and comes little over a week since the Swiss were rubbishing claims that the peg was costing the SNB too much money. So much for central bank promises!!!
The Swiss National Bank (SNB) introduced the currency peg in 2011 in response to a major increase in its value against the euro. At the time, the move was deemed necessary to protect large areas of the Swiss economy which were (and continue) to be highly dependent on the EU market.
The Swiss dilemma is that of many countries that are highly dependent on exchange mechanisms for one reason or another, in most cases, they just simply break as would a string tying together two uncontrollable ships in a violent storm.
The Euro area is at a significant cross roads. On one hand, the path for QE has been set for some time by the very clear signals from the ECB. However, the lack of concrete actions to date and speculation that some ECB council members are reluctant to go down the QE road is raising concern.
German officials have been traditionally opposed to the QE toolkit while other countries are very much in favour. And while the ECB is nominally politically independent, the fact that the euro and by extension, the ECB are the product of a grand political vision, politics invariably seeps its way through the doors of the ECB Governing Council. At a minimum, the members of the council must surely take stock of what the political leaders are saying, thinking and perhaps even asking.
The Swiss simply got run over by the ECB bus. They got caught in a currency war that they had little chance of winning. And the winners of course are those that produce euro denominated exports. Inward tourism to the euro area should also fare a lot better as the value for money has become far, far better than what was on offer 12 months ago.
So now, we wait for the next move from the ECB, QE or not QE…that is the question!