As long as you can create money by pushing some keys on a computer, nothing will change.

The Swiss Franc and The Tragedy of the Euro

by Philipp Bagus


Philipp Bagus, author of The Tragedy of the Euro recently spoke with the Mises Institute about recent developments in Switzerland and the European Monetary Union.

Mises Institute: In January, the Swiss central bank unpegged the franc from the euro. What does this mean for the future of the Swiss franc?

Philipp Bagus: The Swiss central bank admitted a huge and costly error by unpegging the franc from the euro. First, they chained the Swiss franc to the sinking ship that is the euro. Then, once they found themselves under water and half drowned, they decided to cut the chain. Moreover, the Swiss national bank endured important losses on euro-denominated investments. These losses, borne by all Swiss franc users, in a sense reflect the hidden subsidies given to the Swiss export industry in recent years. Now, the Swiss franc will likely appreciate compared to currencies that are being inflated, such as the euro.

MI: Why was the Swiss National Bank (SNB) chained to the euro in the first place?

PB: By establishing a fixed rate for the franc against the euro, the SNB had committed itself to follow the European Central Bank. So the ECB, managing the crisis of its own poorly constructed currency, was indirectly determining the Swiss monetary policy as well.

MI: Why do you describe the euro as a sinking ship?

PB: The euro is badly designed. There is one central banking system that can be used by a wide variety of governments to finance themselves. This is the tragedy of the euro: governments can finance their deficits indirectly through the central bank as their debts are pledged as collateral for loans to the banking system. Or they can be directly purchased by the central bank.

The effect of this policy is to externalize the costs of this monetization of the deficits on all users of the euro, some of them living in other countries. There is therefore an incentive in the euro countries to make deficits and accumulate debt, while externalizing costs on foreigners. They wanted to prevent this with the rules agreed upon within the Stability and Growth Pact, but no one feels bound by those anymore.

MI: Could this lead to the downfall of the euro?

PB: It has already led to an enormous debt for most countries. Add to that the expansionary monetary policy of the European Central Bank, which is always coming up with new tricks that put more money in circulation, such as their recently-announced quantitative easing.

As the number of euros increases, the value of each euro is diluted. The Swiss National Bank had decided to tie the franc to this depreciating currency, but apparently, by January, the Swiss had had enough.

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