Alpine Angst: Swiss Defend Their Island of Prosperity
The euro zone's woes have made the invulnerable Swiss franc extremely attractive to investors. But the capital flowing into the country has made the franc too strong, hurting exports and domestic retail sales. Switzerland is now fighting to preserve its prosperity by pegging its currency to the euro.
The people currently coming to Switzerland are not just there for the beautiful landscape. They want to get out of the euro zone and into the Alpine country, for several hours or more -- and sometimes for good.
They are among the best customers of Swiss customs agents working along Switzerland's 1,855-kilometer (1,159-mile) international border. They include Germans who have settled on the Swiss side of Lake Constance to take advantage of lower taxation rates, Frenchmen who earn good money as workers at luxury watch factories on Lake Geneva, and Italians who are moving their savings out of Berlusconi-run Italy to bank accounts in the Swiss canton of Ticino.
The Swiss currency had already been long seen as an alternative to gold. But since the evening of Aug. 9, when it was announced that the Swiss franc had reached parity with the euro for the first time, Switzerland appeared to have finally become the safest haven for investors in turbulent times.
By August, the franc had increased in value by almost 30 percent within 15 months. This had little to do with the Swiss, but a lot to do with the recommendations of international analysts. In light of the risk that the European monetary union could collapse under the mountains of debt of its member states, bankers recommended that their customers invest in the currencies of stable countries: the Japanese yen, the Swedish krona and the Norwegian krone, the Canadian and Australian dollars -- and the Swiss franc.
Billions in Losses
The rising flow of capital made the franc more expensive, an effect that certainly has some advantages for the Swiss: low interest rates, cheaper imports and greater purchasing power for domestic investors abroad. But the drawbacks outweigh the benefits, because a strong currency adversely affects exports, with proceeds in euros or dollars remaining the same while profit margins shrink. This is what has happened in Switzerland. In addition to the export economy and the tourism industry, small and mid-sized companies have been especially hard hit, because they can't shift their production abroad. Worst yet, the Swiss are now taking their strong francs to go shopping in cheaper neighboring countries.
Retailers already posted billions in losses in the summer. The president of the employers' association called for longer working hours without increased wages, while specialists were already predicting the end of Swiss economic growth.
After several failed interventions and substantial losses of 30 billion francs (25 billion, or $34 billion) since January 2010, Philipp Hildebrand, president of the Swiss National Bank (SNB), finally put his foot down. Measures were urgently needed to fend off the "acute threat" to the domestic economy, Hildebrand said, announcing that the SNB would immediately "implement, with all its consequences," a minimum exchange rate of 1.20 francs per euro.
Does pegging the franc to the euro mark the beginning of the end for Switzerland's unique monetary approach? Or is it merely a new, brief tugging on the emergency brake, as it did in 1978, when the franc was temporarily pegged to the deutsche mark? Switzerland's central bankers will have to demonstrate perseverance this time. But their plan seems to be working -- in the last few days, the exchange rate has in fact settled at around 1.20 francs to the euro.
Bags Full of Cosmetics
It had little effect on the mood in Switzerland's border regions, however. Even after the intervention by their central bankers, Swiss citizens are still coming from German supermarkets with shopping bags full of bargain-priced cosmetics and steaks, buying houses on the French shore of Lake Geneva and booking cheap vacations in Italy. Does this mean that Switzerland remains a bulwark against the dangers surging in from the euro zone?
But the strengths of the Swiss are related to the weaknesses of their neighbors. What happens in Switzerland is a reflection of conditions in the European Union, but with the colors reversed -- like negative film.
What characterizes the Swiss? "The Swiss have a reputation," says Christoph Oschwald, "for protecting valuable things, like money, data and gold. Even the pope."
Oschwald, who not only cuts a dashing figure but also has the gift of the gab, is the 55-year-old owner of a Swiss company called SIAG. It operates two bunkers cut into cliffs in the Bernese Highlands, which it calls the "Swiss Fort Knox." It claims they can withstand nuclear bombs, earthquakes and solar storms. As we drive to the facilities in the morning hours, a seemingly endless postcard landscape unfolds along the road, including Lake Zug and Lake Lucerne and the Jungfrau massif. "This country is too small to cause problems," says Oschwald. "But it isn't too small to solve other people's problems. We offer a future for anyone."
Customers from the euro zone appreciate this, says Oschwald. "The EU politicians should leave our country alone. Instead, they should see to it that their own project doesn't go under," he says derisively. "We Swiss don't want to be, won't be and don't have to be part of this EU, a 27-horse carriage that's being pulled by only one horse now, the German horse. The rest of them are tangled up in their harnesses or lying in the carriage." He is mainly referring to the Greeks, Spaniards, Italians and Portuguese.
Withdrawing like Snails into Their Shells
He sympathizes with the people who seek protection in Switzerland from German tax investigators. And the Swiss, he adds, haven't forgotten that former German Finance Minister Peer Steinbrück once threatened his countrymen with the "cavalry" over its banking secrecy laws. "We're like snails," he says. "If you tap their antennae, they withdraw, and for a long time at that," says Oschwald, as he parks his car in front of the entrance to the bunker on the outskirts of Gstaad.
What is being stored in the system of caves and passageways at Swiss Fort Knox? Is it the same things that are being stored in Amsteg in the St. Gotthard Pass, where a company called Swiss Gold Safe offers its services in a bunker that was once built to offer the members of the Swiss Federal Council a safe haven in the event of a Nazi invasion?
"Asking me about gold is like asking the Israeli army about the atom bomb," Oschwald says in a reference to Israel's policy of deliberate ambiguity regarding its nuclear capabilities. Then he opens a three-and-a-half-ton door in the rock, slips through an infrared barrier and leads us into his realm. The Swiss army used explosives to blast seemingly endless passageways into the mountain. Today bundles of wires attached to the ceiling lead to heavily secured rooms, in which rows of black cabinets conceal their treasures. "What you see here is the currency of the present, but mainly of the future," says Oschwald.
He is referring to data, terabyte loads of data from all over the world and from every imaginable sector, stored knowledge that cannot be lost. "The euro will probably no longer exist in its current form in five years," says Oschwald, "but some of the things in storage here are a thousand times more valuable than money."
As if to prove his point, the manager points to Safe A 1790, where the so-called "digital genome" is stored in an inconspicuous suitcase. It is a kind of time capsule, compiled by scientists from all over Europe, containing information that will allow future generations to read data stored in defunct file formats.
Of course, the bunker is also attractive to investors, Oschwald adds. There is apparently growing interest in storing assets outside the euro system and far away from banks, because, as he points out, even a bank's safe isn't necessarily a safe place in the event of a bankruptcy.
'The Tax Authorities Treat Us Like Customers'
Switzerland's reputation as a financial center has taken a noticeable hit recently. Responding to pressure from the United States and the EU, the country softened its banking secrecy laws. Only last week, Bern yielded to parts of a new ultimatum by the US Justice Department on the treatment of untaxed assets of bank customers. In addition, ill-advised speculation to the tune of billions on the part of Swiss banks like UBS and Crédit Suisse had already shaken the confidence of investors. "It's terrible what these manager types have done to our reputation as a banking center," says Oschwald, comparing it to "a casino guaranteed by the government."
But the Swiss wouldn't be who they are if they didn't come up with a solution, even when faced with the most serious of challenges. In the case of Swiss Fort Knox, the company purchased one section of the army's mountain bunker and rented the other. Broadband cables now run underneath the mountain, the rooms where servers are housed are cooled with glacier water, and the partners in this bunker operation can land their private planes on a former Swiss Air Force runway. "If large amounts of a customer's data are destroyed anywhere in the world, we have the copy here and have to be capable of flying out the server immediately," says Oschwald. The way that the army and the customs agency cooperate with the company is in keeping with the Swiss model of government, which holds that the state is there to serve citizens, and not the other way around.
"Why is our company headquartered in the Canton of Zug, which the Germans call a tax haven?" Oschwald asks before stepping into his limousine. "Because the tax authorities there treat us the way they should: like customers. What that means is that we have a modest tax burden and enjoy the best service."
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