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09/15/2011 10:16 AM

Alpine Angst

Swiss Defend Their Island of Prosperity

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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."

Problems on Both Sides of the Border

Many Germans see it the same way. The tower of the cathedral in the southwestern German city of Konstanz offers a view of the hinterlands behind Lake Constance. Formula One world champion Sebastian Vettel goes there to relax at his 14,000-square meter (3.5-acre) estate just across the border in Switzerland. Former Tour de France winner Jan Ullrich lives nearby.

Quite a few of the other 250,000 Germans registered in Switzerland have settled in the area. Foreigners, most of them Germans, now make up 50.6 percent of the population of Kreuzlingen, the sister city to Konstanz.

Since Switzerland joined the Schengen Area at the end of 2008, freedom of movement has prevailed. Border controls are now limited to sporadic random checks in the hinterlands. A German who crosses the border from Konstanz and walks toward the Hotel Schweizerland in Kreuzlingen is entering a country whose status as an island in a sea of EU countries only exists these days on paper.

On the other hand, the border area between Konstanz and Kreuzlingen also offers a sense of how great the divide between the two worlds once was. For one thing, the remains of the old "Jews fence," topped with barbed wire, which was intended to prevent the uncontrolled passage from Nazi Germany into neutral Switzerland, are still on display there. Georg Elser, a German carpenter who unsuccessfully tried to assassinate Hitler, was captured and arrested shortly before reaching the border fence. A bust inscribed with his words, "I wanted to prevent the war," serves as a reminder of his failed attempt. Elser was murdered at the Dachau concentration camp in 1945.

Gathering Together in the Storm

Today the interactions between the neighbors in Konstanz and Kreuzlingen are characterized by sober-mindedness and materialism. The first Germans cross the border in the morning to their jobs at MOWAG in Kreuzlingen, where they assemble armored personnel carriers and are paid their wages in hard francs. MOWAG's combat vehicles are used in Saudi Arabia and Afghanistan.

A little later in the morning, the Swiss start moving in the opposite direction, heading for drugstores and supermarkets in Konstanz, where prices for skin creams and beef are often as little as a third of those in Kreuzlingen. German consumers waiting in line watch stoically as some of their Swiss neighbors, the thrill of the hunt in their eyes, buy up trunk-loads of cosmetics and other consumer products.

Is it anyone's fault that the crisis in the global financial world has had such a strong impact on this little world on the shores of Lake Constance? Average wages relative to the exchange rate in August were about 70 percent higher on the Swiss side than on the German side of the border. In addition, prices on the German side are about half as high as they are on the Swiss side. "In our town, the retailers are suffering while ordinary citizens are benefiting," says Andreas Netzle, the mayor of Kreuzlingen. "It's the other way around in Konstanz."

The currency crisis has already opened his eyes and those of many others, says Netzle. It has highlighted how greedy people can be, he adds, and how little sympathy some have for those suffering as a result of the financial crisis.

Passers-by in the pedestrian zones agree. "Switzerland as an island of the blessed? Don't make me laugh," says an older man. "If anything, we're an archipelago. But the minute a really bad storm comes along, we gather together -- at the highest point."

Nevertheless, some things have changed in Kreuzlingen, since the Swiss, previously not known for their price sensitivity, have started comparing prices at home and abroad. Wholesalers have adjusted their prices and distributors have reduced their profit expectations, while highly subsidized vegetable farmers have come under pressure. It's as if a door that had been closed for a long time had suddenly been torn open, allowing fresh air to enter the Swiss system.

"Until now, I've been selling the same lettuce here in Switzerland for twice as much as I sell it at home," says farmer Rainer Schächtle. He lives in Konstanz, where his shop is located. But his fields and greenhouses are in Tägermoos on the Swiss side.

He'll go under if his Swiss customers stop buying his lettuce in the future, says Schächtle. Thanks to Swiss pay levels, his field worker alone costs him an average of 3,150 francs (€2,620) in labor costs a month. "You can't survive at German producer prices."

'Spirit of Farmers'

The bastion that is Switzerland is also under threat 296 kilometers southwest of Kreuzlingen, at the other end of the country. In Chancy, across the border from France, Robert Cramer says cheerfully: "I'm someone who clearly supports Switzerland joining the EU."

Cramer is a member of the Council of States of Switzerland, the upper chamber of the Swiss parliament. He is the first Green Party member in the history of the body. He is also an untiring champion of a cosmopolitan Switzerland.

Using the example of the Canton of Geneva, which pokes into French territory like the beak of a predatory bird, Cramer explains something that many Swiss don't like to hear: The Swiss are deluding themselves when they believe that they can isolate themselves with their wealth in an idyllic place, close to nature. "The spirit of Switzerland is a spirit of farmers," says Cramer. "But the wealth of Switzerland comes from city dwellers."

Geneva, a city of bankers, clockmakers and international organizations, is a perfect example of what Cramer is talking about. Geneva is a booming metropolis, but it's also bursting at the seams. There are many more jobs than places to live. Some 85,000 commuters cross the border from France into the canton every day.

But for some people who work in and around this bastion of prosperity, but can no longer afford to pay the equivalent of €3,000 for a three-room apartment, their only choice is to live across the border in France, where rents are only a third as high.

Keeping Geneva Within Limits

Ironically, half of the Canton of Geneva still consists of farmland and forests. But long-time residents refuse to allow development in this green belt, preferring to see workers live in Annemasse, a sort of low-cost French suburb of Geneva.

Every morning, some 8,000 blue-collar and white-collar workers -- half of the working population in Annemasse -- leave this city, with its bland apartment buildings, and head for Geneva. In return, Geneva sends €8 million in compensation to Annemasse each year. But it isn't enough to offset the border town's problems, where rents and the cost of living have risen disproportionately as a result of the higher incomes of cross-border commuters.

"One of our nursing homes is only half full, because we can't find enough nurses and workers," says Christian Dupessey, the mayor of Annemasse. Qualified candidates are emigrating in droves, he adds. "A teacher earns €2,300 here, which is a lot less than a supermarket cashier in Geneva. Seventy jobs are currently unfilled in our city administration alone."

Together with Swiss politician Cramer and other like-minded people, the mayor of Annemasse is fighting to promote a cross-border way of thinking. "It's a misconception to believe that you do better when you focus mainly on yourself." The canton hospital in Geneva would be forced to shut its doors if the French commuters who work there ever went on strike.

Euro-Zone Commuters Are Better Off

The battle for a share of the pie has become tougher, and the tone coarser, in the Geneva metropolitan area. In 2009, the right-wing Swiss People's Party warned against the "riffraff from Annemasse," who would soon be able to take a commuter train to downtown Geneva. Meanwhile the defenders of Swiss heritage have found yet another mouthpiece: Eric Stauffer, head of the populist party the Geneva Citizens' Movement (MCG), the third-largest political force in the canton. Stauffer recently complained openly that "Geneva has become a lawless zone," where "gangs of thugs from France" are being allowed to commit acts of violence and burglary as they please.

"Don't forget what it says: 'Foreigner's Identification Card'" -- these are the words a Swiss customs agent recently said to him, says Tomy, a Frenchman enjoying a beer after work in Geneva's clockmakers' district. The resentment has become more noticeable recently, but he doesn't take it personally, he says with a smile, noting that he is paid well in return. Tomy, a computer scientist in his mid-30s from Annecy in France's Savoy region, decided that he could make a good living in Geneva, where he polishes the metal that companies like Rolex and Patek Philippe use to make their luxury watches.

Wages have always been high in the watch-making sector: 6,500 francs a month for polishers, and 12,000 francs for sertisseurs, the people who set precious stones. But the more the value of the franc has gone up recently, the better off the commuters from the euro zone have become. "I now have four apartments in France, a boat and a happy family," says Tomy with a chuckle. He pays for his beer and gets ready to drive back across the border.

Foreign Tourists Staying Away

If anyone has a sense of what is going on in these confusing times for the Swiss, it has to be Jean-Marie Fuchs. He runs Europe's highest altitude restaurant, at more than 3,800 meters (12,500 feet) above sea level, just below the summit of the Klein Matterhorn.

Fuchs can see the Matterhorn, Mont Blanc and Monte Rosa from his front door. When he turns around and looks inside his restaurant, most of the people he sees are Asians. They are peaceful, uncomplicated guests who happily eat spaghetti or the Swiss potato pancakes known as rösti from the buffet before heading over to the adjacent souvenir shop to buy plastic cows or Swiss Army knives.

Indians are the fastest-growing group among foreign tourists in Switzerland, followed closely by the Chinese. The number of Indians staying in Swiss hotels has gone up by 33 percent in the last year. This has been particularly important in 2011, considered a "sluggish" year, with the strong franc serving as a deterrent for German and British tourists.

$20,000 for a Week's Vacation

Those tourists who want to have a meal up at Jean-Marie Fuchs' restaurant buy a ticket in Zermatt for 98 francs. Then they take a cable car up the mountain and walk to the restaurant through a concrete-lined gorge that was blasted into the rock just below the summit of the Klein Matterhorn. Swiss tourism officials are considering building a pyramid that would artificially increase the mountain's altitude to 4,000 meters. "It's clear that all the guests want to come here, to the highest point," says Fuchs.

There are days, says the restaurant owner, when he is constantly "walking around with an oxygen bottle to rescue customers." At close to 4,000 meters above sea level, people can suffer from mountain fever. Fuchs isn't someone who complains without good reason. He's more of a prototypical pragmatist, the kind of person author Thomas Küng once described when he wrote: "If the Swiss had built the Alps themselves, they would have been more modest. But now that they're there, you have to make the best of them -- and on them."

For the people down in the resort town of Zermatt, the mountains represent their livelihood, from the "Almrausch" ski school to the restaurateurs who serve up oyster platters in former cowsheds. Tourism is an indispensable source of income for Switzerland, which, with 2.8 percent unemployment and a government debt amounting to only 36 percent of GDP, is one of Europe's model economies.

But what happens when the Asians have left and visitors from the euro zone stop coming? When guests like Teddy Lim, an auto dealer from Jakarta who is now standing beneath the Matterhorn with his wife, three children and his mother, decide to go to Australia on vacation, as they used to, instead of spending $20,000 for a week in Switzerland?

A Little Later

Even the Swiss National Bank has no answers to these questions, not even after last week's move to peg the franc to the euro, which is seen as a monetary adventure whose outcome is uncertain. No one knows whether the newly erected dam will hold up, or whether speculators will now be even more likely to flee into francs. If central bankers are forced to print more and more francs to fend off the assault, inflation will be unavoidable.

An exchange rate of 1.20 francs per euro is already too high for many companies. Businessmen like Jean-Claude Biver, CEO of the watchmaker Hublot, have already stated that their production will only become truly profitable again if the rate goes above 1.30 francs to the euro. But is the fate of the franc even in the hands of the Swiss anymore? Are they still as independent as they once were, both politically and economically?

Only time will tell. If it turns out that the euro zone goes bankrupt after all, while the franc survives, Albert Einstein will have been right. He once said that he knew where he would go if the world was ending: "Switzerland. Because everything happens a little later there."

Translated from the German by Christopher Sultan

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