The Surging Franc: Swiss Fear the End of Economic Paradise

Aug. 28, 2011— -- By seeking safety in the Swiss franc, global investors have caused its value to skyrocket. But the currency's rapid appreciation hassignificantly hurt exports and tourism -- and given rise to serious worries about the future.

The global financial crisis has finally made its way to this small Swiss valley. When Hans Stadelmann talks about currency speculators, it seems like two worlds are colliding.

There is Stradelmann, the 44-year-old cheese maker standing in his small factory, which smells of freshly cut Appenzeller cheese. Five men are working at the boilers, making the most popular Swiss cheese in Germany according to a traditional recipe handed down through the centuries.

And then there are the international financial markets, that abstract global entity whose actors have decided that the Swiss franc is a safe investment and, in doing so, have pushed the currency's value to record levels against the dollar and the euro. A year back, one euro was worth 1.35 francs. Two weeks ago, the value was 1-to-1.

This presents a problem for Stadelmann. About 40 percent of his products are exported, most of them to EU countries. In order to keep his earnings level in francs, he's being forced to charge higher prices in euros -- and not all of his customers are willing to pay them.

"I'm already selling less, and I'm afraid it's going to get much worse," Stadelmann says.

And it's not just his company he's worried about. "I get my milk from 50 small family farmers," he says. "If I close up shop, I'd be destroying the livelihoods of 50 families."

Swiss Buying Imported Cheese

Stadelmann is powerless against the financial markets. He knows it, and it only makes him worry more. Investors across the world are finding safe haven in the Swiss franc, and the country's export industry is paying the price. Exports from the Alpine nation tumbled by about four billion francs (€3.5 billion or $5 billion) in June, and exports to the EU, the country's most important trading partner, were down almost 15 percent.

Even Swiss consumers have been merciless. Since imported products have gotten cheaper, they have even been buying foreign cheese. Though Stadelmann belittles cheeses imported from Holland and Germany as "chewy globs," he still can't hide how much he's worried about his industry.

Of course, it might be hard to take the complaints of the Swiss seriously, especially since they come from one of the most prosperous countries in the world. Per capita economic output is roughly 73,000 francs, the national debt is only 38.3 percent of GDP, and the unemployment rate is only 3 percent.

But the Swiss fear the end of their success story. Over the course of the past year, the value of the franc has risen 20 percent against the euro. "With an appreciation of 2 to 5 percent, export-dependant companies can go under -- and they know it," says Jan-Egbert Sturm, a researcher at the Swiss Federal Institute of Technology Zurich. "But what's happening now is really bad."

Switzerland's economy wouldn't be able to cope with it if the euro dipped below 1.1 francs, Sturm warns. For this reason, the Swiss National Bank has attempted to get the franc back to a reasonable level by flooding the market with freshly printed money and thereby devaluing the currency.

Wholesalers Feeling the Squeeze

Stadelmann, the cheese maker, benefits from high milk subsidies and long-term delivery contracts with his wholesalers. But worries are even greater at that level, the next step in the supply chain. "It's a matter of survival," says Josef Hardegger. "We are deep in the red."

Hardegger's company exports 8,000 metric tons of Swiss cheese each year and employs roughly 100 people. "For the past year and a half, my business partners have only wanted to talk about prices," Hardegger complains. "The rise in the franc's value preoccupies me from early in the morning till late at night."

The fact that the franc has been steadily rising in value since January 2010 makes this particularly difficult for him, Hardegger says. After every time he has negotiated new prices with his dealers and supermarkets in the euro zone, the euro has fallen in value again against the franc, cutting his profit margins even further. "I'd be happy if the exchange rate against the euro could just stay unchanged for a few months," he says.Trapped by Image

This uncertainty has also affected Rivella, the Swiss soft drink producer. The company sells 20 percent of its products abroad. Three years ago, it decided to focus more heavily on the market of Germany, its northern neighbor. So far, Rivella drinks are only available in a few German cities, but the company wants to gradually put them on shelves throughout the country. "We have a multi-year plan," says Axel Kuhn, who is in charge of international markets at Rivella.

But the appreciation of the franc has complicated that plan. While almost all of the company's expenses are paid in francs, revenue from Switzerland's neighbors would come in weaker euros. If the franc stays so strong, Kuhn says prices would have to be raised. But, at €1.29 to €1.45 per liter, Rivella is already one of the most expensive soft drinks on the market.

Some large Swiss firms are thinking of solving this problem by moving production abroad. But that's not an option for Rivella because it might hurt its image. "In a certain way," Kuhn explains, "a bit of Rivella belongs it to everyone in Switzerland." Most Swiss have grown up with the sweet drink, and, on average, they drink 10 liters (2.6 gallons) of it each year.

A Blow to Tourism

The franc's appreciation has also hurt Switzerland's tourism industry. Of course, the country has always been an expensive place to vacation, but it is now running the risk of becoming a place for only the very wealthy. Business has dropped by about 5 percent, says Jürg Schmid from the Swiss Tourism Federation. Things could get even worse this winter because the industry has so far been benefiting from long-standing bookings.

"The ski resorts will probably have a harder time than us," says Marcel Perren, the director of tourism for the city of Lucerne. "But we can't work magic," he says. "Prices for guests coming from the euro zone have risen 20 percent, and we have nothing to do with it."

In the meantime, dinner at a restaurant in Lucerne can quickly cost €50 euros per person, or twice what it is in Germany. Such prices have led to a decrease in the number of German tourists coming to Lucerne. Compared to 2010, the number of Germans spending the night in the city has dropped by almost 10 percent. The number of Italian visitors has dropped by about 12 percent.

Still, Lucerne has been able to make up for some of these losses because it has grown more popular with Asian tourists. Indeed, the flood of tourists from China, Thailand and India has transformed its tourism industry. The Asian tourists stay in one or two star hotels and spend less money in restaurants, but they make up for it with the luxury products they take home to relatives.

Heidi Vogt, a tour guide in the city, has also noticed the change. "Fewer people are coming from Italy and England," she says. Although she has three colleagues in her team who speak Chinese, they have seen a drop in the number of tours being reserved. "The Chinese bring their own guides with them," she says.

Perren, the city's director of tourism, tries to keep positive about the appreciation of the franc, but his confidence sounds forced. "The situation demands Swiss creativity," he says, "and we are facing a serious challenge."