Why the shocking price of Swiss cheese and skiing means the euro is heading for disaster
Published by The Mail on Sunday (18th January, 2015)
Yesterday, in a McDonald’s in Switzerland, I saw people paying nearly £8 for a Big Mac and fries. For anyone unfamiliar with their prices, that’s more than double the cost of the same meal in the UK: £3.88. The ten-minute taxi ride to get from my hotel – £123 for B&B in a chain establishment – to the fast food restaurant was £25.
Like thousands of British holidaymakers here for a skiing break, the crippling prices mean that for every second I’m here, my bank balance is falling as fast as the snow around me.
Switzerland always was pricey. But last week, for complex reasons, the government’s bankers unhinged their Swiss franc from the euro. Instantly, the franc took off like a hot air balloon.
Now it’s the only point of conversation. One young Spanish couple spoke with amazement at paying the equivalent of £68.70 for two posh burgers and beers. British dental surgeon Alyn Morgan was sipping a £15 Margarita cocktail in a ski bar in Verbier in the early hours of yesterday morning. Three days earlier, it would have cost £12.
‘I was crying on Thursday, the day we came on holiday,’ he said. ‘Our trip was costing at one stage 30 per cent more. When news broke about the franc, I was watching this weekend’s trip getting more expensive by the minute.’
Mr Morgan, 43, and his wife Emma travelled from their home in London for an annual January skiing break with five friends. The group had just spent £700 on a sushi meal at the Nevai Hotel that would have cost £579 before the central bank’s intervention.
Tourism is now in real peril. Exports will cost more. The decision to stop pegging the franc to the euro will cause economic difficulties in Switzerland. So why on earth did these safety-first, boring Swiss bankers decide to break away and cause such convulsions to the currency markets last week?
The answer is that, however bad it might be for the Swiss, it’s a nightmare for the euro. And it is precisely because of the euro’s perilous weakness that these seismic events are happening.
In many ways the situation here is a mirror image of what happened with Britain’s ERM fiasco in 1992, when we stopped locking the pound to a basket of European currencies.
The Swiss have spent the past three years trying desperately to stop a tide of money pouring into the country, mostly from investors desperate to avoid or ditch the euro: the influx was causing the franc to inflate and make their famous exports – chocolates, watches, pharmaceuticals – too expensive, especially for the Euro market that accounts for half of Switzerland’s trade.
They even began charging negative interest in their world famous banks – effectively upending the basic rule of banking by forcing depositors to pay – but still the cash flowed in.
Finally, last week, rumours swept the money markets that the European Central Bank was about to print more money – so-called quantitative easing – to bail it out of its latest crisis; this time, brought on by concerns Greece will tumble out of the eurozone after an election later this month.
The pressures between the strong franc and weak euro became intolerable, and the Swiss threw in the towel. The cap had to be lifted, and the franc instantly jumped 39 per cent against the floundering euro – the biggest single-day move for a rich nation’s currency in four decades. It ended the day ‘just’ 17 per cent up in a market that considers a two per cent move dramatic.
This unleashed what the boss of Swatch rightly called a ‘tsunami for the export industry, and for tourism and finally for the entire country’. With the instantly increased price of exports, came fears of job losses.
But while many Swiss shares slumped, the bigger problem is faced by the euro. It has lost a key pillar of support and, as one London analyst said so rightly last week, ‘can’t find a friend for love nor money’. Even now, after such a long time and damaging episode, the eurozone and its pathetic panjandrums have not resolved the internal contradictions of a costly experiment that has caused economic carnage around the Continent.
Now even Germany, the Continent’s economic powerhouse, is struggling to bear the cost of this flawed attempt to align diverse economies without resolving core structural issues.
The timing of the Swiss shock could not have been worse (or perhaps more delicious) – on the eve of this week’s World Economic Forum in Davos, when business leaders and global dignitaries (and Prince Andrew) gather in the glitzy alpine town to debate the state of the world.
The central bank’s announcement was called ‘a bit of a surprise’ by Christine Lagarde, the head of the International Monetary Fund, who had not been given advance warning.
This is diplomatic speak for ‘what the hell?’ or worse – especially since three days earlier the bank’s vice-chairman had insisted the exchange rate cap remained the cornerstone of fiscal policy.
And in the ski resorts yesterday, it was British holidaymakers left utterly dismayed as equipment rental and guiding costs rose 20 per cent overnight. A week’s ski pass for a family of four in Verbier shot up from £863 to £1,030. A beer on their first night cost £4.50 but two nights later was £5.40.
Shopkeepers across Switzerland are desperately trying to calculate the damage.
‘Everyone was very startled by events,’ said Niklaus Wilhelm, manager of a upmarket cigar shop in Zurich. ‘We have to see what happens but it is just too expensive for people to come on holiday to Switzerland now.’
Wilhelm said some 40 per cent of his sales came from European customers. At the start of last week he was selling cigars costing €8 in Germany for the equivalent of €11; now they are €15.
Meanwhile, a German border town was flooded with Swiss people stocking up on cheaper clothes, electronics and food.
Happily, in the rest of Europe, there is good news for us Britons: the euro has slumped against sterling to the most attractive rate since July 2008. And even here in Switzerland, there was one party of holidaying Britons left content amid the crisis last week.
Lawrence Jones, owner of an internet hosting business, was in Verbier with friends when they went to withdraw cash from an ATM. As they did so, they realised the rate had not been changed, so kept pulling out more and more money until the machine was empty.
‘Sometimes the Swiss aren’t quite as organised as some may believe,’ he said happily.
There are always winners alongside losers in these situations. But this was just small change for a nation that has already blown so much money trying to insulate itself from the crushing euro catastrophe.