Will Switzerland Peg Its Franc to the Euro?

Swiss policymakers will hold an emergency meeting with key business groups, labor unions and representatives from the machinery, tourism and pharmaceutical sectors to discuss the Swiss franc's damaging impact on the Alpine country's economyFriday.

Zurich, Switzerland
Panoramic Images | Getty Images
Zurich, Switzerland

Trade unions have asked for the Swiss franc to be pegged to the euro to stop its appreciation, so could the talks produce such a solution? Highly unlikely, economists and some officials said.

The director of Switzerland’s Federation of Small and Medium Businesses SGV has warned in a statement on the federation’s website that a peg to the euro would put upward pressure on interest rates and increase inflation, while seriously impairing the national bank’s autonomy in currency matters.

Friday's discussions will merely produce an exchange of ideas, according to UBS economist Caesar Lack.

Economists agree that the Swiss government’s hands are tied in fighting the continued rise of the Swiss franc against the euro and the dollar , as long as the euro zone debt crisis rumbles onand makes the Swiss franc an attractive safe haven currency.

In 2010, the Swiss franc gained 16 percent against the euro and 7 percent against the dollar.

Swiss drugs industry supplier Lonza and Swatch are among the companies that have warned a strong franc will weigh on sales.

On Thursday, Swiss sanitary equipment maker Geberit posted a 5.7 percent fall in fourth-quarter sales as a result of the unfavorable exchange rate.

Switzerland exports almost two thirds of its goods to the euro zone.

Central Bank Interventions

Other ideas on keeping the Swiss franc’s impact on the economy in check include a “gentlemen’s agreement” under which Swiss banks would abstain from any speculative currency trading as well as an agreement to apply more favorable exchange rates to hard-hit exporters.

As long as the euro zone debt jitters stay in the markets, traders say the only other straw of hope for struggling exporters will be renewed currency intervention by the Swiss National Bank.

But Peter Rosenstreich of ACM told CNBC: “we are far away from another SNB intervention.

The bank's interventions last year were unsuccessful by every measure.” “But we may see the SNB adopting a Bank of Japan-style approach in which it will verbally intervene in the market.

The market will be very sensitive to that,” Rosenstreich added.

In recent comments, the SNB has implied it will only intervene in the currency markets if there is a threat of deflation and economists say the bank will be unlikely to accept any direction from the Swiss government in order to remain independent.

The Swiss National bank has already incurred an 8.5 billion francs ($8.2 billion) paper loss on its euro holdings as it massively intervened in the currency markets in the spring of 2010 and has been diversifying its currency holdings away from the euro.