On the Swiss Franc, Deutschmark, and Euro
September 8, 2010
An article by Peter Garnham on page 23 of today’s Financial Times makes the claim that the Swiss franc “is increasingly being viewed as the proxy for the old Deutschmark.” Among all paper currencies in times of trouble, investors prefer francs most as a store of value.
Historically speaking, a more accurate portrayal is that the Swiss franc increasingly resembles the Swiss currency of 1973-82 (and especially 1973-78), not the mark of 1973-98. In the 1970’s, the yen, mark and Swissy were called “hard currencies.” Underpinned by sizable Japanese, German and Swiss current account surpluses and comparatively low inflation in an age when price trend differences were wide enough to matter, the hard currencies appreciated chronically against other currencies including the dollar.
The Swiss franc outperformed the mark, advancing 43.9% versus the German currency between period averages in the first quarter of 1973 and September of 1978. The highest monthly mean on the Swissy’s mark cross rate occurred in March 1982. At 0.7931 francs per mark, it had gained 44.7% from a first quarter 1973 average parity of 0.8714 marks per franc. By 1982, the dollar was in the midst of a multi-year but ultimately temporary period a great strength, as high real interest rates in the United States resulted from loose fiscal policy and a tight monetary policy. That tempered the franc’s appeal relative to the mark, and the Swissy was also stabilized by a Swiss National Bank, which more and more subordinated domestic monetary policy to a currency stance that sought Swiss/DEM stability.
The franc’s average value in the final dozen years of the mark’s existence was 0.8498 francs per mark, and it was worth 0.8238 at the end of 1998 at which point the mark stopped being Germany’s currency. The mark and euro locked together at a parity of 1.95583 marks per euro, enabling we analysts to continue to track a virtual DEM/CHF cross rate for continuity purposes. That implicit value did not change much until the summer of 2008. On August 19, 2008, for instance, a euro fetched 0.8244 francs, virtually unchanged on balance from the end of 1998.
The franc’s stability against the euro and mark could not withstand the unusual uncertainty of the Great Recession and its aftermath including the European sovereign debt crisis. At today’s peak the franc was 26.3% higher against both currencies than its value on August 19, 2008.
My objection to characterizing the franc as the Deutchmark’s new heir apparent is that they are alike in just one respect, the same respect that connects the franc of current times with the franc of the 1970s. But the euro inherited the mark’s aura for more reasons than its presumed store-of-value appeal. The German Bundesbank used to set monetary policy for many countries in Europe, not just Germany. Those nations were referred to as satellites. When the Buba tightened credit policy, other central banks mostly followed suit, for not doing so risked pressure on their currencies. Now the ECB sets Continental Europe’s credit policy settings.
Euroland resembles old Germany more than Switzerland does. Germany was Europe’s largest economy by a considerable margin and had Europe’s biggest population. The Swiss population was just 7.5 million in 2008. Euroland’s population was 43.6 times greater than Switzerland’s and even about 7% bigger than America’s. The currency of a country the size of Switzerland has no chance of evolving into a major reserve currency to rival the dollar’s hegemony in such portfolios. True, the euro is a greatly watered-down version of the D-mark and may fall short of achieving that status as well. But the euro has broken into the ranks of reserve currencies and secured the number two ranking, which the Swissy will never do.
Despite its significant decline from a peak of $1.6038, the euro is almost 10% stronger against the U.S. currency than when the common European currency was born at the start of 1999. That’s a far cry from the Deutschmark’s 139% advance between 1969 and the end of 1998. We’ll need time to tell if the euro acquires full hard currency stature, but it already has other elements of the old mark that the franc does not. The distinction is like the paradox of the dollar. Nobody should mistake the U.S. currency over the past four decades for being a good store of value against other major currencies of the world, but its claim to being the preeminent reserve currency asset of the world still has no serious challengers.
Copyright Larry Greenberg 2010. All rights reserved. No secondary distribution without express permission.
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[…] from Euroland’s sovereign debt problems is the Swiss franc, which as explained in a post from this past Wednesday has reverted to a role the currency acquired in the 1970s. Ironically, that was an era […]