Charles Wyplosz is Professor of International Economics at the Graduate Institute of International and Development Studies in Geneva.
The Swiss National Bank (SNB) set a minimum exchange rate at CHF 1.20 per EUR on September 6, 2011. Do the reasons for the enforcing of the exchange rate peg still apply today 2 years later?
Probably yes, but we will not know until we remove the SNB commitment and see what happen! Two years ago, the euro was going down the drain, driven by governments that had no clue about what was happening, and even much less about what they should do. This has not changed much. Two years ago, the ECB seemed as confused as the governments, or unwilling to act decisively for fear of upsetting the German government. This is what has changed. We have a new ECB, which has demonstrated that it understands the risks for the euro and some willingness to take serious action. The OMT has put a floor under public debt valuations by making what central banks must do, an unlimited commitment, as the SNB with regard to the value of the franc. But the crisis is not over, debts are huge and rising. Markets are less panicky, and so too are governments, so they are even less willing than before to move. Until that happens, the SNB must remain very, very careful. Removing the floor, only to reestablish again, is not a great idea.
Are there any undesirable side effects of the exchange rate ceiling for Switzerland or the neighbor countries in the EU?
As long as the exchange rate remains close to its ceiling, the SNB has lost effectively its policy autonomy. With better economic conditions than in much of the rest of the Euro Area, the SNB might wish to raise its interest rate sooner than the ECB. Doing that would immediately put the exchange rate under pressure at its limit and trigger interventions that would, in effect, undo the policy change. Eventually, this could lead to higher inflation than desired and undermine external competitiveness, exactly how an appreciation would do. This means that, would inflation threaten to rise, the SNB will have to reconsider the ceiling.
Austerity remains at the center of heated debates in Eurozone, though the real problem is a banking crisis. Is it realistic to hope for an economic recovery in the Eurozone without essential new regulations?
Austerity has been a well-predicted disaster. Debt ratios are rising nearly everywhere and unemployment is at historical highs. The two problems that lie at the root of the sovereign debt crisis remain. The banking union, as currently planned, is far too incomplete for comfort. Fiscal discipline remains governed by the Stability and Growth Pact, which has failed and will continue to fail. In addition, the legacy of decades of fiscal indiscipline and of the crisis has left a number of countries with suffocating public debt levels; this calls for sizeable debt restructuring, which governments currently do not even want to consider. A growth recovery would considerably help, but it is far from clear that sufficient and sustainable growth is in the making. In the absence of such a recovery, the worst might still lie ahead.
Thank you very much.
Charles Wyplosz is Professor of International Economics at the Graduate Institute of International and Development Studies in Geneva. He is Director of the International Centre of Money and Banking Studies (ICMB).