What Next For Swiss / European Union Relations?

In 2011 Switzerland took some drastic steps to limit its exposure to the Eurozone debt crisis, including pegging the franc to the euro at 1.20. How might relations between Bern and Brussels fare in 2012?

1. For one the Swiss National Bank will continue to keep down the value of the franc at whatever cost. In 2011 the SNB bought something like €45bn to prevent the franc rising too much against the euro (which had absolutely hammered its exports until then as investors sought a safe haven.) This looks set to continue, as the markets continue to view Switzerland as a safe option. The trouble is that if the Eurozone implodes, suddenly Switzerland is left with countless billions in useless euros. That could spell disaster!

2. In addition, tensions regarding banking secrecy in Switzerland could easily boil over. Eurozone countries including Spain and Italy are imposing huge spending cuts right now, and as a result are clamping down on tax evasion

3. Swiss independence of the European Union looks set to be eroded. Right now, the Swiss government passes equivalent laws to the European Union as they impact Swiss-EU relations. The problem though is that as these relations become more complex, Swiss independence becomes more of a problem. For example, in 2010 a Swiss refusal to extend the Schengen agreement to Romanian and Bulgarian citizens (granting them free movement inside Europe) could have resulted in the annulment of several free trade agreements. (In the event the Swiss people agreed to the extension.) Brussels will therefore pressure Bern to give up more of its sovereignty, to try and speed up changes.

4. In other ways the European Union will become morelike Switzerland. The Swiss government passed a balanced budget law in 2003 that has since become the envy of Europe, as Swiss debt drops to just 1/3 the European average. Last December the Eurozone imposed an equivalent law, requiring all members to run a balanced budget from now on. The question of course is: will Eurozone members be able to restrain themselves from spending, and match these good intentions?

So how might all this affect expats living in Zurich? It could contribute to a general feeling of unease, as these are turbulent times that make people worry about their job security among other things.

In addition, there’s likely to be a sense that all is not well between Bern and Brussels, as both sides strive to defend their interests. On the other hand, it means that transferring money to and from the Eurozone will become easier, as the Swiss National Bank holds fierce to its 1.20 peg.

Michael Smith at foreign exchange specialist Pure FX