Saturday, September 3, 2011

The problem of high-priced currencies

To listen to the average economics commenter, having your currency increase in value is an unalloyed good while having to decrease the value of your money is THE ultimate economic failure.

Well, it is not so simple.  Anyone who tries to make a living producing something pretty quickly discovers that a high-priced currency is quite hazardous to their economic health.  Witness the problems of the Swiss Producers these days.

The Surging Franc
Swiss Fear the End of Economic Paradise
By Christian Teevs  08/25/2011 
By seeking safety in the Swiss franc, global investors have caused its value to skyrocket. But the currency's rapid appreciation has significantly hurt exports and tourism -- and given rise to serious worries about the future.

The global financial crisis has finally made its way to this small Swiss valley. When Hans Stadelmann talks about currency speculators, it seems like two worlds are colliding.

There is Stradelmann, the 44-year-old cheese maker standing in his small factory, which smells of freshly cut Appenzeller cheese. Five men are working at the boilers, making the most popular Swiss cheese in Germany according to a traditional recipe handed down through the centuries.

And then there are the international financial markets, that abstract global entity whose actors have decided that the Swiss franc is a safe investment and, in doing so, have pushed the currency's value to record levels against the dollar and the euro. A year back, one euro was worth 1.35 francs. Two weeks ago, the value was 1-to-1. 
This presents a problem for Stadelmann. About 40 percent of his products are exported, most of them to EU countries. In order to keep his earnings level in francs, he's being forced to charge higher prices in euros -- and not all of his customers are willing to pay them. 
"I'm already selling less, and I'm afraid it's going to get much worse," Stadelmann says. 
And it's not just his company he's worried about. "I get my milk from 50 small family farmers," he says. "If I close up shop, I'd be destroying the livelihoods of 50 families." 
Swiss Buying Imported Cheese 
Stadelmann is powerless against the financial markets. He knows it, and it only makes him worry more. Investors across the world are finding safe haven in the Swiss franc, and the country's export industry is paying the price. Exports from the Alpine nation tumbled by about four billion francs (€3.5 billion or $5 billion) in June, and exports to the EU, the country's most important trading partner, were down almost 15 percent. 
Even Swiss consumers have been merciless. Since imported products have gotten cheaper, they have even been buying foreign cheese. Though Stadelmann belittles cheeses imported from Holland and Germany as "chewy globs," he still can't hide how much he's worried about his industry. 
Of course, it might be hard to take the complaints of the Swiss seriously, especially since they come from one of the most prosperous countries in the world. Per capita economic output is roughly 73,000 francs, the national debt is only 38.3 percent of GDP, and the unemployment rate is only 3 percent. 
But the Swiss fear the end of their success story. Over the course of the past year, the value of the franc has risen 20 percent against the euro. "With an appreciation of 2 to 5 percent, export-dependant companies can go under -- and they know it," says Jan-Egbert Sturm, a researcher at the Swiss Federal Institute of Technology Zurich. "But what's happening now is really bad." 
Switzerland's economy wouldn't be able to cope with it if the euro dipped below 1.1 francs, Sturm warns. For this reason, the Swiss National Bank has attempted to get the franc back to a reasonable level by flooding the market with freshly printed money and thereby devaluing the currency. more

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