The role of the swiss franc in Switzerland’s European stance

Research in International Business and Finance 38 (2016) 35–44

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The role of the swiss franc in Switzerland’s European stance Guillaume Vallet a,b,∗ a b

CREG, Université Grenoble-Alpes, France Institute of Sociological Research, Geneva, Switzerland

a r t i c l e

i n f o

Article history: Received 27 January 2016 Accepted 30 March 2016 Available online 6 April 2016 Keywords: Switzerland European Union Integration Swiss franc Money

a b s t r a c t The case of Switzerland appears to be unique with regards to the European economic and monetary integration process, which began in 1957: although the country has had close and growing links with the European Union (EU) over time, it does not want to access full membership. Even though this situation of high integration without full membership entails certain constraints, it is also interesting for Switzerland in many respects. In particular, it allows the country to preserve the sovereignty of its money, which is the backbone of Switzerland’s modern existence. That is why I consider that the Swiss Franc is at the core of Switzerland’s European stance. © 2016 Elsevier B.V. All rights reserved.

JEL classification: E58 F15 F31

1. Introduction The current strong tensions in Europe reveal both the success and the difficulties of the economic and monetary integration process that have existed in Europe since the Treaty of Rome in 1957. The monetary issue especially sustains efforts in that direction. If the European Central Bank (ECB) has successfully fulfilled its mandate of price stability, it has faced many problems: its lack of ability, as well as will, to foster growth, its role of lender of last resort, and lack of confidence in the euro. Thus, besides the important necessary reforms and changes concerning the eurozone’s functioning and survival (Bibow, 2012), this situation seems also to prove that the “reluctant Europeans” within the European Union (EU), such as Denmark, Great Britain or Sweden, are right, because these countries do not fully partake in economic and monetary European integration. In other words, they are highly integrated into the European single market but they also maintain – to some extent – their monetary autonomy, allowing them to primarily focus monetary policy on the needs of the national economy. In the same way, perhaps more so, this is true of Switzerland, a country that is strongly linked to the EU and the countries belonging to the eurozone, particularly from an economic and financial perspective, but does not want to become a full member. This de facto integration without de jure accession reflects the Swiss philosophy towards European integration that has been implemented since 1957. Despite the fact that its main economic partners are EU members, Switzerland wants to preserve its political independence from the EU because the country fears that accession may harm the very economic basics that created the “Swiss exception”, often called Sonderfall.

∗ Corresponding author. E-mail address: [email protected] http://dx.doi.org/10.1016/j.ribaf.2016.03.017 0275-5319/© 2016 Elsevier B.V. All rights reserved.

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Moreover, from the EU political authorities’ point of view, Switzerland is seen as an important partner as a result of its high level of Gross Domestic Product (GDP) per capita, which offers stability in Europe. The EU has therefore accepted a “third way” for Switzerland, between accession and full independence, through the signature of several bilateral agreements since 1972. Although such a stance is precarious, it is also interesting for Switzerland, especially because it secures its European traffic and does not entail any loss of fiscal or monetary sovereignty. For this reason some label Switzerland a European free rider: the country would benefit from European collective goods without giving up any domestic particularity for the whole. However, it is necessary to go beyond such an assertion, and to deeply understand Switzerland’s stance. I argue that the latter is linked to the specificities of the country depending on the preservation of monetary independence. Consequently, we shall demonstrate in the paper to what extent “money matters” in the Swiss case, because it gives access to national prosperity, as well as identity, justifying Switzerland’s European reluctance. More broadly, as the latter indicates through the monetary perspective that “where there is a will, there is a way”, the Swiss case is a significant example, even a lesson, of the eurozone, of the need to create a “complete currency” (Ponsot, 2013), relying on an economic but overall political base. This article attempts to tackle this issue from two angles. The first recalls the historic particularities of Switzerland’s position in the European integration process, and displays both the advantages and the costs of such a stance. We argue in the second part that Switzerland accepts this situation and does not seek membership because “money matters” in the country for not just economic but also sociological, as well as political, reasons. This leads to a “national will” to preserve the independence of the Swiss franc, showing that whatever its costs, it is essential for the country to preserve its monetary independence. 2. The Swiss reluctance to the EU In order to comprehend the specific relationship between Switzerland and the EU, it is necessary to understand the characteristics of the Swiss position first, and thereafter to explain why Switzerland is reluctant to proceed to EU membership. 2.1. Switzerland towards the UE: strong links and dependence. . .without full accession If we refer to Krugman (1991), the countries that are geographically and economically close are used to trading a lot because of such proximity. From a purely economic point of view, there are some gravitational effects between those economies, which are “natural trading partners”. This facilitates the setting-up of bilateral agreements because the costs are prone to weakness and trade diversion will be limited (Viner, 1950). From this perspective, Switzerland, which is located at the core of the EU, and even Europe, is a “natural trading partner” of the EU: one-third of jobs in Switzerland depend on Swiss exportations to the EU, and Switzerland is the second export market for EU countries, just after the United States of America. Also, close to 45 per cent of Swiss foreign direct investments (FDI) go to the EU. Switzerland is the EU’s third largest export market and the fourth largest source of all imports too. It is important to highlight that given Switzerland’s geographical position in Europe, the EU needs to have access to the Swiss territory for the transport of goods between two countries (Germany and Italy, for example).1 Even though relations are bilateral, Swiss dependence on the EU is higher because of the country’s relatively small size. Switzerland has even known growing economic and financial dependence towards the EU, particularly the eurozone. The EU’s enlargements, as well as deepening, have given the internal market growing importance for Switzerland. Fig. 1 sustains efforts in that direction. For this reason the country has accepted – despite not being a member of the EU – the need to contribute to the European cohesion funds, which is the price for accessing the EU internal market, even if this amount is lower than full membership

1

As we explain infra, Switzerland and the EU signed bilateral agreements in 1999. Between them, this question about transport arose.

Fig. 1. Swiss exports to the EU (1963/2014). Source: SNB (2015).

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(more than 200 million Swiss francs per year). Furthermore, this implies a strong dependence on the European currencies: given its small size, as well as its weak weight, Switzerland increasingly has to accept the euro in the traffic of goods both outside and inside Switzerland (DFF, 2008). It is strongly relevant for financial and banking activities, because their share in the Swiss GDP (around 15 per cent) relies on the internationalization of their activities (The CityUK, 2012). Nevertheless, Switzerland’s stance apparently questions many theories of regional, economic and monetary integration, such as Balassa’s pioneer analysis (1961), the “domino theory of regionalism” (Baldwin, 1993), and the classical optimal currency area’s authors (Mundell, 1961; McKinnon, 1963). According to them, it is true that Switzerland may apparently gain from deeper integration with the EU: business cycles are quite similar (Vallet, 2010), reciprocal economic openness is high or there exists a certain intensity of the mobility of labour factors with the so-called “frontaliers”. However, such an assessment is insufficient to deal with the Swiss case for several reasons: – The OCA theory and, more widely, the other previous theories are questionable (Priewe, 2007). – Even assuming the pertinence of the OCA theory, the eurozone is far from being one (Bibow, 2012). – The Swiss case is more complex than it at first appears. Therefore, we shall try to explain such a special case by presenting some of the reasons for its reluctant stance towards Europe. 2.2. Why is Switzerland so reluctant to proceed to full EU membership? If Switzerland is often represented as a particular country, it also likes to present itself as such (Church and Head, 2013). Switzerland is a Sonderfall, meaning a special and rare case. These particularities must be understood first with respect to the country’s geographical features: as it is a small, open country, Switzerland’s development has relied on external market access, which has always been a source of both opportunities and constraints. Second, Switzerland is hesitant about the highly institutionalized integration processes, which imply a substantial loss of sovereignty, because they could jeopardize some of the pillars of the Swiss model. That is particularly true in relation to the EU (Gstöhl, 2002), which could question its “national identical triangle” (neutrality, federalism, direct democracy) (Vallet, 2010) because of the sovereignty delegation to the EU’s supranational institutions. Indeed this “triangle” historically lies at the base of Swiss national cohesion and its identity. This partly explains why Switzerland has kept its distance from the EU’s integration process since the Treaty of Paris in 1951 and the Treaty of Rome in 1957. Third, economic arguments are also used. If Switzerland depends extensively, and for a long time, on the EU’s internal market, the country becomes open to extra European trade. Its openness rate 2 of 45 per cent of the GDP includes exchanges with not only EU but also Asian countries, and, above all, the United States. Swiss exports to the United States represent around 10 per cent of the overall Swiss exports, meaning that this country is the second partner country for Switzerland, just after Germany. Hence, we can see that Switzerland is “between two worlds”, indicating that the country’s situation cannot simply be deemed European dependence. Moreover, Switzerland considers that the European market, especially the eurozone, is not sufficient in terms of growth perspective. With the launching of the euro in 1999, Switzerland dreaded that the European economic area would work like a closed web, namely with specific internal economic relationships that would be discriminatory for third-party countries like Switzerland. Frankel and Rose (1997) called it the “endogeneity of monetary integration”. Fortunately for Switzerland, and unfortunately for the eurozone, these fears have not surfaced. On the one hand, the eurozone is neither an OCA, as we have highlighted, nor has it endowed itself with the economic tools and even political will to foster growth (Bibow, 2013). On the other hand, as a result of its high degree of de facto economic integration to the eurozone, and given that European monetary integration has not led to discriminatory effects, Switzerland has also benefited from it. Indeed, according to Baldwin (2006), if trade creation thanks to the euro is on average approximately 10 per cent for the whole area, it is roughly 5 per cent for Germany, 16 per cent for Spain, 4 per cent for Italy, 10 per cent for the United Kingdom, 4 per cent for Sweden and Denmark, and 12 per cent for Switzerland. Thus, the Swiss position is, from such an economic point of view, both interesting and viable. Full membership would entail higher costs without any significant benefits. Conversely, not to access to the euro area allows the country both to benefit from the dynamism of trade with the euro area while maintaining the possibility to use monetary policy for internal needs. In the same way, without supporting the completeness of the costs, Switzerland takes advantage of the monetary and financial efforts realized by the euro area countries. The perspective, and thereafter the launching, of the euro have led to a more stable monetary environment for Switzerland, in particular because Switzerland only has to deal with the fluctuations of a unique exchange rate. This is particularly advantageous to Swiss border consumers and to Swiss exporting companies because of the more stable monetary environment implying fewer price distortions. They have been able since 1999 to use only the euro in their transactions with the eurozone countries instead of using several different currencies, as was

2

Which can be defined as the average of whole exports and imports, in% of the GDP.

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the case before. Thus, the foreign exchange risk is lower and the economic forecasts better, resulting in a higher level of competitiveness. The same is true from the financial perspective: Switzerland benefits from the main EU developments without supporting all the costs. It is important because the high degree of economic integration entails spillover effects in terms of financial integration. Indeed, the economic integration process and removing national boundaries eases the trade of goods, services, labour and capital, in particular capital flows on the financial market. Symmetrically, if the financial integration process has its own logic and autonomy, it also facilitates daily transactions thanks to a unique and unifying payments system. Thus, Switzerland must participate in the European financial integration process, given the geographical orientation of its trades. For this reason, for example, Switzerland really integrated in 2006 the Single European Payments Area (SEPA), namely the eurozone’s unique mass payments system, while the country was not a full member thereof. On the other hand, however, Switzerland is not subject to EU regulations and directives, and is able to develop a specific financial supply at the core of Europe. It is worth noting that it is heavily relevant in the Swiss case because the openness and relatively small size of Switzerland oblige it to be linked to other financial places all over the world, for transactions, loans or borrowing activities. Table 1 demonstrates this. More widely, Switzerland’s specialization in financial activities is really a national structural choice because the country has historically built a large part of its wealth on it (Laurent and Vallet, 2014). In particular, banking privacy allows Switzerland to attract significant amounts of capital flow. In spite of the current financial and political turmoil, which has led to official international condemnation of banking privacy’s existence, Switzerland is still able to maintain it through adaptation (Schriber, 2007; Swiss Federal Department of Finance, 2009, p. 37). The country is even the world leader in private banking, with around 30 per cent of overall world assets under management. Banking circles fear that accession to the EU may lead to the end of banking secrecy in Switzerland, and then to an exit of capital from the country. If it is not a specific European issue because of the international pressure on Switzerland since the beginning of the ongoing crisis, it is strongly relevant within the European context. Indeed, since the European Council of Feira in 2000, the EU has wanted its new members to exchange some fiscal information in this field, and for this reason staying outside the EU is essential for Switzerland (Schwok, 2006). On the contrary, Switzerland launched the so-called “Rubik Agreements” at the beginning of the crisis; thanks to bilateral agreements this consisted of transferring funds to countries that accepted the renouncement of obliging Switzerland to send information about foreign banking account owners to their fiscal authorities. However, few countries have accepted or some have been starting to change their mind (Germany); Switzerland has accepted the principle of exchanging fiscal information. Nevertheless, banking secrecy in Switzerland has not totally died. First, not only could the process of transmitting information to other fiscal authorities be long, but also only the individuals are concerned, and not the holdings, which are some important clients of Swiss banking and financial institutions. Second, international pressure has led to the building of a more positive image of secret banking in Switzerland since Swiss bankers appear “cleaner” than before the crisis, and reserve banking secrecy for fair clients. Finally, if neutrality deals more with the Swiss political external stance, the two other pillars of the triangle have important internal economic consequences in the Swiss case. Swiss democracy and federalism result in Swiss citizens permanently controlling the Swiss government (Swiss Federal Department of Finance, 2009). This eases the balance of public expenses, which in turn maintains a low national debt, because the government is much more careful in its actions (Jeanrenaud, 2001 p. 119). Thanks to this framework, the country is able to be more competitive because it relies on an export-led growth model (Bibow, 2012). It is worth noting, however, that the federalist framework of the country implies strong supervision between the federal and cantonal levels (vertical dimension) and also between cantons (horizontal dimension): there exists a fiscal redistribution within the country, allowing people to live together and to preserve the country from facing strong inequalities and excessive distortion of productive structures. Hence, as such an efficient organization would have to be integrated into the EU framework, this perspective creates doubt in the country. In sum, in terms of the European stance, Switzerland tries to establish strong commercial and financial links with the EU while maintaining economic and political particularities that are presented as essential. The “philosophy” of such a strategy is to push away full accession to the EU as long as integration with the rest of the world is also a Swiss priority. The main Table 1 Geographical Distribution of Financial assets and commitments of the Resident Banks in Switzerland in 2013. Financial Assets

Euro Area United Kingdom United States Japan Russia Total

Financial Commitments

(1)

(2)

(3)

(4)

232 406 278 392 343 747 40 826 5 489 1 251 778

18.5 22.2 27.4 3.2 0.4 100

222 193 273 113 192 336 18 472 13 246 1 236 510

17.9 22.0 15.5 1.4 1.0 100

Source: SNB (2014). Notes: (1) in millions of Swiss francs; (2) in% of the Swiss total foreign assets; (3) in millions of Swiss francs; (4) in% of the Swiss total commitments towards the foreign world.

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problematic for Switzerland is to be sufficiently “close to Europe” to participate in the EU’s main developments, but without entailing a strong and unique dependence on the EU. For this reason Swiss relations with the EU over the last fifty years must be understood not as a step towards membership but conversely a step away from it. This therefore explains, first, why the country preferred access to the European Free Trade Area (EFTA) that arose in 1960, because it represented a way to reinforce economic integration without giving up political concessions. Second, the Swiss stance makes more understandable the particularity of the bilateral agreements that have been signed between Switzerland and the EU since 1957, in 1972, 1999 and 2004, because they are not a step towards full membership. These agreements satisfy the Swiss economic and political circles: to them this is currently the best way as far as Swiss European policy is concerned, and it must be pursued in the future. They allow the country to avoid the EU’s spillover effects and those of the eurozone ones in particular. All in all, from the Swiss point of view, this kind of agreement allows the country to preserve the main characteristics of its economy, particularly monetary autonomy. Indeed, the money issue is at the core of Switzerland’s European stance: to preserve the Swiss franc is an issue dealing not only with prosperity, but above all a sociological one, as we will explain in the next part. 3. The Swiss franc as the “Helvetic backbone”: why money matters in Switzerland’s European stance Here we intentionally use the word “Helvetic” to explain to what extent we are dealing with a sensitive issue in Switzerland when we talk about money in such a country. Hence, as we explained in the first part, Swiss monetary, as well as political, authorities are ready to make sacrifices or difficulties in the short run to preserve the sovereignty of the national currency in the long term. This indicates that they will do their best to use money to foster Swiss people’s prosperity, the social links within the country, as well as the external political existence of the country. 3.1. Swiss monetary independence: the price to pay for prosperity Swiss contemporary monetary history has been marked by regular appreciation of the Swiss franc towards the euro, as well as other currencies, both in nominal and real terms (Bordo et al., 2006; Kugler, 2012). However, as the euro represents a share of 62 per cent in the level-headedness of the nominal and real effective exchange rate (Fluri and Müller, 2001), it is strongly relevant to consider specifically the Swiss franc/euro parity. More accurately, if we focus on the ongoing current crisis, the Swiss franc has tended to appreciate strongly against the euro, as we can see in Fig. 2, where a decrease in the curves indicates an appreciation of the Swiss currency. Two kinds of explanation can be mobilized here to analyze such an appreciation. In the long term, the importance of the current balance surplus (between 10 and 15% of GDP per year since the 1990s) implies an abundance of capital flow for Switzerland. This leads to an appreciation of the Swiss franc exchange rate because of the heightened demand for this currency. In the short term, and what is noteworthy here, appreciation is linked to two main factors. First, the Swiss national currency has appreciated since 2007 because of the end of an international carry trade in which the Swiss franc used to be one of the major international financing currencies. When investors no longer wanted a financing currency, this led to a sudden and strong appreciation of the exchange rate (Frankel, 2007), which is true of the Swiss franc. Cline and Williamson (2011) consequently consider that there was a kind of market correction for the Swiss franc, which was undervalued before the crisis. Second, the Swiss franc is a safe haven currency, which seduces investors in the case of international disturbances (Cairns et al., 2007; Ranaldo and Söderlind, 2010; Coudert and Raymond, 2011). This is a historic trend. Indeed, international investors who are looking for a stable environment find it in Switzerland because of its economic, monetary, fiscal and political stability, and because of its institutional particularities, such as banking secrecy. When capital inflows are massive, there is a sudden increase in demand for Swiss franc assets. Moreover, given the fact that the Swiss financial markets are relatively small, the prices of the assets tend to be higher, and so on for the Swiss franc towards other currencies. This explains why, during the

Fig. 2. Swiss franc nominal exchange rate against the euro (01/1999–01/2015). Source: SNB (2015).

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current crisis, the Swiss franc appreciates, not because of the Swiss monetary policy (Lenz and Savioz, 2009), even though Switzerland is not at the core of the international disturbances (Kohler, 2010). It is worth noting that such a strong demand for Swiss francs in turbulent times induces massive portfolio investments in Switzerland and then a very low capital cost by international comparison. This advantage is even called “interest rates bonus”: historically, short nominal and real interest rates, as well as long nominal and real interest rates, have been lower than those of any EU members since 1957, as Fig. 3 displays. Consequently, as accession to the EU implies eurozone membership according to the European treaties (the so-called “acquis communautaire”), Switzerland would lose its bonus because the country would have to give up its monetary sovereignty to the European Central Bank (ECB). This would automatically lead to a rise in the short-term interest rates in the domestic economy, because the ECB’s interest rate would be effective in Switzerland, which would be harmful for Swiss competitiveness. Furthermore, Switzerland would also have good reason to dread a rise in long-term interest rates with full accession, because of the link between the short and long terms (“structure of the interest rates”). In this scenario, there would be negative effects for the cost of capital and therefore investment and growth. In sum, Switzerland has to preserve its monetary independence and its national currency, because it seems that the Swiss franc’s intrinsic characteristics are, to a large extent, at the source of the bonus. A study realized by UBS at the beginning of the 2000s (UBS, 2000) showed that 50 per cent of the bonus could be explained by international investors’ confidence in the Swiss franc. They decide to invest in Switzerland rather than elsewhere because they want to diversify their placements and to protect themselves from financial risk. The problem for Switzerland is that such an appreciation of the Swiss franc against the euro has entailed negative effects on the Swiss economy during the ongoing crisis because dangerous steps have been crossed with the appreciation. Indeed, if Switzerland’s economy is able to face a trend appreciation due to its specialization, it nevertheless depends on its extent. For this reason, if some econometric studies indicate that there is no strong evidence of negative Swiss franc/euro exchange rate pass-through effects in Switzerland (Fisher, 1999; Stultz, 2007), other more recent studies stress the opposite because of the crossed levels: it is not the same for exporters when the Swiss franc/euro exchange appreciates from 1 euro/1.65 Swiss francs to 1 euro/1.45 Swiss francs, and from 1 euro/1.45 Swiss francs to 1 euro/1.25 Swiss francs. To sustain efforts in this direction, Table 2 recalls different econometric studies, indicating the loss for the Swiss economy given the national currency’s recent appreciation against the euro. Appreciation was so strong that the SNB decided to implement a kind of official peg to the euro from September 2011 to January 2015: because of the tightening of monetary conditions in Switzerland, the Swiss National Bank chose to reduce its monetary margins because of the peg instead of undergoing instability. On the one hand, this can be seen as a radical measure because, in the Swiss case, as a result of the nature of exchange rate fluctuations, anchoring reduces domestic monetary autonomy from a “technical point of view” (Guillaumin and Vallet, 2012). On the other hand, however, the peg brought strong advantages to Switzerland. First, in the short term, such a policy entailed quick positive effects, which were the stabilization of the exchange rate, as well as the reflation of the Swiss economy. In the current Zero Interest Rates Policy (ZIRP) context for central banks, it gave good results. Furthermore, with the Swiss case, such a policy prevented the interest rate “bonus” from becoming a “malus”. Second, in the medium term, the SNB did not hesitate to set up complementary measures, unfortunately often called “non-conventional”. For instance, it helped as a

Fig. 3. Ten years of interest rates, in percent (bond’s yields) (01/1999–01/2015). Source: SNB (2015). Table 2 Effects of a Swiss franc/euro exchange rate’s appreciation on Swiss exports. Studies

Aggregates

Short Term Effect

Aeppli (2008) SECO (2007) KfK (2003) Lampart (2006)

Goods Exports Goods Exports Total Exports Total Exports

−0.3% −0.5% −0.3 to −0.4% −0.2%

Source: Lampart (2011).

Long Term Effect

Maximum Effect after

−1%

5 years

−0,7%

3 years

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lender of last resort the too-big-to-fail banking institutions such as UBS. In the same way, it decided, with the government, to implement certain rules for banks to prevent them from supplying bad credit to the real estate sector and thus to avoid instability (Swiss National Bank, 2013); it has also gained more power to supervise financial activities (Federal Council, 2011). In the long term, the last advantage was that the peg allows the Swiss franc to exist. Indeed, if the SNB had not reacted, perhaps Switzerland would have had to consider asking for full EU membership in the long term. This explains why the SNB did the same in its recent monetary history towards the European currencies that matter for Switzerland, especially the Deutschmark. If, for the same reason, it implemented an official peg thereto from 1978 to 1979, it probably also did so with a de facto peg several years later in the hope of creating stable monetary conditions in Switzerland (Jochum and Savioz, 2005). Hence such pegs, whatever nature they take – de jure or de facto – improve the monetary efficiency, as well as independence, of the SNB, thanks to an improved forward-guidance framework. This means that the SNB is able to bear the apparent costs associated with the euro, and even transform them into advantages. This appears to be strongly relevant as far as the Swiss stance toward the EU is concerned: maintaining a fixed or quasi-fixed exchange rate monetary regime in an open economy framework preserves the existence of the Swiss franc, which helps the exposed sectors and makes business cycles converge while improving monetary authorities’ credibility (Frieden, 1997). Hence the fear to lose such an advantage linked to the Swiss franc as a specific asset has led the SNB to withdraw the peg on January 2015. If it appears to be a surprise regarding the benefits brought by the peg, some have already announced that the “music would stop” in 2015 (Vallet, 2014). Indeed, given the reputation as well as the credibility of the Swiss National Bank strongly rely on its capacity to prevent the country from being affected by inflation, it feared that the rise in monetary base would lead to inflation. That means that beyond the external perspective developed above, the existence of the Swiss franc gives strong advantages from an internal perspective: it allows the money to fully play its social – as well as political – role, contrary to what is happening with the euro. This is strongly relevant in the Swiss case, as we explain below. 3.2. The Swiss franc for Swiss people: they will never walk alone Arguably, the Swiss franc has played a significant role in terms of building unity, as well as the nation-state, in Switzerland. This has been the case through a material (wealth, prosperity), as well as symbolic, dimension (myth). Indeed, the Swiss franc is the incarnation of modern Switzerland: as it represents the result of Swiss people’s will (the sense they have given to the national political project), money can be considered an institution giving sovereignty. In other words, the Swiss franc fits perfectly what Schumpeter used to consider the essence of money: “Everything that a people desires, does, suffers, is – is reflected in a people’s monetary system” (Schumpeter, 2014; p. XIV). However, this has taken time to evolve. In effect, when the country experienced independence in 1848, it did not have a single, or even really its own, currency. If the Swiss franc was officially born in 1852, it was under the domination of the French franc in reality: more precisely, it was just France’s monetary and financial “appendix” within the Latin Monetary Union, meaning that the sovereignty of money did not exist (Laurent and Vallet, 2014). Furthermore, there used to be many local currencies that competed with the Swiss franc inside the country (Weber, 1988) leading, de facto, to the denationalization of money (Hayek, 1976). A significant change came about with the creation of the Swiss National Bank (SNB) in 1907. Its status clearly indicated that it controlled the printing presses in Switzerland from this point on, in order to suits the needs of the Swiss people. Then the monetary policy had to be implemented in order to foster the economy and then to ensure that people lived better as a result of prosperity. It is strongly relevant to note that in such a federal country, one of the rare institutions that uses the term “national” is the central bank, showing to what extent the Swiss franc lies at the core of national sovereignty. To illustrate this, we can use two examples. The first refers to the period following the creation of the SNB, just after World War One. Thanks to Swiss neutrality and stability during it, Switzerland increasingly became a major banking and financial location within Europe. Hence, with the support of the main economic sectors, the SNB implemented orthodox monetary policies in order to attract capital inflows to maintain a low cost of capital, and then to build a high value-added specialization. During this period, two major decisions sustained efforts in that direction: – The political decision in 1934 to set up a better juridical environment for investors through a law protecting banking secrecy: this gave a signal to Swiss domestic, as well as international, investors that they could invest in Switzerland because their capital would be warranted in total discretion. – The implementation of the Gold Standard through a strong official link between gold and the Swiss franc. Such a change first took place in 1929 in banking law and really became effective later in 1931. What is interesting in the Swiss case is to understand that such decisions were more than just the support from the main economic sectors to achieve such a strategy. They were the results of bargains from which a national coalition emerged (Eichengreen and Temin, 2000), implying the entire people’s representatives. During the 1930s, in spite of the high costs of the Gold Standard regime in Switzerland (Bordo and James, 2007), such a coalition took place to build a strong currency. The latter both allowed banking and financial activities, as well as a strong industry, to exist, and was useful for a multicultural country seeking to create unity thanks to the prosperity induced. As the political leader, Musy, summed up in the 1930s:

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“One has said with reason that our Swiss franc is the main column on which our national political building is based. We have to preserve it [. . .]. With such an economic structure as ours, one can consider money as the single big financial enterprise from which all the Swiss people, whatever the economic groups they belong to, are interested in” (Musy, 1933 p. 571). Such an example indicates that, despite its independence, the central bank can act in the national interest, preserving the existence of the sovereignty of money. Because “money is rather, primarily a weapon in this struggle” (Weber, 1971, p. 108), it is worth noting that there is monetary governance rather than a sole monetary policy taking place in Switzerland, as a result of the national project hidden behind the money. To return to Schumpeter, this means that the SNB’s monetary policies are embedded in a political framework, indicating that “nothing demonstrates so clearly what a people is made of than how it conducts its monetary policy” (Schumpeter, 2014, p. XIV). To be clear, the SNB’s decisions follow several channels in the hope of reaching such a political will. First, the SNB’s actions participated in the institutionalized state of money, through the definition of the official unit of account and the establishment of a unified monetary area playing its role in a nation-state (Helleiner, 2002). From this point of view, if money does not always emerge from the State, it is nevertheless linked to it because the State sets rules allowing money to circulate and because of its debt that enhances banking system’s functioning (Aglietta et al., 2015). Second, independence did not prevent the main Swiss economic actors from collaborating in the national interest. Employers, labour unions, farmers, the government and the SNB worked to be able to define the best monetary framework in order to reinforce its independence from abroad and its internal unity. Third, such monetary policies, even if they were clearly orthodox, did not question sovereignty. Indeed, Switzerland also established fiscal sovereignty, implying fiscal transfers between cantons. Furthermore, the central bank was intent on acting as a lender of last resort towards both fiscal and banking problems (bail-in). For example, it decided to help an important banking institution (the so-called “Banque Populaire Suisse”) during a severe crisis that affected Switzerland in 1933. Regarding our second example, it is important to underline that such a monetary framework was not specific to this period. It is still evident today because the SNB does not want Swiss people “to walk alone”, as we can note in the Swiss Constitution: “The SNB implements a monetary policy that suits the general needs of the country; it is administrated with the help and under the surveillance of the Confederation” (Article 99, Paragraph 2). Furthermore, both the SNB and other main Swiss authorities have the intention to “preserve the interests of the national economy and have to contribute, along with the private sector, to foster the prosperity as well as the economic security of the population” (Article 94, Paragraph 2). For this reason, the SNB’s monetary policies still take into account the situation of the industry, as well as the banking sector. In return, they look for the support of the SNB, particularly through the defense of the Swiss franc and the implementation of rules that fit their needs (BAKBASEL, 2011; SwissBanking, 2012 pp. 2). As Aglietta summarizes, it is strongly important for a central bank to have clear constitutional missions relying a political will. For this reason, despite the SNB being considered one of the most orthodox central banks in the developed world (Nilles, 1994), in terms of monetary history, either such a monetary framework serves the national interests, or it can be pragmatic if necessary in order to preserve those interests. Furthermore, money is so important in Switzerland that it deals more with collective governance than unique management by the sole central bank. In particular, if the SNB has the responsibility of supervising the banking and financial sectors, as well as playing the role of lender of last resort towards it in case of necessity, it can also rely on the government’s capacity to save the system, through indebtedness. More accurately, admittedly both the government and the SNB would be ready to act together to avoid the vicious circle between banking risk and sovereign risk, which is not the case in the eurozone. Despite the set-up of the banking union, there is still some doubt about the capacity and the political will of the European institutions, as well as members of the eurozone, to completely realize such a reform even if it is necessary in a monetary union. The same is true of the implementation of a federal budget used for the stabilization function. The latter has to be associated with a monetary union, which really takes place in Switzerland, contrary to the eurozone. In sum, as the Swiss franc is a complete currency but not the euro (Ponsot, 2013), the Swiss people are strongly attached to their money. On this point, Ponsot and Vallet (2013) show that the Swiss franc in fact crystalized two kinds of confidence, indicating to what extent money is an institution, namely a resource that has been transformed in social rule (Touraine, 2013): – Internal: it relies both on what Aglietta and Orléan (2002) and Théret (2008) call a “methodic confidence” (social mimetism due to the use of money), a “hierarchical confidence” (in the institutions that hold money, that is the actors of the Swiss monetary governance, cited above) and an “ethical confidence” (the social norms and values that money embodies). – External: if worldwide economic actors have faith in the Swiss franc, it is because it corresponds to a safe haven, representing the attractiveness of the Swiss financial location and because it is linked to Swiss banking secrecy. Such external confidence in the Swiss franc in turn leads to confidence in the country (Helleiner, 2008). We are able once again to see the interconnection between the economic, monetary, financial and political dimensions in the Swiss case: Swiss power in the economic, monetary and financial fields entails political bargaining power, allowing the country to exist internationally despite its small size (Perrenoud, 2005). In other words, the Swiss franc is also at the core of Switzerland’s external policy. In conclusion, the recent monetary historic period is crucial to understanding to what extent money matters in Switzerland, and therefore why the country has been so reluctant to consider full accession to the EU for more than fifty years. From this point of view, the Swiss case has to be understood from an economic, monetary and financial perspective, but also thanks to a sociological and political framework. For this country that is so diverse at the internal level and simulta-

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neously extremely open to the international market, the national currency is one of the main means allowing Swiss citizens to live together and to have a specific identity. In other words, the Swiss franc is both a real and symbolic anchor to a world characterized by the globalization process and its centrifugal forces, which could lead the country to implode. 4. Conclusion Switzerland’s economic and political stance towards the EU appears at first to be paradoxical: in spite of tied relationships since the beginning of the European integration process, which started in 1957 within the framework of the EU, the country does not wish to gain access to the EU as a full member. Switzerland prioritizes a reluctant stance which both suits its interests and entails strong constraints for the economy. In particular, this is the case as far as the Swiss franc/euro exchange rate pass-through is concerned, as it tends to appreciate at regular intervals. However, we have tried to explore how such an analytical framework is not appropriate to deal with economic, and above all monetary, integration. Money is not just an asset; it is an institution, meaning that it embodies economic, social and political dimensions. From this point of view, the euro is clearly an incomplete currency, entailing a rational reluctance by Switzerland to pursue the integration process. Hence, the latter wants to be as independent as possible towards the EU, essentially in the monetary field. We have actually demonstrated that such a stance has strong sociological and political roots, strongly anchored in the Swiss citizens’ collective psychology. In other words, “money matters” in Switzerland because it has fostered economic and political stability. This is essential for this country, which is simultaneously a small open economy and a heavily diversified society, with multiple internal identities. 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