analysis
Switzerland owes its coveted currency to its notoriously low inflation. But behind this truism lies an incomparably more complex and unpleasant reality.
June 10, 2026, 06:37June 10, 2026, 06:37
The franc is “extremely overvalued” and “no one in politics or the media seems to be particularly upset about it.” Swatch Group boss Nick Hayek was beside himself when the dollar/franc exchange rate reached a new all-time low of just over 76 cents at the end of January. With his interview with CH Media in February, he personally ensured that the franc exchange rate became a national nuisance.
The Swiss franc is one of the strongest and most stable currencies around.Image: Shutterstock
But the recurring surges in the appreciation of the Swiss currency are rarely enough for more than a brief media outcry. The franc is one of the last truly hard currencies in the world. Sometimes the price swings upwards quickly, violently and painfully, as was recently the case with the dollar, which was preceded by a phase of significant overvaluation lasting several years.
The US dollar is weakening against the Swiss franc.
It often happens that the franc remains overvalued for a long time. This was the case, for example, in the run-up to the euro debt crisis, when the Swiss National Bank was forced to introduce a minimum euro exchange rate in autumn 2011 and defend it at great expense for a good three years.
But most of the time, even now, the appreciation of the franc is continuous. Exporters have time to adapt and are using it. The central bank can content itself with keeping a watchful eye on what is happening.
Inviolable
Despite all the temporary adversities, neither the Swiss economy nor the population wants anything fundamentally different than a solid hard currency. Or more precisely: In the opinion of a large majority in the country, the franc and the Swiss federal state have been inseparable for 176 years.
Anyone who wants to verify this claim only needs to look at the voting results of the various popular initiatives, which involved a significant intervention in the principle of the National Bank’s monetary policy independence: “Save our Swiss gold” failed at the ballot box in 2014 with 77 percent no votes. The full money initiative was rejected with a “no” vote of 76 percent.
The external reason for this inviolability of the franc and its guardian is the low inflation. In Switzerland, prices have risen by a good 16 percent over the past 25 years, in the Eurozone it was 76 percent, in Germany 72 percent, in the USA 94 percent and in Great Britain even 96 percent.
The strong franc is the result of this outstanding monetary and economic policy performance. In a world with flexible exchange rates, the inflation differences between countries determine the long-term development of the exchange rate (see box on purchasing power parity).
A phenomenon of the century
And the low inflation in Switzerland by international standards is a once-in-a-century phenomenon. The UBS Global Investments Yearbook 2026 shows: Since 1900, inflation in Switzerland has increased by an average of 2.1 percent per year, which is roughly equivalent to what most central banks today describe as price stability. No other old industrial country has achieved lower inflation over this long period. In the USA, prices have risen by an average of 2.9 percent over the past 125 years, in Great Britain by 3.5 percent and in Germany by as much as 4.5 percent.
Of course, the costs of the devastating world wars, in which Switzerland hardly suffered any damage, distort the statistics. But the neutrality policy alone certainly cannot explain why the Swiss state runs a budget that has been the basis for the relative value of its own currency for decades.
Today’s five-lier no longer contains any silver and is still a solid value.Image: Keystone
The eminent Swiss monetary theorist Ernst Baltensperger put it this way in his 2012 book “Swiss Francs, a Success Story”:
“Switzerland’s pronounced awareness of the fundamental social importance of the monetary order, its stability and reliability, has contributed greatly (…) to the country’s economic and political success since the establishment of the federal state.”
According to Franz Jäger, Emeritus Professor of Economics at the University of St. Gallen, the reason for this sense of order is the international competitive pressure, which in many small states demands “above-average discipline, reliability and the rule of law” from the politically and economically active population.
Consciousness of order
In the foreword to the book “Small State of Switzerland, Obsolete or Successful Model?” published by him and the former banker Konrad Hummler in 2017, Jäger describes it. a concordance democracy, which, in conjunction with the direct democratic state order, promotes the balance of social interests, dialogue, finding compromises and ultimately stability.
Silja Häusermann, professor of Swiss politics and comparative political economy at the University of Zurich, holds the opposite opinion. She sees the direct democratic instruments as a destabilizing element of Swiss concordance democracy. In an essay in 2016, she noted a “dramatically increased party polarization,” which, among other things, had led to a striking increase in extremely controversial popular initiatives, not least for the purpose of raising one’s own political profile.
The proportion of popular initiatives for which all government parties make the same voting recommendation has fallen from 80 percent in the 1970s to zero percent today, the scientist wrote in her essay. The gap has not narrowed since then, as the highly controversial initiatives on 10 million Switzerland, the 13th AHV pension, corporate responsibility and mass immigration continue to show.
Political polarization and the associated risk of increasingly inconsistent or even erratic economic policy decision-making are the franc’s Achilles heel. The strong currency is not least the expression of the belief of countless foreign exchange market participants that Switzerland’s economic policy decisions arise from a political system that produces predictable and economically rational results. But such faith is not set in stone. (schweiztoday.ch)
What is Purchasing Power Parity?
If the prices of a good rise faster in country A because the inflation rates there are higher than in country B, the currency of country A will devalue or the currency in country B will have to appreciate. The theory says this for good reason. If this adjustment were not made, people in country B would be able to use their currency alone to fill ever larger shopping baskets than people in country A, without having to pay more. Nevertheless, it may be that open economies with free trade in goods and flexible exchange rates also enjoy the advantages of a land of milk and honey at times. But experience shows that differences in purchasing power are only temporary phenomena, as the devaluation of the dollar since autumn 2022 from over one franc to currently under 80 centimes has proven.