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Franc monster is strangling Switzerland’s economy

With the Swiss franc at a record high, the country’s shoppers are abandoning local business and tourists are being extra frugal

In the Karussell shopping centre in the Swiss town of Kreuzlingen on Thursday, all was quiet. At noon in the Ca’Puccini café, one white-haired lady nursed an empty coffee cup. The opticians: empty. H&M: two browsers. In the Import perfume shop the saleswoman said she had served just eight customers since 8.30am. “It’s unbelievable,” she sighed. “I went on holiday for three-and-a-half-weeks and came back to this – look! There is nobody here.”

She knew where everyone was: “Germany. Over there.” She nodded her head backwards. Her problem is that “over there”, just a ten-minute walk away, is the medieval university town of Konstanz. And since the Swiss franc (SFr) stormed to a record high last week, reaching almost 1:1 parity with the euro (down from SFr1.3: €1 last year) after global currency traders piled in, more and more Swiss shoppers have abandoned the motherland to snap up bargains across the border.

Meanwhile, the Lago mall in Konstanz was bustling. In DM, the equivalent of Boots the chemist, the Städler family from the Swiss town of Maur were stocking up. In their trolley were multiple cans of Axe deodorant for the two teenage sons (€3.25 compared with SFr6.2), family-sized bottles of Head & Shoulders shampoo (half the price back home), and various beauty products from L’Oreal no longer available in their local supermarket due to a standoff over wholesale prices between Co-op and the manufacturers.

“It’s ridiculous really,” said the dad, Marco. “Everything is at least half the price, sometimes a third of the price back home. I’d be prepared to pay a premium, maybe 20-30%, to shop back home, but not 50% or more. I’d be mad.”

The Städlers were not just benefiting from the unusually clement currency exchange rates: they were also able to claim back the 19% Mehrwertsteuer (VAT) charged on almost all German goods. After a hard day’s shopping, all they had to do was pop into customs on their way back home and ask for a stamp on the green VAT refund forms they received in each shop.

Last Saturday, the tiny road border crossing between Konstanz and Kreuzlingen had a record day. “We were stamping 380 per hour at one point,” said Robert Helfrith, a customs spokesman. “Last year we stamped five million forms; in the first six months of this year we had already stamped three million, so we’re looking at a 20% increase in Swiss shopping trips in Konstanz year-on-year,” he added.

In his office at Konstanz townhall, Friedhelm Schaal, the head of economic development, presented more statistics. On the wall was a printout of the previous day’s currency fluctuations; when he gets to his desk each morning, the first thing he does is look at how the franc is performing. The stronger it gets, the richer his town becomes. “We have an annual sales volume of €550m and 30% of that comes from Swiss customers,” he said. “By the end of this year we’re expecting that percentage to rise to 35-38%.” And that’s not all: “The average Swiss customer spends 30% more than the average German.”

By the Limmat river in Zurich on Thursday afternoon, Christian Bruggers, the manager of Teddy’s Souvenir Shop, was looking at a rather different set of accounts. “We’re still getting the same number of tourists, they’re just not spending as much,” he said, as his colleague rang a few francs for a fridge magnet through the till. “Like the cuckoo clocks, the proper ones [SFr155-2,500] – no one is buying those right now. But what can I do? I can’t lower my prices. My costs are still the same.”

The Milligan family from Berkshire were browsing. “We’ve had a bit of a shock with the prices,” said Debbie, on holiday with her husband Rob and daughter Ellen, 13, and son James, 9. “We were in Frankfurt a few days ago and bought three pretzels for €1.75. Here we saw one pretzel on sale for SFr7. Breakfast in our hotel, just an ordinary Novotel, costs SFr28. We’ve been going to the supermarket and making our own.”

The Swiss government is so worried about losing tourists that it recently gave the national tourist board an extra SFr12m for marketing. “It’s a worry for us,” said Daniela Bär, press spokeswoman for Schweiz Tourismus. “We don’t have our figures yet but we’re expecting a 5% decrease in tourist numbers on last year.” The lesser-known mountain regions are the worst hit, she said. “The cities get a lot of business travellers who aren’t as price sensitive, and the big hitting mountain resorts, like the Matterhorn and the Jungfraujoch will be fine too. But the smaller places are already suffering.”

Until the financial crisis, the franc traded in a relatively narrow band. But since then, it has strengthened 40% on a trade-weighted basis, snapped up by panicked investors seeking havens from the dollars and euros.

The Swiss National Bank (SNB) has warned that what billionaire entrepreneur Christoph Blocher this week described as the “catastrophic” overvaluation of the franc could tip the country into recession and deflation. It is also causing losses for millions of east European homeowners with mortgages in francs, as well as for European banks holding franc-linked derivatives contracts. Less likely to garner sympathy are the ultra rich Swiss-domiciled hedge fund traders who are grumbling that their lavish bonuses – often paid in dollars – are suddenly worth a lot less than they thought.

But for many wealthy Swiss residents, many of whom own homes abroad, the situation has left them even richer. Drinking outside the Restaurant Churchi am Wasser in Zurich on Thursday, a group of software developers were toasting the success of a new project.

“My disposable income has gone through the roof recently,” said Briton Martin Taylor, 41, a senior IT manager who has a euro mortgage on a house in Holland. “In Holland, I paid 52% income tax. Where I live, in the canton of Zug, I pay 5.6%”. A Dutch colleague admitted that last Saturday he decided to transfer SFr15,000 into his euro bank account. A week later, he would already have made SFr1,700 profit if he transferred it back.

But it is the traders panic-buying francs who have really left Switzerland in such a precarious position, according to many angry business leaders. These “speculators” were recently criticised by Nick Hayek, chief executive of the Swatch group, who told them to “stop messing with our Swiss franc”. Christoph Raz, a producer of Emmental cheese, said this week that he had already lost 17% of exports. Serge Gaillard, director of employment at Switzerland’s State Secretariat for Economic Affairs, predicted big job losses by this autumn if the franc remains so high.

Fifty per cent of Switzerland’s robust and stable economy is dependent on exports, and it’s this sector the SNB was trying to shore up earlier this month when it started trying to devalue the franc by flooding the currency markets. So far the experiment has had only modest success: on Friday the franc had fallen back to around 1.13 against the euro.

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