Stacks of Swiss franc and euro banknotes are displayed in Bern August 15, 2011.PASCAL LAUENER/Reuters
The luxurious Gstaad Palace in the Swiss Alps is a beloved vacation spot for those who can afford to pay 990 Swiss francs ($1,023) for a luxury facial and 1,600 francs for an overnight stay in a rustic but well-appointed mountain hut.
This summer is different. Whether it's business leaders forgoing their annual retreat to the mountains or well-off pensioners cutting back on vacations, Gstaad Palace's revenue fell 21 per cent this summer, according to Andrea Scherz, whose family has owned the hotel for the past 65 years.
"This summer we had a very big and bad surprise," Mr. Scherz says. "I've been here now 16 years and I've never seen such a huge change from one year to another."
The only consolation for Mr. Scherz is that if the Swiss National Bank had not taken action a year ago, business would likely be worse.
A year ago the Swiss economy was facing an abyss as its rapidly rising currency nearly reached parity with the euro. The SNB stepped in last September and introduced a peg of 1.20 francs to the euro to stave off recession as the strong franc threatened everyone from machine exporters to hoteliers.
In the past year, the central bank has spent billions to guard the franc and shows no signs of backing away from the peg, repeating it will enforce it with the "utmost determination."
The move was not without controversy. Experts point to other currencies such as the Norwegian krone, the Swedish krona and the Australian dollar that have strengthened as investors seek new havens and the SNB diversifies its holdings.
For now, the peg appears to be doing its part to stave off disaster.
While much of Europe is in the doldrums, the Swiss economy remains stable. Switzerland's Federal Department of Economic Affairs reported a 0.7 per cent increase in gross domestic product in the first quarter from the last three months of 2011.
That compares with no growth in the first quarter within the euro zone. Swiss consumers and the government kept on spending amid low unemployment, offsetting a decline in exports.
"With a 1.20 exchange rate, companies have a fair chance to come back to the profit zone," said Rudolf Minsch, chief economist of the business lobby group Economiesuisse.
Survive perhaps, but whether they will thrive is another matter. The strong franc, still viewed as overvalued, is cutting into the revenue and profit of firms large and small as demonstrated during the recent earnings-reporting season in Switzerland.
The tourism, machinery and paper industries are among the most affected. Phone company Swisscom AG, for example, lowered its full-year revenue forecast as it believes the franc will remain strong.
Schlatter Group, which makes welding plants and weaving machines, expects a loss this year and is cutting jobs. Geberit AG, a maker of toilet systems, figures currency losses knocked some 50-million francs off its first-half revenue, though it still managed to eke out a 2.2 per cent increase in sales in the
period.
"If the SNB hadn't fixed it at 1.20 and the exchange rate had gone down further, then the negative influence on our results would have been much greater," said Roland Iff, Geberit's chief financial officer.
As in Canada, firms are adapting to life with a strong currency, cutting costs, adjusting prices and expanding in other markets. Geberit, for example, pared its prices in Switzerland by 10 per cent last October because plumbers were going across the border to buy their products in Germany, angering Swiss distributors.
PB Swiss Tools, which makes products such as screwdrivers and mallets, is focusing on adapting to the strong franc and the increasing competition it brings by continuing to automate production. "It's even more important," said Eva Jaisli, chief executive of the family-owned firm. Ms. Jaisli says the SNB's peg has been helpful in that it allows her company to budget. As a board committee member of Swissmem, an association for mechanical and electrical engineering companies, she believes some firms will struggle if the exchange rate remains at 1.20 for years. The danger is they won't be able to invest and will lose their competitiveness.
Like other business leaders, she says if the franc gained further, PB Tools would have to shift its strategy for its operations in the euro zone. It all comes down to the will of the SNB. With each new saga in the European debt crisis, observers question whether the Swiss central bank can continue to support its desired exchange rate. If struggling countries like Greece or Spain leave the euro zone, investors will be even more desperate to get their hands on safe-haven francs.
Experts say the peg is not under any threat for now. Prices are falling and the SNB can therefore afford to print money and buy euros to safeguard the franc. As well, the SNB could modify the peg rather than abandon it altogether, according to Adam Cole, the global head of currency strategy at RBC Capital Markets in London.
"The SNB has both the incentive and the means to maintain the peg for as long as it needs to," said Mr. Cole. What the SNB can't control is what happens with the economic crisis just outside Switzerland's borders. If the crisis continues and deepens, it could prove to be a far greater challenge to Swiss firms.
"When the euro zone is in a recession…that has a much stronger, negative influence than a strong Swiss franc," said David Marmet, an economist at Zürcher Kantonalbank. "When there's a combination –a strong Swiss franc and a recession – that is of course grave."
Mr. Scherz, the general manager of Gstaad Palace, says the economic crisis has played a major role in the hotel's revenue decline.
He figures the hotel can survive five years in this current economic climate. Afterward things could get much more difficult as investments fall behind and the clientele begin to notice.
There are still some encouraging signs: Gstaad Palace was booked out one recent weekend amid the town's annual summer polo tournament. Mr. Scherz hasn't been forced to cut prices or slash staff, preferring to maintain its luxurious standards and hold off for better times.
But the economic crisis is never far from his mind, with some of his important guests sharing their gloomy views. One big banker warned him that the current economic woes are the "tip of the iceberg."
"I'm pretty nervous for the next few years," Mr. Scherz says. "We're healthy, we're strong. It's all a matter of time for how long."