Harry Geels: The miracle of Switzerland, partly thanks to its strong currency

October 29, 2024

_{This column was originally written in Dutch. This is an English translation.}

By Harry Geels

According to the latest ranking of UN organisation WIPO, Switzerland, Sweden, the US, the UK and Singapore are the most innovative countries in the world. There are various reasons for this. One of these is a strong domestic currency. Many euro supporters claim that the Netherlands cannot survive economically without the euro. This is a bunk argument for several reasons.

According to the latest Global Innovation Index Score of 2024 from WIPO (World Intellectual Property Organization), Switzerland is the most innovative country in the world. The top 5 also includes Sweden, the US, the UK and Singapore. The Netherlands has once again fallen one place. In 2020, our country was still in fifth place, but it is now in eighth place. The index consists of approximately 80 (sub) criteria. The precise ranking therefore depends on a complex of factors. However, a good case can be made for the ranking of Switzerland.

The Alpine country has high-quality educational and research institutions (such as ETH Zurich and the EPFL), relatively high investments in R&D (especially in the pharmaceutical, engineering and technology sectors), strong intellectual property protection and a stable economic and political environment. Furthermore, Swiss companies often focus on high-tech and precision industries that require a strong emphasis on innovation. In Figure 1, the innovation score is linked to GDP per capita: the more innovative a country, the higher the GDP per capita.

Figure 1

Industrial production

Many euro countries are losing out to the innovation cannons on the basis of industrial strength, and that is not just the top 5, China and Japan. As a former industrial nation, Germany in particular suffers from competition from China in particular due to too much bureaucracy, a still too great dependence on expensive fossil fuels, poorly functioning capital markets and a culture of risk aversion. However, the difference in growth of industrial production between Germany and Switzerland, for example, is becoming very significant.

Figure 2

Positive influence of strong Swiss franc

There is another factor that should not be underestimated that plays into Switzerland's hands: its traditionally strong currency. This ensures lower inflation. Cheaper imports lead to an improvement in the purchasing power of the Swiss and to an increase in the profitability of companies that have to import a lot. The latter benefits R&D. A strong currency is also an incentive to innovate, because otherwise the competitive position could deteriorate. The Netherlands has always been an innovative country due to a strong guilder.

There are also some strengthening effects. Lower inflation and higher innovation increase prosperity in a country, which in turn leads to more opportunities for better education, healthier government finances and cheaper borrowing costs. Financiers are more than happy to lend to reliable partners in strong currencies. A prosperous country also attracts the best people who want to work in a country that leads the way in the field of innovation, education and good living conditions, without the tax burden continually increasing.

Euro is political project

Now let it be clear once and for all. The euro is not an economic, but a political project. It's a deal between Germany and France. German reunification on the French condition of the euro. Economically, we can trade just fine without a common currency. Non-euro countries such as Switzerland and Sweden, just like the Netherlands before the euro, have always done a lot of business with Germany (and the rest of the EU) and continue to do so after the introduction of the euro. Your own currency is no obstacle whatsoever. With well-functioning currency and forward markets, trading in other currencies is not a problem.

Payment with euros abroad has not necessarily become cheaper for private individuals either. Although, as the euro was sold at the time, there are no longer bid-ask spread commissions, but banks have compensated for the loss of currency commissions with 'cross-border transaction fees', 'ATM withdrawal fees' and 'card transaction fees abroad'. And even if currency costs have become lower as a result of the euro, we have still lost out due to higher inflation, partly thanks to the Latin-style monetary policy.

Alternatives

Let Germany and France run the euro together and let all other EU countries join on a voluntary basis if they have structurally proven to comply with the SCP rules (otherwise one currency will not work anyway) and are given the opportunity to leave if the rules are changed. of the game are not observed. However… the euro marriage between Germany and France is complex enough. The differences between Germany and France in terms of monetary, economic, and fiscal policy are actually too great for this.

There are also other 'euro solutions', as previously explained in the column 'To save the euro or not to save the euro, that is the question', for example 'dual currencies' or the Matheo Solution (the euro as a medium of exchange, local currencies as a measure of value).

This article contains a personal opinion from Harry Geels

More columns by Harry Geels