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Mostly Economics: Swiss Tourism Suffers as Franc Value Rises.

India, Aug. 21 -- Jack Ewing of Economix reports this interesting development.

Exporters in any country are susceptible to currency fluctuations, but in Switzerland the effect is particularly extreme. The strong franc, which has risen more than 10 percent against the euro this year, has made Swiss chemicals, machinery and watches-the country's three most important exports-more expensive for foreign buyers.

The strong franc, pushed upward by Switzerland's relatively healthy growth and its status as a haven from financial turmoil, has also had a negative effect on a sector most people don't think of as an export: tourism.

Economists classify tourism as an export when the tourists come from abroad. In Switzerland, the tourism industry accounts for 3.4 percent of gross domestic product, according to economists at UBS. But because tourism is labor intensive, it has an outsize effect on the job market. Tourism accounts for 6 percent of employment in Switzerland, more than 200,000 full-time jobs or four times as many as watchmaking. Tourism is also a crucial source of employment in rural areas where there are few other alternatives.

After declining steadily since 2008, the tourism industry this year has recovered slowly even as the rest of the economy grew briskly. Overnight stays in Switzerland rose 1.3 percent nationwide through May while the overall economy grew at an annual rate of 2.2 percent in the first quarter, according to UBS figures. And most of the increase in hotel guests came from business travelers in major cities like Zurich and Geneva, while the number of visitors fell in regions such as Tessin, in southern Switzerland. In Graubunden, which includes well-known destinations such as St. Moritz or Davos, the number of visitors rose only 0.4 percent despite good skiing conditions.

The importance of tourism to Switzerland helps explain why the Swiss National Bank went to extraordinary efforts this year to try to prevent the franc from strengthening too quickly against the euro. While the strong franc is also tough for manufacturers, Swiss companies tend to make highly specialized products where price is less of a competitive factor.

Tourism is highly price sensitive. The Swiss Alps must compete with neighboring Austria, Italy, France and Germany, which also offer plenty of mountains and ample opportunities for skiing and hiking. The neighbors all belong to the euro area, which is also where most Swiss tourists come from, and enjoy a natural price advantage.

Unfortunately for Switzerland's 5,000 hotels and resorts, the Swiss National Bank's currency interventions ultimately failed to check the franc's rise against the euro (though some economists argue that the bank did slow the increase and give businesses more time to adjust).

The Swiss National Bank is effectively out of ammunition after printing money to expand its foreign-currency reserves from less than 50 billion francs in early 2009 to 239 billion francs in May. The central bank reported a loss of 4.2 billion francs on its investments in the the second quarter of 2010, because of the decline of the value of its euro holdings.

Swiss hoteliers are responding by cutting prices and in some cases quoting prices in euros, while promising that the cost won't change even if the exchange rate does, according to a recent UBS study. They can also take some comfort that the dollar, after falling against the franc earlier this year, has risen again. American citizens make up the second-biggest group of tourists in Switzerland, after the Germans.

Other than that, about all Swiss hoteliers can do is pray for falling snow-and a falling franc.

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Date:Aug 21, 2010
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