"The euro is a marriage where divorce is not an option"
There is no way out of the Euro, says Jean-Pierre Roth. “The chaos would be overwhelming”. The former president of the Swiss National Bank in a wide-ranging conversation on Switzerland, the euro crisis and the future of banking.
Mr. Roth, on January 15 the Swiss National Bank decided to discontinue the minimum exchange rate between the euro and the Swiss franc. Do you know of any similar incident in history?
Jean-Pierre Roth: Yes, our exchange rate regime has been adjusted before. For example: The SNB decided in 1973 to no longer peg the franc to the dollar. Within six months the dollar lost more than 25 percent of its value.
What consequences will the discontinuation of the minimum exchange rate have by the end of the year?
Our economy is extremely adaptable. Early estimates show that there will be an economic slowdown, and we can weather that. The export economy must rely more than ever on innovation and high quality. Certain activities will likely be transferred abroad.
How would you classify the current shift in monetary policy?
I see parallels to the seventies: Switzerland is an island of stability in a turbulent financial environment. It is suffering as a result and can barely fight back.
How important is the strong franc for the identity and solidarity of Switzerland?
Hard currency is an economic reality. It reflects the healthy status of our public finances, the high savings ratio in Switzerland, the strong competitiveness of our export industry, the low inflation. In a word: it's a distinction, not a curse!
Is the hard franc good or bad for the Swiss financial center?
Above all, the financial center's success is a result of good services; the Swiss franc plays only a secondary or indirect role here. Ultimately, I would rather have my money handled by people who have their own affairs in order.
What does money mean to you?
When the monetary system doesn't work, the economy is finished – the only thing left will be the exchange of goods. Money is an absolute necessity.
And for you personally?
I save money to prepare for the future. That's why it is so important that money maintains its value.
And that brings us to our topic: Is the euro crisis finally over?
No. The term "euro crisis" is also a misnomer. The finance ministers came up with this term to divert attention away from them. In truth, this is a public finance crisis. National debts in Europe are high, and the outlook is grim. The population is aging; the ratio of the working population to those who have retired will continue to worsen, health care costs are rising. In addition, the economy is growing slowly, but the European countries' social models are based on annual growth of four to five percent. This can't work.
Is there a way out?
We have to work longer and more efficiently. The discussion of retirement age has to be held, everywhere. Thank God it is already quite high in Switzerland. But even here, we should also be able to work longer.
Do we have enough work?
Of course. It is an illusion that the opportunity to work is strictly limited. The pie can grow; we have seen this happen with the strong population growth in recent years – the pie becomes larger and larger.
Other than a higher retirement age, what do we need to manage the crisis?
Social spending has to be curbed. People are being promised and guaranteed too much. Politicians today lack the courage to say, much less to do, anything about this. The picture is the same for labor market reforms. The labor markets have to become more flexible – everyone knows that, but the politicians do not want to tackle this issue.
Is the single currency also a problem?
The euro was necessary within the dynamic of European consolidation.
You don't exactly sound euphoric.
The mistake was that too many countries were included in the euro zone and the criteria for acceptance were not enforced strictly enough.
In order to correct that, a partial return to national currencies or a division of the euro have already been considered.
That won't work. The euro is a marriage where divorce is not an option.
Any marriage can be ended.
No. The Europeans have created a reality that cannot be reversed. The chaos would be overwhelming.
Why did the US recover from the crisis much faster than Europe?
Their labor market is more flexible; their tax system is simpler; they have relatively open borders. Immigration is possible, and the subject is not taboo. Their population is younger. The politicians have made fewer promises and are willing to tackle further reforms. In general, the US is more business-friendly than Europe. And certainly, with the huge domestic demand, the country can also function as a closed economy.
How is Switzerland doing?
Better than the rest of Europe in many respects. Our labor market is relatively flexible, we are open to free trade, and we are more globally positioned than our neighbors. But the crisis in Europe still affects us, of course. The fact that our neighboring countries are not doing well is the worst scenario for us.
What can you conclude from this?
In any case, we must reduce our dependence on Europe. Of course, the European market is important – it accounts for 60 percent of our exports. But global competitiveness is of central importance to us, above all considering that the growth markets are outside of Europe. It must be our goal to be good for the world – and then, we will automatically be good enough for Europe, too.
The economic crisis also became a crisis of trust in the banks.
If Roger Federer stops winning tournaments, his salary will decrease relatively quickly. Many people found it inexplicable that a banker could perform his work poorly and still earn a lot of money. I understand this.
Have the banks and the bankers learned a lesson?
Time will show where we stand. But people also have to understand that we are talking about an industry focused on money, unlike manufacturing or the watch industry, for instance. The financier's profession is all about maximizing returns – for his clients, too. But the crisis changed many things, even in the legislative framework.
Many things have been regulated lately – is it already too much?
Sometimes I actually wonder whether all these new rules are necessary, whether anyone even grasps it all and whether they understand the costs associated with these rules. There probably has been some over-steering that has to be corrected.
The focus is on higher capital requirements. That is a simple, unbureaucratic means, isn't it?
You are joking, n'est-ce pas? As the president of a cantonal bank, I can tell you that absolutely nothing about this is unbureaucratic or simple. How to measure the capital ratio, how you weight the risk of the assets – these things are terribly complicated. It's easy for politicians to say that the capital ratio has to be at 10, 12 or 15 percent. How a bank is managed, on the other hand, is more important. When the quality of that isn't right, even 15 percent won't be adequate.
The quality of management can't be regulated.
No, that's impossible.
The real problem is the "too big to fail" issue. When a company doesn't do well, it goes out of business. Of course, this is a social problem, but not a catastrophe. We can support the employees; they can look for new jobs. In the banking sector, however, people are afraid to trigger a domino effect. But banks should be able to go out of business just like any other company.
How do you imagine the future of Swiss banking?
Our prospects are quite good in the operational area. Swiss banks are efficient, and in this way the difference to foreign banks is striking. And our quality is high. We are changing with the times; we were the first with the automatic clearing system along with many other innovations. And we foster an open, multilingual culture – these are all good things.
Let's turn to the central banks. Their relevance has grown significantly in recent years; hardly a day goes by without them making an appearance in the media.
To me, this is a sign that the politicians are not doing their work properly. The central banks are having to do it for them.
What do you mean by that?
The central banks reacted quickly and courageously, and with their monetary policy they were able to prevent the financial crisis from deepening into a Great Depression. But structural reforms have to be driven by politicians. What I am seeing today is not good: The central banks are doing a lot, and the politicians do not feel the pressure to do anything themselves.
In order to maintain the minimum exchange rate with the euro, the SNB had to buy hundreds of billions in foreign exchange products. There are some observers who are now warning of inflation. Does that pose a real danger?
No, because it's not like the central bank is injecting money into a void. There is a huge demand for liquidity, and the Swiss National Bank is providing it. The financial institutions want more liquidity on their books, just as many investors are currently holding a high cash position. That is the debit side for the Swiss National Bank, and all of the foreign currencies are on the credit side. When trust returns, the demand will lessen and the SNB can gradually reduce the liquidity. It will issue bonds and absorb the money.
The currency reserves could be invested in a sovereign wealth fund like Norway. Many mainstream politicians have called for this, as have bankers from Vontobel or Pictet.
It's a bad idea! In Norway – a petroleum exporter – the fund was not created from interventions in the foreign exchange market; rather the money comes from the surplus on their current account. That means this is where Norway invests the money it saves. For us, these currency reserves came from a monetary development. If Switzerland were to invest these reserves and then needed them quickly – because the franc was under attack, for instance – what should we do? Sell the Gotthard Tunnel? That won't work. These funds have to remain liquid – and within the control of the central bank.
What options do small-scale investors have?
Diversification is important, and I would keep a good portion of the funds liquid.
Do you hold your money this way, too?
I am very passive in my portfolio management. My account is with a good bank. They make bank notes and don't advertise. [Editor's note: the Swiss National Bank, where former employees can keep accounts.]
Is there a threat of bubbles?
When the interest rate is so low, certain asset classes will be overvalued because investors do not know where else to put their money. That is a reality that leads to bubbles. Why did the stock market do so well last year? War almost broke out in Ukraine, oil prices were at rock bottom, Chinese growth figures were low, Europe was trapped in stagnation. But the stock markets were booming. How can this be true? In a zero-interest rate world, many things are distorted.
University research, SNB, Banque Cantonale de Genève, member of various high-ranking boards of directors – what is the common theme throughout your career?
My commitment has never changed: I will dedicate my whole life to working for Switzerland. After the SNB, my position at a cantonal bank was an acceptable alternative; I did not want to stray too far from the public sector. And my other directorships are in major international companies where I can contribute my vision of Switzerland.
You come from Saxon near Martigny – why is it that so many successful Swiss people come from Valais?
Because the canton is poor! We have to leave the canton and find our success elsewhere. If you are born in Zurich, you can just stay in Zurich – that's much too easy.
This interview was conducted on December 5, 2014 and supplemented on January 19, 2015.