The currency market, also known as the foreign exchange market, has recently reached a significant milestone with the exchange rate of the Swiss franc against the euro rising to the so-called “parity”. This means that now one Swiss franc can buy one euro. Ten years ago, you would have needed one and a half francs to buy one euro. We can certainly recall an episode that occurred back in 2015 when the Swiss franc briefly jumped by more than 20% in a single day. But it was just an episode in history (see Figure 2 below). Now this rise in the franc exchange rate looks much more sustainable.
From a long-term perspective the Swiss franc has been the most stable “paper” currency. Certainly, it cannot compete with gold. Still, in the past 50 years the exchange rate of the Swiss franc against the US dollar has appreciated by about 80% (see Figure 3 below).
You can say that this is because Switzerland is extremely rich (see Figure 4 below). That is true. Data from the Swiss National Bank, as published by expatica.com, shows that Swiss residents have assets averaging 460,000 francs (475,000 US dollars or 465,000 euros). In total, there are 800,000 millionaires residing in a country of fewer than nine million people. Furthermore, the data also shows that that Switzerland accounts for 1.7% of the world’s wealthiest 1% of people. This is despite Switzerland having just 0.1% of the world’s population.
It can be assumed that this has always been the case and there is nothing extraordinary here. However, history suggests that the Swiss case is not so simple and obvious since the standard of living in Switzerland before World War I was either lower or comparable to the standards of living in many other Western European countries (see Figure 5 below).
How did Switzerland manage to become a leading nation in terms of wealth over the past hundred years? And how did its currency manage to achieve the status of “paper gold”?
Let’s dive into some macroeconomic theory. It states that a country’s foreign exchange rate depends on two factors, namely, its current account balance and its capital and financial account balance.
1. The current account balance reflects the balance of cash flows generated by the real sector of the country’s economy in its dealings with the outside world. The lion’s share of the current account balance is usually generated by the trade balance. For example, if the volume of exports of goods and services of some country significantly exceeds the volume of its imports then it accumulates a surplus in terms of foreign exchange or foreign currencies. In turn, this has a strengthening effect on the exchange rate of its national currency.
Switzerland’s current account balance and trade balance have been substantially positive for many years (see Figure 5 below). And their sizes are significantly larger than those in other countries. In other words, the volume of goods and service sold by the Swiss to foreigners substantially exceeded the volume of imported goods and services.
2. The capital and financial account reflects the balance of cash flows generated by the financial sector of the economy resulting from its transactions with the outside world. If the surpluses generated by the real sector of the economy are invested abroad, then the country has no reserves left. On the contrary, if funds invested by foreigners in the country are added to the surpluses generated by the real sector, this leads to the accumulation of huge foreign exchange reserves. This is exactly what Switzerland was experiencing for a long time. Foreigners were happy not only to buy Swiss goods and services, but they also were quite happy to invest their money in Swiss companies or deposit it into Swiss bank accounts. As a result, the country with less than 9 million inhabitants has accumulated gold and foreign exchange reserves amounting to 1.083 trillion USD (see Figure 7 below).
How did Switzerland manage to achieve this enviable position of being able to sell its goods and services so successfully?
First, for many years they have been working HARDER than others (see Figure 8 below).
Second, they were working MORE PRODUCTIVELY than others (see Figure 9 below).
Third, they were SAVING (see Figure 10 below) rather than spending money on consumption.
Fourth, they were INVESTING their savings in innovation and infrastructure (see Figure 11 below).
As we all know, however, the “patience and hard work always pays off” mantra only partially reflects real-life situations. In addition, you need to pursue an adequate domestic and foreign policy.
Domestically, Switzerland has maintained a relatively stable political environment for more than 170 years (see Figure 12 below). And this is despite the fact that the country is a mixture of ethnic groups, languages, religions and cultures. There are three main ethnic groups living in the country. There are also four official languages (German, French, Italian, Romansh), while the number of the population of foreign origin is approaching 30% (see Picture 13 below).
The use of English in communication between different ethnic groups of the country, as strange as it may seem, is perceived relatively calmly, despite the high percentage of socially conservative rural population (see Figure 14 below).
The history of Switzerland has not always been so peaceful. However, after the last civil war of 1847, the country’s political elite came to the realization that to maintain peace and domestic neutrality within this conglomerate of ethnic groups, languages, religions and cultures is the most sustainable strategy from a long–term perspective (see Figure 15 below).
In its foreign policy Switzerland chose to pursue a similar strategy of neutrality as well. It did not participate in either World War I or World War II, despite the fact that it was surrounded by warring countries on all sides. After all, it is convenient for everyone to have a quiet, nearby “safe haven” where many languages are spoken, where you can conduct negotiations, where a foreigner can live without attracting any attention or where you can just park your money to keep it away from envious eyes and grabbing hands.
That is true that living in such a country is obviously not cheap (see Figure 16 below). However, the Swiss are not overly bothered. And they still feel much happier than those living in most other countries (see Figure 17 below).
What conclusions can you draw for yourself after reviewing the Swiss experience of the last 100 years?
If you want to become rich the Swiss way then you need to adhere to the following life and financial strategy:
1. Work hard. It sounds old-fashioned, but to achieve a better result in terms of quality you need to put more effort in terms of quantity.
2. Continually develop your knowledge, skills and experience. You should be able to do something better than others.
3. Avoid overspending on consumer goods and stick to saving your money. Debt will not help improve your standard of living in the long run. A sustainable rise in the standard of living can only be achieved by increasing your labor productivity. Both economic theory and common sense confirm this fact.
4. Invest your savings to improve your health, education and competitiveness.
5. Your family life should be peaceful. Be flexible in your relationships with family members, friends and neighbors. You may have your own principles, but do not try to impose them on others. You cannot choose your family. That is why it is better to maintain friendly neutrality in relations with family members. But you can choose your friends in accordance with your life principles and priorities.
6. In your workplace and business relationships try not to take sides. In doing so you will always remain a person with whom other people would be prepared to cooperate, share their secrets, start common projects and in whom they would be willing to invest their money.
7. Whether you are a socially conservative person or a “liberal hawk”, be tolerant in your workplace and business relationships. Otherwise, personal political attitudes and social preferences will prevent you from making sound business decisions.
The Swiss way of becoming rich may certainly seem boring and may not be suitable for everyone. For example, despite the highest standard of living, the Swiss are more likely to use public transport than other Western Europeans (see Figure 18 below). No doubt that this culture of quietly accumulating wealth may be unappealing to many.
That is why if you are not happy with the prospect of living the life of a modest Swiss millionaire who does not view public transport with disdain and who also prefers to keep a low profile, then the “Swiss way” is not for you.
But don’t feel overanxious about this situation. After all, the ultimate meaning of human life is not to be rich but to be happy. And every individual has his or her own definition of happiness and his or her own way of achieving it. And that’s good.