How many of you hear people complain about rising prices or an unstable economy? In today’s western world- whether it is when watching tv or going shopping- inflation is everywhere. European citizens are struggling with the impacts of inflation daily, as the world reaches a record high since the 1930’s, all with the exception of one small European nation: Switzerland.
Inflation can be broken down into a supply and demand issue. American economist Ben Bernanke says that inflation occurs when the quantity of goods demanded at any price is rising quicker than the quantity of goods supplied at that same price. This causes the prices to increase, leading to the value of a currency decreasing. In other words, money doesn’t go as far as it used to. This is caused by three things: Supply (how much and how effectively the economy produces), money (the amount available to people) and expectations (what the public predicts will happen next).
When understanding what inflation is, it’s easier to identify the root of the current problem. To start we have to travel back in time to 2020 and the COVID-19 pandemic. As most of you know, in lockdown everyone was stuck at home, looking for new ways to pass the time, when internet shopping entered the scene. Since most adults were still getting paid a monthly salary, but stuck inside, their savings accounts started to grow. What do you do with this new money and endless hours of boredom? Buy new things, of course! Therefore, the demand for entertainment products grew at an extreme rate, while the supply for these products was decreasing due to the worker shortage and factories being shut down. This combined with shipping disruptions caused increased price chain reactions throughout the whole economy.
The economic difficulties the eurozone was facing were amplified by a certain something called the Russo-Ukrainian war. When Russia invaded Ukraine in 2022, the EU members all sanctioned Russia, cutting off trade with the country. Pre-war, Russia provided 40% of Europe’s natural gas supply. This loss led to European countries having to source natural gases from farther away places, costing more money; creating another large demand and supply margin.
Due to Switzerland’s geopolitical situation, they were in the same boat as the rest of Europe regarding COVID-19 and Russo-Ukraine war, but not inflation as a whole, because the Swiss had a couple aces up their sleeves.
Firstly, Switzerland has a significant trade margin, as they export $305 billion annually, $3 billion more than what they spend on importing goods. This trade surplus means that they have backup resources to deal with economic crises.
Secondly, they do not share currency with the eurozone; instead Switzerland’s currency is the swiss franc. This helped as they weren’t impacted by the euro depreciating. They could import goods from EU nations for better prices, which on a massive scale results in a significant amount of money being saved.
Thirdly, the Swiss partially regulate the markets most vulnerable to inflation: the energy and mortgage markets. By having the state place regulations on these markets they are less exposed to extreme changes, giving the citizens time to adjust. Switzerland is also less reliant on natural gas imports as they produce hydroelectricity.
In conclusion, while the root causes of today’s inflation also impacted Switzerland, the Swiss managed to handle the crisis by applying state regulations on the key problematic markets, having a significant import/export margin and keeping their currency stable.
It’s safe to say that other European countries have something to learn from the way Switzerland has and is handling this economic crisis.
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