Economics and politics - comment and analysis
21. January 2021 I Heiner Flassbeck I Economic Policy, Economic Theory, Europe

Switzerland is a currency manipulator

Cross-posted from Brussels Morning (


There is no doubt that Switzerland is a currency manipulator; whether its behaviour is wrong or right is less clear. There are other surplus countries  (with consistent current account surpluses) that also manipulate currencies and the US supports speculation, the biggest manipulator.

The US Treasury released its annual report last month, examining global trade and financial relations to see if there is manipulation of currency relations causing unfair competition for producers of American goods and services.

Unusually, it found this time that Switzerland and Vietnam have been explicitly declared currency manipulators. As a result, the US will likely press these governments into dialogue to determine possible remedial action for these ‘abuses’. Although Germany is also a candidate for currency manipulation (it is considered undervalued), it is not quite a manipulator as the European Central Bank has not intervened in the foreign exchange market since 2001.

There is a ‘small’ problem with this approach, however. The so-called rules the US government has insisted on being observed do not exist. There is no international agreement the US government can invoke should it detect ‘misconduct’ from its trading partner.

Trade disputes would have to be settled by the World Trade Organisation (WTO), which has never been interested in questions over the development of currency relations and has not received a mandate from member states to do so, even though distortions in exchange rates have certainly been the most significant of trade distortions  the past 50 years.

The International Monetary Fund (IMF), responsible for currency issues, still holds the dogma that ‘efficient financial markets’ are capable of finding suitable currency relations. That is why it has never investigated the role of currency fluctuations distorting trade flows.

Paradoxically, it is precisely the American government that has encouraged such a stance for many years. That the American government is explicitly representing Wall Street’s interest, whose internationally active banks earn ‘nice money’ with foreign exchange transactions, is completely undisputed in informed circles.

The Americans have a point

Nevertheless, the Americans have a point: if a country that has been running high trade and current account surpluses for years constantly ensures that its currency does not appreciate further, everything suggests that this is a currency intervention to maintain its own surpluses and, therefore, the deficits of others.

That is why it is downright ridiculous for the Swiss to argue that the current account surplus results from ‘high savings rate’ and rather than an undervalued currency. Economies that run surpluses take in more than they spend. If one calls this behaviour ‘saving’, then the statement that economies that save have surpluses and those that do not save have deficits has no content. By the same logic, one can say that economies that export more than they import have surpluses and vice versa.

What to do with global savers

The question is how to get countries on the same page globally when it comes to savings behaviour. Certainly, globally not everyone can save in the manner described. The world’s saving is always exactly zero and getting every country in the world to become savers is unfortunately impossible.

If each country did try to build up surpluses, however, there should be a mechanism to ensure on a global level there is a balanced current account. The struggle for current account surpluses (unlike all trade) is a zero-sum game internationally. It is, therefore, imperative that some countries abandon the idea of running current account surpluses. But how do you get them to do so against their will?

It can only be done through a mechanism that itself has a zero-sum character, i.e., always takes from one what it gives to the other. This mechanism is about real exchange rate changes, i.e., changes in the competitiveness of countries. This price regulates the conflict between saving countries’ intentions and can be done rationally or chaotically.

How can we prevent currency wars? 

The rational response would be to reach an international agreement that ensures real exchange rates and the competitive relationships between countries do not change at all over time. The chaotic response would be to leave exchange rate formation to the markets and intervene in the markets without any international agreement when currency relations arise that are completely unsustainable for one side. Then exchange rates are also exposed to the political power game, where, in the end, the strongest wins.

A pragmatic solution to this difficult situation would start with the surplus countries admitting there is no justification for surpluses and permanent absolute advantages in international trade. The deficit countries, for their part, would have to admit that the financial markets do great damage in trading currencies and often create a situation where even unilateral intervention by an appreciating country can be justified to prevent excessive appreciations.

This fix could even support the American position if the US were to concede that it is inevitable for Switzerland, like many other countries (Brazil is a striking example), to stand up to the markets when exchange rates go in the completely wrong direction. At the same time, the US would insist that the emergence of absolute advantages in international trade through undervaluation and the resulting surpluses in the current account (as is the case for Germany, the Netherlands, Sweden or Switzerland) must be nipped in the bud by the international community.

In a new international order, the US, together with other important members of the WTO, would declare war on currency speculation. They would destroy this primitive but extremely profitable business model once and for all by ensuring that inflation differences between countries are always and everywhere immediately compensated by exchange rate adjustments. They would also stop countries that engage in wage dumping within a monetary union (such as Germany and the Netherlands) by imposing trade sanctions.