Switzerland is a country with a long and proud tradition of neutrality, but given the perilous state of the surrounding eurozone, it may be find itself in a "currency war" as the Swiss franc strengthens in response to capital inflows.
An appreciation has adverse consequences for Swiss exports, and overall national income. The Swiss central bank combated appreciation with intervention in the foreign exchange market in September, and promises to intervene again if the franc appreciates past Sfr1.20. But Swiss authorities are considering deploying a new weapon as well. Last month, Thomas Jordan, the head of the Swiss National Bank, indicated that he was prepared to use capital controls.
The currency war facing Switzerland is reminiscent of the appreciation of the Brazilian real in 2009 and 2010. Mr. Jordan's proposed use of capital controls echoes the Brazilian response. He would be wise to consider that experience, and its lessons about the efficacy of capital controls. Capital controls offer a limited capacity to prevent appreciations in emerging market countries. They are likely to be even less effective for Switzerland.
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