The Swiss are disturbed by Europe’s efforts to deal with the crisis via liquidity injections.

Go figure: Switzerland is becoming just like China! No, not because the country has degraded to the statism of the 1930s in all aspects of social life from health to the freedom of the press and expression. They also do not have a minister of health who would dare say, “If necessary, we will take children from their families and raise them ourselves as the state.” And the sad part is, no one says in response, “Take a look at the orphanages, first. They are full of good citizens and they are looking for new ones, right?” Meanwhile, Switzerland is considering imposing capital controls as the world is shaken by the risk of a new Eurozone crisis. Taking it one step beyond, they already have set up a task force to take the necessary steps including those on capital controls. Of course, we do not need such measures as Turkey’s economy is strong and firm. We are planning to pay off our debt to the IMF. Hence, everything is going like clockwork. The only thing is that the people of Turkey are no aware of this yet.

The terms "Switzerland" and "capital control" in the same sentence shows how serious the issue is. It’s the fifth year of the crisis and we are still very far away from envisaging the normal. Switzerland used to be the high temple of financial freedom. It used to earn profits from the banking system and did not consider imposing capital controls. They were keen on keeping the identity of depositors secret. Today they are discussing imposing capital controls. The crisis has shaken Switzerland’s faith in the market economy.

What is the cause of it? Lately, Switzerland has been suffering from short-term fund inflows. Hot money used to be a malady for countries like Turkey. Now it is troubling everyone. As Europe has been monetizing to manage the crisis, massive cash flows occur toward countries that are doing better. Turkey owes its successful performance since 2008 also to this movement. As investors have started to avoid lending to Greek, Spanish and Italian entrepreneurs, a savings surplus has emerged at Europe. The flow is inevitable if the European crisis is not solved but efforts are made to deal with it via liquidity injections. It was Europe’s incompetence that has enabled Turkey to carry on with a historic imbalance, that is, to finance the current account deficit. As they are continuing to pour water into the leaking bucket, short-term funds keep on flowing towards Turkey and peer countries.

But is Turkey the only recipient of short-term fund surplus? No, it is just one of many. The Koreans analyze any issue starting with hot money inflows. Fund flows are important for them, too. As the Korean Won strengthens, the export giant faces trouble in the shrinking export markets. Similarly, the Swiss are disturbed by the current climate, by Europe’s trying to deal with the crisis via liquidity injections. Everyone in search of a safe haven is taking their investments to Switzerland. It appears that the tendency to transfer savings to Switzerland is as alive as German’s inflation-phobia.

So, what happens at the end of the day? The Swiss Franc strengthens. Since the beginning of 2012, the Franc/Euro exchange rate has been stable at 1.20. Switzerland keeps the rate constant by continuously purchasing Euro-denominated assets. Europe’s savings flow to Switzerland. Thus, the supply of Euro and demand for the Swiss franc increase. The Swiss National Bank purchases Euro-denominated financial assets with the Euro supply. As structural problems remain intact, the Euro inflow continues. Switzerland returns the Euros, but they find their way back to Switzerland. Europeans do not solve but manage their problems. They also have not taken political measures to deepen the integration process. Therefore, Switzerland is not able to prevent the strengthening of the Franc. They said, “If this turmoil continues, we should impose capital controls on the one hand and negative interest on bank deposits on the other.” What else can they do?  They want to stop inflows. They therefore consider raising the cost on deposits. Indecisive Europe is causing Switzerland to lose faith in the market economy.

So, what about Turkey? Will we be affected? The answer is no according to the “we will be fine” lobby. But I think we have to keep in mind that in 2012, Turkey is more vulnerable than it was in 2008. Not only is the current deficit greater. Due to the meaningless tides, the credibility of the Central Bank is not as strong. Moreover, there is a bunch of other countries at the target of global funds and these still perform as well as they did in 2008.

What can I say? If you ask me, I would take the issue seriously.

This commentary was published in Radikal daily on 01.06.2012