Switzerland, the nation that hasn't gone to war with a foreignpower since Napoleon, is reluctantly debating a generational taboo:ceding monetary independence to win a battle over its runawaycurrency.

Swiss National Bank Vice President Thomas Jordan said thecentral bank is assessing “a whole range of options” to prevent thefranc, which reached a record against the euro this month, frommaking Swiss goods prohibitively expensive. Even a cup of coffee atCafé St. Gotthard in Zurich costs $8.30, with one Swiss francbuying $1.2816 at today's exchange rate.

Billionaire entrepreneur Christoph Blocher, one of thepoliticians who called on SNB President Philipp Hildebrand toresign after the bank lost $21 billion last year in a vain attemptto restrain the currency, now supports a franc target.

“The franc is catastrophically overvalued,” said Blocher, aformer justice minister for the People's Party, Switzerland'slargest. “It's almost like economic warfare — to wage a war, youmust use all measures at your disposal, and you must win.”

Switzerland's currency is 39 percent overvalued against theeuro, based on purchasing power parity as calculated by theOrganization for Economic Cooperation and Development. That's “aheadache,” according to ABB Ltd., the world's largest maker ofpower-transmission gear, which responded by buying more parts fromeuro-region suppliers to feed its Swiss factories. Workers at LonzaGroup AG, a Basel-based chemicals maker, are working longer hourswithout extra pay, while VonRoll Infratec AG, a maker of pipingsystems, is paying some salaries in euros.

'Drastic Decisions'
“If the franc can't be weakened, many machinery makers will have totake drastic decisions this fall,” Economiesuisse, the country'sbiggest business lobby group, said. The Swiss currency appreciatedas much as 1.3 percent today, trading at 1.1181 at 1:48 p.m. inZurich, up from 1.1329 yesterday. Versus the dollar, it was at77.86 centimes.

The franc, considered a haven in times of turmoil, hasappreciated 11 percent versus the euro this year, reaching a record1.0075 on Aug. 9. Against the dollar, it appreciated to an all-timehigh of 70.71 centimes earlier this month. A visitor to a Swissbranch of McDonald's Corp. pays 128 percent more for a Big Mac thana U.S. diner, up from a 72 percent premium a year ago, according toa Bloomberg index that measures burger prices in dollars, based ondata collected by “The Economist.”

Zurich is already the world's second-most expensive city afterOslo, a study conducted by UBS AG showed today. Zurich residentsalso had the highest wages and purchasing power, it said. Genevaranked third in terms of prices.

'Generalized Fear'
The Swiss governmentand the central bank held “intense” talks over a possible franctarget and measures are ready to be adopted this week,SonntagsZeitung reported on Aug. 14, citing people familiar withthe situation. The SNB may introduce a lower limit of slightlyabove 1.10 against the euro before gradually increasing it,according to the newspaper.

“We have to find ways to further improve efficiency and hopethat the franc will return to normal, which it will do eventually,”said Mehdi Barkhordar, managing director at Produits ArtistiquesMetaux Precieux, a Geneva-based precious metals refiner and traderknown as PAMP. “Everyone in the world is panicked. It's the fashiontoday because of the climate of generalized fear.”

Daniel Kalt, an economist at UBS in Zurich, sees anexchange-rate target versus the euro along with purchases offoreign currencies as a way to stop investors from piling into thefranc. The Zurich-based central bank was last forced to commititself to an exchange-rate target in 1978, when it strapped itsexchange rate to Germany's deutsche mark.

October Elections
Lawmakers, facinggeneral elections in October, have joined executives in signalingincreasing concern about the franc's ascent. Swatch Group AG ChiefExecutive Officer Nick Hayek and Credit Suisse Group AG ChairmanUrs Rohner attended a meeting with Swiss Economy Minister JohannSchneider-Ammann on Aug. 2 in Bern, according to Neue ZuercherZeitung. The participants all pledged to back the SNB, the reportsaid.

Schneider-Ammann said after the meetings that the central bank“wants to feel that it's being supported on significant decisions.”The franc's strength will be on the agenda when the sevengovernment members meet on Aug. 17.

“Corrections will only be sustainable if the SNB swiftly followsrumors with actions, or else it will be regarded as toothlesstiger,” said Ulrich Leuchtmann, head of currency strategy atCommerzbank AG in Frankfurt.

Pride in Franc
With exports contributingabout half of gross domestic product, Swiss companies includingNestle SA, the world's biggest food company, and UBS, the country'sbiggest bank, are under increasing pressure to cut costs tomaintain margins.

Goldman Sachs Group Inc. earlier this month cut its Swiss growthforecasts for this year to 1.9 percent from 2.1 percent, and fornext year to 0.6 percent from 2 percent. The “chances of the realeconomy emerging unscathed are remote,” economists Dirk Schumacherand Adrian Paul said.

“I'm proud of the Swiss franc, but something needs to be done,”said Peter Seid, 70, a retired teacher from Winterthur,Switzerland. “Otherwise, people will face pay cuts, or if thesituation persists, they might even start losing their jobs.”

The SNB has been reluctant to purchase foreign currencies afterattempts to weaken the franc in the 15 months through mid- June2010 caused a record loss last year. Social Democratic lawmakerSusanne Leutenegger Oberholzer said as recently as last month ifHildebrand “isn't in the position to get the exchange rate undercontrol,” he should step down.

Right Timing?
While it has shed about 3.5percent against the euro since the SNB's surprise rate cut on Aug.3, the franc has strengthened 7.2 percent over the past two monthsas European leaders struggled to contain the debt crisis. That willmake it hard for the SNB to prevail, said to Alexander Krueger,chief economist at Bankhaus Lampe KG in Dusseldorf.

“As long as people are concerned, the franc will continue toappreciate, probably beyond parity” with the euro, he said.“Currency interventions wouldn't be enough to counter this extremerisk aversion. The SNB is rather powerless.”

Policy makers are ready to “act as soon as we're convinced thatit's the right time,” Jordan at the SNB told Tages- Anzeiger in aninterview published on Aug. 11. He also said that “any temporarymeasures” to weaken the franc are possible, when asked about acurrency peg to the euro.

Ashraf Laidi, CEO of Intermarket Strategy Ltd. in London, sees acurrency peg as “far from practical,” while Simon Smith, chiefeconomist at FXPro Financial Services Ltd. in London, said acurrency target would be hard to impose while the franc remainsstrong.

No Panacea
“If the franc is as overvaluedas the Swiss authorities currently believe, then this would have tobe rectified somehow before a peg could be instigated,” Smith said.“The final issue is that, with sovereign risk factors being such apowerful force on currencies, it's quite difficult to see how theSwiss could stand side-by-side with the euro in the comingyears.”

With all four main government coalition parties now willing tosupport renewed currency purchases, the SNB may find it easier toaccelerate its efforts, said Adrian Vatter, a professor ofpolitical science at the University of Bern.

“Swiss parties are eventually uniting behind the government andthe central bank,” Vatter said. “This will strengthen the SNB'scredibility and give it the backing needed for setting anexchange-rate target.”

Swiss Battle
Swiss soldiers were lastengaged in battle on Swiss soil in 1798/99 to fight the advancingarmy of Napoleon Bonaparte. The Swiss defeat led to the collapse ofthe old Swiss Federation.

Christophe Darbellay, head of the Christian Democratic Party,told Bloomberg News in a telephone interview that “we need to doeverything we can to fight the franc's ascent given this difficultsituation,” saying there is no “taboo.”

The central bank may have to spend between 200 billion ($251billion) and 300 billion francs to defend any target, said Kalt atUBS. “The SNB would have to keep intervening and defending itslower target for as long as it takes,” and “it would be a high-riskgame.”

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