Great conflagrations sometimes have obscure beginnings. This week's announcement from the Swiss National Bank that it will intervene in the currency markets to bring down the value of the overheating Swiss franc may seem like a rather arcane piece of economic news to most people. But it could have dangerous, and far-reaching, consequences.
Investors have been furiously buying up Swiss francs over the past year because they regard the currency as a safe haven from the growing uncertainty threatening economies across the world. In such a context, the Swiss authorities are justified in their move to bring the value of the currency back down to earth. The franc is clearly overvalued when the relative price of goods in Switzerland and its European neighbours are compared. Worse, the high value of the franc is severely harming Swiss exporters.
The concern is that other countries might not be so reasonable, that the Swiss central bank's move could trigger a round of beggar-thy-neighbour currency interventions around the world. Japan –which is another nation whose currency has been appreciating as investors flee to perceived safety –might well follow the Swiss move. The fear is that other nations will then pile in with their own interventions to increase their share of a shrinking global export market.
The appreciation of the Swiss franc is a symptom of the wider panic about the future of the eurozone and the apparent inability of politicians to agree on a way to prevent the developed world slipping back into recession.
The shot fired in the currency wars by Switzerland this week is one more ominous indication that the efforts of world leaders to get to grips with the economic crisis are running out of time.