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A year ago, Switzerland, arguably the world’s most stable and prosperous economy, shocked the world.

On January 15 2015, its central bank abandoned the cap it had imposed on the franc’s value against the euro. Within hours, the Swiss currency had leapt as much as 40 per cent against the euro and dollar. The moves ranked among the biggest financial shocks of recent years — and the global standard has been pretty high since 2007.

The Swiss feared the worst for their economy. Would a much-stronger franc wreck export sales? How would its watchmakers, or ski resorts survive?

A year on, Switzerland is in better shape than expected. Last January’s “Frankenschock” proved less damaging than feared partly because it lost intensity. Thanks to the dollar’s strength, the franc surrendered its gains against the US currency, although it remains more than 10 per cent higher against the euro.

Local manufacturers such as watchmakers, which lost competitiveness, were the worst hit. Swiss unemployment has risen. But at less than 4 per cent of the labour force it is still below levels seen during the post-2007 financial crises and remains the envy of other European countries. Meanwhile, higher local costs were largely irrelevant for Switzerland’s large multinationals given the economic turbulence elsewhere in the world.

With the strong franc slashing import costs, annual inflation fell to minus 1.1 per cent last year. So far, however, Switzerland has also avoided dangerous “deflation”. While some costs have fallen drastically — Credit Suisse reckons new cars are 17 per cent cheaper than in 2011 and TV screens cost 40 per cent less — prices have risen for domestically-oriented services such as restaurants.

But all is not necessarily well in the Alpine economy. Frankenschock has still had a powerful impact. Economic growth slowed to less than 1 per cent in 2015, the weakest since 2009. Moreover, the effect on investment and long term recruitment decisions may have yet to feed through. Swiss policymakers, including at the Swiss National Bank, worry about the distortions created in the financial system by negative interest rates imposed by the central bank in an attempt to weaken the franc.

A longer term worry is of Swiss “deindustrialisation” akin to that seen in the UK since the 1980s. Steep franc appreciations, however, are not new for Swiss industry; they have punctuated the past half century. Arguably they simply encourage innovation and flexibility, enabling Switzerland to keep a world-beating lead in manufacturing.

Frankenschock was a price Switzerland paid for retaining its own currency; the SNB was unable to combat European Central Bank actions to weaken the euro.

Switzerland’s determination to preserve its independence creates an additional risk hanging over the economy. The country is not a member of the EU, but depends hugely on access to EU markets. This year it must renegotiate its relationship with its big neighbour

After a 2014 referendum vote in favour of tougher immigration controls, Swiss politicians must in the next 12 months implement curbs on EU migrants. The difficulty they face is squaring that with the EU principle of the free movement of people. Switzerland’s trading relationship with the EU is based on a web of bilateral contracts. In a worst-case scenario, those contracts could be terminated.

Failure to secure future access to EU markets and recruit skilled labour would pose a threat at least as great as a soaring currency. The uncertainty already worries Swiss business leaders.

Their assumption is that a pragmatic solution will be found; both sides would have much to lose and the EU has bigger problems to resolve without picking on tiny Switzerland. But symbolically, Johann Schneider-Ammann, Swiss president, will spend the Frankenschock anniversary on Friday in Brussels meeting Jean-Claude Juncker, European Commission president. Reaching a deal with the EU, a government spokesman says, “is probably the biggest challenge facing Switzerland in 2016”.

ralph.atkins@ft.com

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