Switzerland: an Island in Euroland?
Chairman of the Governing Board Swiss National Bank
Bank of Greece
Friday, 21 May 2004
It is a great pleasure for me to talk to you today about
Swiss monetary policy. Athens is the place to go to this summer. For sure, it
will soon become, once again, a symbol of sport and peace, competition and
Switzerland too will follow the Games with passion. But for
many Swiss, your country is not just associated with sport, it is part of our
culture and part of our history. In fact, Greece and Switzerland have enjoyed
continuing cultural and economic ties over the centuries. Your great statesman,
Ioannis Capodistrias, had retired to Geneva when he was elected Head of State of
the newly created Greek Republic in 1827, and he was named honorary citizen of
Lausanne and of Geneva. His friendship with the banker Eynar contributed also to
the foundation of the National Bank of Greece. Later, the relationship between
Greece and Switzerland strengthened further when both countries became members
of the Latin Monetary Union. The Union, which led to the setting of a fixed
exchange rate between Greece, Switzerland, Belgium, France, and Italy, was the
first attempt in continental Europe to create an extended area where gold and
silver coins could circulate freely.
While Greece, with its strategic position between Asia and
Central Europe, has long been exposed to commerce, Switzerland, a country
without natural resources, has in some sense been forced to embrace trade in
order to survive. Switzerland has now become a global player. Today, the "cliche"
of Switzerland as an isolated country with its citizens "entrenched in the
Alps, living happily and looking after their cows" totally belies the facts.
We tend to easily forget that exports of goods and services
account for more than 40 percent of our gross domestic product and that the
European market absorbs about twothirds of our exports. The presence of Swiss
firms in European countries is also very pronounced, with more jobs created
abroad than at home in recent years. In 2002, Swiss direct investments in Europe
represented around 7 billion euros, i.e. 13.5 percent of total investments in
Switzerland, and Swiss firms employed close to one million people in Europe,
equivalent to about one quarter of Swiss employment. Around 9'000 of those
employees are living in Greece.
My purpose here is not to brag about the Swiss economy, but
to emphasize the fact that Switzerland is very open to international trade,
investment, and migration, and that our economy is very integrated in the global
economy and intimately linked to the euro zone.
Swiss Monetary Policy
With those facts in mind, you might wonder whether
Switzerland, a highly integrated country surrounded by trading partners sharing
the euro, can still follow an autonomous monetary policy. What are the
consequences of the introduction of the euro on the Swiss franc and on the
effectiveness of Swiss monetary policy? And what are the effects of this new
international monetary order on countries outside the dollar-euro block more
I will try to provide some insights on these questions today.
First, I will present the change in monetary framework due to the introduction
of the euro. Then I will enumerate the main fears that we originally had
regarding the effects of that transformation, and our experience with the new
environment over the past 5 years. Finally, I will share some lessons on the
influence of the introduction of the euro for the international monetary system
and for the autonomy of Swiss monetary policy.
1. A New International Framework
January 1, 1999, constituted a true revolution for Europe.
Many observers argue that the introduction of the euro represents the major
postwar stage in European integration. They are right. The Maastricht Treaty, by
removing national currencies and defining budgetary rules, lead to an important
transfer of power from national capitals to European institutions. The French
franc, the Italian lira, and the German mark were all symbols of national
identity. The euro is now playing an integrating role in people's minds. In this
regard too, the new currency brings a revolutionary dimension. Is it not the
case that national currencies were almost always and everywhere brought about by
fundamental political changes? Let us not forget that the Greek Drachma was
launched after Capodistria's assassination and Greece's switch to a monarchy,
the French franc was the "franc Germinal", the Italian lira was
created with the Italian unification, and the Reichsmark appeared in 1873 at the
foundation of the German empire. These are very strong symbols indeed.
For Switzerland too, the introduction of the euro was a kind
of revolution. For the first time in our history, our country was completely
surrounded by a single currency area. In terms of population, Switzerland, with
its 7 million inhabitants, could be compared to Missouri in the middle of the
United States. Just try to imagine Missouri with its own currency! Although
perhaps my good friends and central bank colleagues from the Federal Reserve
Bank of St. Louis would not mind all that much! Until 1999, we had been living
amidst very diverse European currencies. In fact, our country had always
lamented about this situation. Indeed, given our large export sector, we could
only dream of a stable monetary environment without exchange rate fluctuations,
which interfere with economic decisions and price comparisons. Among our earlier
efforts, I should mention here, not only our participation with Greece in the
Latin Monetary Union, but also steps towards close cooperation between
Switzerland and the European Monetary System in the mid-1970s, steps which
remained, however, without concrete results.
A common misrepresentation should be corrected here, that of
Switzerland somehow benefiting from external monetary disorders. The notion that
the welfare of a country boils down to the short-run profits of a few foreign
exchange dealers is narrow minded. The reality offers a completely different
picture. Switzerland has always suffered from external monetary turbulences and
always wished for a stable monetary order. For example, the various crises of
the European Monetary System in the 1990s, with a dramatic drop of the Italian
lira, have led to the complete removal of the traditional textile industry from
our economic geography. Such structural adjustment could arguably have occurred
anyway, but the decisive factor at the time was of monetary origin.
The purpose of the creation of the common currency was not
only to concentrate the monetary power in the hands of the European Central Bank,
but also to promote the conditions for transparency and competitiveness that
would in turn foster trade, investment and growth in the internal European
market. Price comparisons are indeed easier today, andtrade and liquidity
management are much simplified, although it is still too early to numerically
assess the impact of these effects on growth.
Simplifying trade and investments in the European market not
only benefits members of the European monetary zone, but it also helps anyone
interested in being active in the European market. Switzerland, with its high
degree of integration in the euro zone, reaps large benefits from this stable
situation. Thus, it is clear that on those aspects, the introduction of the euro
was very good news for the Swiss economy.
2. Potential Drawbacks of the New Framework on a Small Open
But would the introduction of the euro be only good news for
the Swiss economy?
A revolution is always associated with risks and
uncertainties, thus it should not surprise you that we were concerned about
potential negative developments.
In the mid-1990s, as the European monetary construction was
under way, we tried to imagine the potential negative effects of the euro
introduction on the Swiss economy. Our goal was to be prepared to face difficult
situations. This is what central bankers are paid for, after all. We had
identified three main challenges:
a) First, the major risk was that the introduction of a
European currency would destabilize the Swiss franc. In the past, the Swiss
franc, along with the German mark, played the role of a safe haven currency
whenever monetary crises occurred. With the disappearance of the German currency,
the Swiss franc would find itself first in line of fire in case of a dollar
crisis, for example, or even worse, in case of doubts about the stability of the
b) Second, we risked seeing the euro being increasingly used
as a means of payment in Switzerland. As the common currency was about to become
the main unit of account for our exports, we feared that domestic firms might
adopt the euro as well, so as tominimize exchange rate risks. Some were even
imagining wages being paid in euros. If use of the franc were to be crowded out
by the euro, the Swiss National Bank would have had little leverage left to
influence monetary conditions in our own country. It would become a paper tiger!
c) Third, even short of a "euroization" of the
Swiss economy, we feared the loss of our monetary autonomy. Given the importance
of the common currency for the Swiss economy, what else could the Swiss National
Bank do other than follow the European Central Bank's monetary policy and de
facto integrate the franc into the euro zone? A gradually shrinking interest-rate
differential between euro and Swiss franc investments as well as a loss in
monetary autonomy would have resulted.
How does our recent experience relate to these concerns?
3. Our Experience as an Independent Monetary Entity
a) The Euro/Swiss Franc Relationship
Our fears of a euro destabilizing the Swiss franc did not
materialize. Relative to the euro, and since its introduction, the franc has
been fluctuating in a relatively narrow band of plus or minus 5 percent, about
four times less than against the dollar during the same period. The Swiss franc
appears now to be less affected by exchange rate shocks and more shielded from
speculative movements. In the past, the Swiss franc was overreacting to the
dollar's fluctuations, so that the pain of an appreciation of our currency
relative to the greenback was exacerbated by a simultaneous appreciation of the
Swiss franc relative to the German mark. This double whammy effect, attributed
to the narrowness of the Swiss franc market, was highly penalizing for our
Since the introduction of the euro however, this pattern is
no longer observed. Thus, the evolution of the Swiss franc sticks closer to our
economic fundamentals. I will address this issue more extensively later on and
argue that this trend can be generalized to apply to other currencies as well.
b) The Euro as a Means of Payment Those who thought that the
euro would make the Swiss franc obsolete as a means of payment were also
mistaken. True, our ATM machines have been adapted to provide euro banknotes, so
that it is now possible to pay in euro almost everywhere in Switzerland. Yet,
despite these efforts, the demand for euro notes is still weak and those notes
do not circulate any more extensively than French francs, Italian lira and
German marks used to. In truth, it may well be that the expenses incurred to
transform all those ATM machines ended up being a misallocation of resources. In
stores and restaurants, prices denominated in euros are usually not very
attractive. Obviously, small shop and cafe owners are not thrilled by the idea
of accepting cash payments in euros. Anyway, they cannot offer as good financial
services as commercial banks or credit card companies!
c) Monetary Autonomy
The last fear we had was related to the potential loss of
monetary autonomy. Could Switzerland, a country completely surrounded by the
euro zone, possibly hope to implement an interest rate policy different from the
one of the European Central Bank? With the loss of its monetary identity,
Switzerland would have seen its interest rates, traditionally below German rates,
converge to higher European interest rates causing severe pains to the Swiss
Fortunately, we did not experience this outcome. First, in
the months following the introduction of the euro, it became apparent that
markets were not anticipating a pegging of the franc to the euro. An expected
peg would have generated a convergence in interest rates, which simply did not
Second, and as could have been expected, the monetary needs
of the Swiss economy differed from those of the euro zone:
As an open economy strongly oriented towards global
markets, the Swiss economy felt more deeply the slowdown in global trade
than the euro zone.
Furthermore, the Swiss franc kept playing its role -
although to a smaller extent - of safe haven in tense international
Finally, Swiss inflation was considerably lower than
inflation in the euro zone, where adjustments and catch-up phenomena
Facing this reality, we decided to act independently and
lowered interest rates initially in March 2001, a few months before the European
Central Bank. Then, facing a clear economic slowdown and a strengthening of the
Swiss franc, we lowered interest rates repeatedly and aggressively. So far, the
magnitude of our policy loosening has exceeded that of the European Central Bank.
We thus kept our monetary autonomy intact, and the interest rate differential
between the euro and the Swiss franc has even slightly increased.
4. Swiss Monetary Policy in the New Monetary Order
What have we learned about the effects of the new monetary
order on the international monetary system and on the effectiveness of monetary
a) The Stabilizing Role of the Euro
Developments in currency markets over the past 5 years have
taught us that the introduction of the euro has fundamentally modified and
stabilized the international monetary system. In the past, this system was
dominated by the dollar. Dollar crises were violently affecting economies
dependent on international trade and capital mobility. The Swiss franc was
particularly vulnerable as Switzerland is a small open economy with a currency
playing the role of safe haven.
Today, the euro has become the counter-weight of the American
currency. When the dollar tumbles, the euro absorbs funds in quest for stability.
Third party currencies are thus better shielded from speculative flows.
Indeed, the Swiss franc is not the only currency to benefit
from this new monetary order. In fact, the stabilizing role of the euro is a
general phenomenon, allowing third currency exchange rates to stay closer to
their fundamentals, as dollar fluctuations often incorporate strong and
persistent unexplainable components.
After the introduction of the euro in January 1999, the
dollar first appreciated and later fell against most currencies. As the euro was
the major counter-weight to those fluctuations, most countries experienced
offsetting movements of their currencies with respect to dollar and the euro.
First, while third currencies depreciated against the dollar, they appreciated
against the euro. And later, when they started to appreciate against the dollar,
they fell against the euro. These offsetting movements have been observed, among
other currencies, for the Swiss franc, the British pound, the Japanese yen, the
Canadian dollar, and the Norwegian krona.
By absorbing exchange rates shocks, the euro thus contributes
to stabilizing external payments of countries trading with both the EU and the
b) The Autonomy of Swiss Monetary Policy
Financial market developments over the past 5 years have also
demonstrated that the monetary autonomy of the Swiss National Bank has not
The amplitude with which the SNB has reacted to changes in
the economic environment since the end of 2000 lies in between the reactions of
the Federal Reserve and the European Central Bank, with more aggressive interest
rate cuts by the Federal Reserve and a relatively modest reaction by the
European Central Bank.
The different responses of those central banks reflect their
institutional framework as well as the economic circumstances of the respective
countries. On one hand, the SNB has been more flexible than the ECB. The ECB is
a new institution without historical record. Moreover, the ECB has a strict
mandate of maintaining low inflation, and there have been upward inflationary
pressures in certain European countries due to the convergence process. Those
factors induced a less aggressive easing of monetary policy in an uncertain
environment. In contrast, with traditionally low inflation, the credibility of
the SNB is strong, which allows it to react quickly to economic shocks without
creating turmoil in financial markets. In the past few years we have thus been
able to act in a flexible way, with our own timing, in order to respond to the
global economic slowdown and pressures on the Swiss franc.
On the other hand, the SNB reacted less strongly than the
Federal Reserve to the deterioration of the international economic environment.
The United States is a relatively closed economy where the Federal Reserve
mandate is broader than price stability. In contrast, our freedom to maneuver is
limited by the openness of our economy. In a small and open economy, monetary
activism cannot fine-tune economic activity. Institutional and economic
characteristics of the different countries and central banks have thus implied
differentiated monetary policy profiles.
Let me conclude by first emphasizing the positive global
influence that the euro has had since its introduction in 1999. Not only does
the common currency contribute to the integration of the European market, but
the appearance of a counter-weight to the US dollar has helped stabilize the
international monetary order. Exchange rates around the world can thus evolve
closer to their economic fundamentals, and the impact of exchange rate
fluctuations on capital flows and foreign trade are dampened.
Developments in the financial markets over the past 5 years
have shown us that although highly integrated in international markets and
despite the emergence of a bipolar currency environment, the SNB can keep its
monetary autonomy and follow an independent monetary policy that is adapted to
the needs of the Swiss economy. As a result of our independent and successful
monetary policy, together with the global character of the Swiss economy, the
Swiss franc has retained its own profile. However, as we have experienced, this
particular profile is not without risks. Extreme volatility of exchange rates
cannot be excluded, but our experience with the euro/Swiss franc exchange rate
has shown that currency markets are not as irrational as some people believe.
With a relatively stable exchange market, low inflation and lower interest rates
than the rest of Europe, the monetary situation of Switzerland is relatively
Things would evolve in a completely different way if
Switzerland were to set its mind on joining the European Union and entering the
euro zone. If markets were anticipating such an evolution, spreads between the
Swiss franc and euro deposits would progressively shrink, in the same way
spreads between German marks and French francs deposits fell in the 1990s during
the build-up of the monetary union. Market pressures could then force the SNB to
shadow the monetary policy of the European Central Bank. Many observers overlook
the fact that, contrary to other countries which have gained an interest rate
bonus by joining the European monetary union, as they previously had higher
interest rates than Germany, Switzerland would loose its interest rate advantage
in joining the monetary union.
No tendency of a convergence in interest rates has been
observed over the past few years. On the contrary, the interest differential has
broadened slightly. For the time being, markets are not expecting any move from
Switzerland towards monetary union, and rightly so, I might add. This does not
mean that my country will never join the EU.
As you probably know, important decisions shaping the
relations between the EU and Switzerland have been taken in recent years. A
first set of bilateral agreements has already come into effect. It gives us
access to the single market and ensures labor mobility. New agreements have now
been negotiated with the aim of harmonizing taxation on savings and integrating
Switzerland in the Schengen and Dublin frameworks, a further step toward closer
As you see, without being formally an EU member, Switzerland
is increasingly part of the European reality. As a matter of fact, we become
more and more European and the EU looks more and more Helvetic! Indeed, the EU
has almost caught up with Switzerland in many respects. We have 26 Cantons and
you have now 25 Member States!
But in all seriousness, while the European integration of
Switzerland proceeds, I see no reason, now, for artificially speeding up
monetary adjustments by linking the franc to the euro. We would give up our low
interest rates without gaining more stability: an unattractive deal in the
present circumstances. In monetary affairs we remain indeed an island in
Mr. Jean-Pierre Roth, Chairman of the Governing Board, Swiss National Bank
Mr. Jean-Pierre Roth with Mr. Nicholas C. Garganas, Governor of the Bank of Greece