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The Euro: Implications for Switzerland and for the Monetary Policy of the Swiss National Bank

Banking Studies Center, Lugano, 22 October 2002, 22.10.2002

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For more than three and a half years now, Europe – and in its midst Switzerland – have been living with the euro as deposit money. The launch of the European Economic and Monetary Union has led to fixed exchange rates and a uniform interest rate level in the euro zone. The conditions for an optimal currency area have probably not yet been met. But the currency union will develop further.

From the perspective of the Swiss National Bank (SNB), the experience with the euro has been primarily positive so far, even though the Swiss franc has somewhat appreciated against the euro since 1999. First of all, Switzerland is now surrounded by a large currency area that pursues similar goals in terms of monetary policy, and, in particular, with respect to price stability. Competitive currency devaluations are no longer an option for members of the euro area, and the exchange rate volatility of the Swiss franc vis-à-vis the currencies of the European trading partners has declined considerably.

For Swiss enterprises, foreign currency management has become easier. Apart from decreasing transaction costs, Swiss firms also benefit from enhanced price transparency and competition in Euroland. At the same time and despite some initial fears to the contrary, Switzerland could has been able to retain its advantage of lower interest rate levels. There has also been some concern that the euro would make the Swiss franc obsolete as a means of payment, but this is very unlikely.

The SNB's monetary policy concept will remain unchanged: in other words, the SNB will continue to conduct an independent monetary policy oriented to price stability and the needs of the Swiss economy. As a consequence, Switzerland is likely to retain its lower interest rate level. Exchange rate targets are incompatible with the SNB's mandate to maintain price stability in the medium term. Nevertheless, since the exchange rate can affect the health of the Swiss economy the SNB will also continue to take the exchange rate closely into account when determining its monetary policy.