The Euro and Swiss Monetary Policy

Georg Rich, Director of the Swiss National Bank

Norwegian-Swiss Euro Seminar, Royal Norwegian Embassy and Credit Swiss Group, Lugano, 18.09.1998

The introduction of the euro is likely to affect the Swiss economy in several ways. Many Swiss are concerned that a lack of confidence in the euro might trigger an excessive upvaluation of the Swiss franc on the foreign exchange market. The European Central Bank (ECB) will certainly make every effort to fulfil the stability mandate enshrined in the Maastricht Treaty. This should also contribute to stabilising the Euro/Swiss franc exchange rate. Financial markets already seem to be convinced about the stability of the future euro. However, they are underestimating the technical difficulties faced by the ECB in setting monetary policy.

If, despite all the efforts of the ECB, the Swiss franc exchange rate were to rise excessively, the SNB could react to such a development by relaxing its monetary policy. The attendant decline in Swiss interest rates would make the franc less attractive to investors. The SNB could go even further by pegging the Swiss franc exchange rate temporarily to the euro. But a temporary peg would raise the spectre of a future surge in inflation. By contrast, a permanent peg to the euro, at least at present, would not be a sensible solution because it would lead to a complete loss of Swiss monetary autonomy.