Will the Euro Make the Swiss Franc Obsolete?

Ulrich Kohli, Alternate Member of the Governing Board

Swiss-American Chamber of Commerce, New York, 07.03.2002

Monetary union brings many advantages to its members, in terms of lower transaction costs, enhanced transparency, and greater efficiency. It also implies costs, however, particularly with regard to the loss of monetary sovereignty. There is now just one monetary policy for the entire Euroland: «one size fits all». This could lead to difficulties in case of asymmetrical shocks. Adjustments that earlier on occurred through changes in exchange rates and domestic interest rates must now imperatively take place through changes in prices and wages, and adjustments in quantities.

Switzerland, in many ways, gets the best of both worlds. It will enjoy many of the advantages promised by the euro, without the loss of an important degree of freedom. Life will be made much easier for the Swiss who travel and do business in Europe. They will benefit from the simplicity, the transparency and the more stable European monetary environment, but Switzerland will keep its trump card of an independent monetary policy.

There is little risk that the euro will become a parallel currency in Switzerland, even though the euro will – and already does – circulate in Switzerland to a limited extent, just like the earlier national currencies did, in border areas and tourist regions mostly. Visitors will typically be better off using the local currency or their credit cards, however. Wages, rents and taxes will continue to be denominated in Swiss francs, and bank and postal transfers and payments will keep on being cheaper and less cumbersome if made in Swiss francs rather than in foreign currencies.

There is nothing to gain from tying the Swiss franc to the euro. Although the nominal franc-euro exchange rate would then be fixed, the long-run real appreciation of the Swiss franc would persist. It would simply take the form of a rate of inflation that would be higher in Switzerland than elsewhere, an outcome incompatible with the Swiss National Bank's objective of price stability. Moreover, Switzerland would lose its interest rate bonus, and the SNB would no longer be able to set a monetary course custom-made for Switzerland.

As long as the SNB maintains an independent course of action, it will uphold the reputation of the Swiss franc as a safe and sound currency, and it will preserve its attractiveness as an instrument for international portfolio diversification. The Swiss franc is an asset for the Swiss financial center. It is a highly successful product, and it will go on having a life of its own.