Thomas Jordan: The euro and Swiss monetary policy
Speech by Mr Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, at the Europa Forum Lucerne, Lucerne, 2 May 2016.
The speaker would like to thank Tobias Cwik and Mathias Zurlinden for their valuable support in preparing this speech. He also extends his thanks to Petra Gerlach and Carlos Lenz, as well as to Communications and Language Services at the SNB. When the euro was created almost two decades ago, there was considerable uncertainty about how the currency would impact Switzerland. My predecessors on the Governing Board of the Swiss National Bank regularly commented on subsequent euro developments in speeches and frequently voiced their expectations and concerns. Things ran fairly smoothly in the first few years; but the financial and debt crisis rocked the currency union and put the euro under pressure.
The SNB has responded with a flexible and pragmatic monetary policy. As the difficulties have not yet been overcome, it is too early to draw definite conclusions. One thing is clear, however: getting to grips with the challenges we face has been – and remains – harder than the cartoon character in the picture suggests (cf. chart 1). From the SNB’s point of view, the experiences of recent years have once again highlighted the importance and value of monetary sovereignty. Monetary sovereignty has its price, of course, but it remains true that the interests of our country are best served by retaining this independence.
Economic importance of the EU, the euro and the ECB
Ladies and gentlemen, as you all know, the EU is Switzerland’s most important foreign trade partner. And within the EU, the euro area countries play a particularly important role for us. In 2015, exports to the euro area accounted for around 44% of total exports; the share of imports from the euro area was larger still. Although the share of exports to the euro area has fallen by around 10 percentage points since 2000 – we are increasingly diversifying our foreign trade towards the emerging markets in particular – overall, the euro area countries remain by far the biggest consumers of Swiss products (cf. chart 2). The particular significance of the euro area for Swiss foreign trade means that the exchange rate to the euro is an important variable, both for our economy and for the SNB’s monetary policy.
The exchange rate influences the price of foreign goods in Switzerland – and thus also inflation, as measured by the national consumer price index; but it also impacts the price of Swiss goods in the euro area, which in turn impacts domestic inflation via production and employment effects. Consequently, the monetary policy of the European Central Bank (ECB) is particularly relevant for Switzerland. This has become clear again in recent years. On the one hand, the ECB’s expansionary monetary policy has encouraged the economic recovery and helped to promote cohesion in the euro area – which in turn has bolstered demand for Swiss products. On the other, the weakening of the euro has put Swiss producers in a bind versus their European competitors and presented problems for Switzerland’s monetary policymakers.
Stability and instability in relation to European currencies
Over the course of several decades, the Swiss franc has appreciated against all European currencies. This applies not just to the nominal, but also to the real exchange rate (i.e. the exchange rate adjusted for the inflation differential between the Swiss franc and the relevant foreign currency), which is an important determinant of Switzerland’s international competitiveness. So, while the appreciation we have witnessed in recent years is certainly very pronounced, it is not entirely new. 2 BIS central bankers’ speeches Our currency has frequently experienced upward surges – often in conjunction with shortterm increases in exchange rate volatility. In the 1970s and 1980s, for instance, the Swiss franc appreciated substantially against all European currencies amid major fluctuations. The exchange rate to the German mark – which remained relatively stable – was an exception.
This was due to structural similarities between the two countries’ economies and to the fact that both the German Bundesbank and the SNB operated according to comparable monetary policy principles at the time. Both institutions were focused on money supply targets and pursued a policy geared towards maintaining price stability. In the 1990s, monetary policy in most of the EU countries was dominated by preparations for the launch of the European single currency. As a result of the Maastricht convergence criteria, the central banks of these countries were increasingly aligning themselves with the Bundesbank. Exchange rates between the affected currencies, as well as exchange rates to the Swiss franc, consequently stabilised. This phase of low exchange rate volatility continued in the years immediately following the launch of the euro. The most recent period of exchange rate volatility against the euro has its roots in the international financial and debt crisis, which rapidly evolved into a euro crisis. Doubts about the viability of some euro area member states’ sovereign debts caused markets to lose confidence in the euro. As in past crises, the mounting uncertainty triggered substantial upward pressure on the Swiss franc.
Why Switzerland doesn’t have the euro
Considering its close economic ties to the euro area, why didn’t Switzerland ever seriously contemplate joining the single currency? Politically and legally speaking, the answer is simple: a country can only join the Eurosystem if it is already an EU member state. Swiss voters and cantons rejected accession to the European Economic Area in a referendum in 1992, and in 2001 followed this up by voting against a popular initiative favouring a “Yes to Europe”. These decisions settled the question of whether Switzerland should join the EU for the foreseeable future. Quite apart from these political and legal factors, the economic case for joining the euro had always been weaker for Switzerland than for many other European countries. Switzerland’s inflation had always been relatively low, and the country thus saw no need to import monetary credibility by pegging the Swiss franc to a stable currency. Furthermore, it makes sense for Switzerland to pursue an independent monetary policy given the structure of its economy – particularly in view of its status as an international financial centre and the research-intensive nature of the industrial goods it produces.
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