Jean-Pierre Roth: Switzerland - a platform for global business
Keynote address by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National
Bank and Chairman of the Board of Directors of the Bank for International Settlements, at the
Consulate General of Switzerland / Swiss-American Chamber of Commerce, New York, 1 June 2006.
* * *
It is a great pleasure for me to be with you today and I would like to thank my dear friend, Ambassador
Loretan, for hosting this lunch of the Swiss-American Chamber of Commerce.
Swiss people always feel at home, here, in this fascinating city. New York is a unique place, not only
because of its size, its beautiful skyline, its location, but foremost because of its openness to the world
and its multiculturalism. Compared to New York, is Switzerland anything more than just a small village
located in the heart of Europe, a country of watchmakers and chocolate producers? Is there anything
to see other than the Matterhorn and the water fountain on Lake Geneva?
It is interesting to note that, despite the strong presence of Swiss multinationals abroad and, of course,
the very well-known Swiss flag - thanks to the Red Cross flag - Switzerland is largely ignored in
international surveys and is almost non-existent in European statistics.
"To live happily, live out of sight!" (pour vivre heureux vivons cachés) is a well-known proverb. This
may well be true, but it serves to fuel many clichés; and misconceptions are generally
counterproductive.
Let me show you the hidden side of Switzerland. You will see that modern Switzerland is adjusting
rapidly to the changing reality of the world economy. Let's consider a few facts:
•
With 7.5 million people, Switzerland is indeed a small country. Although we have no natural
resources, we have a highly developed economy and a GDP per capita that clearly exceeds
the European average. Contrary to the situation among some of our neighbours, our
population is still growing, thanks to immigration. Our foreign population now represents
about 20% of the total population and 25% of the labour force. Despite strong immigration,
our unemployment rate - 3.5% - is relatively low.
•
Switzerland remains a slow-growing country when compared to the United States. Our weak
growth performance is due in part to the full employment, the relatively high level of personal
income and the limited scope for domestic investment. However, in recent years, the Swiss
economy has been doing better than its neighbouring countries in terms of growth and
employment, and also in terms of price stability. Obviously, the fact that we are not a
member of the European Union is not an obstacle to our development.
• Switzerland is increasingly becoming a service-producing country. The flagship of our
service industry is the financial sector, which expanded markedly in the 90s and now
accounts for 15% of our GDP - more than the machine tool industry and the chemical
industry together. The number of banks, however, was reduced by half during that period
and the number of bank employees remained stable despite expanding financial activities.
These figures show that our financial industry has been eager to react swiftly to the
challenges posed by globalisation.
•
Switzerland has a solid balance of payments position. Thanks to a large excess of savings
over domestic investment, our current account surplus is constant and substantial. Contrary
to popular belief, my country is not an importer of capital, but a net capital exporter. Our
current account surplus represents 14% of our GDP, a level which can only be compared to
that of some Asian countries. In recent years, our surplus in absolute terms was even larger
than the surplus of the euro zone as a whole.
•
Switzerland is well-known for its stable monetary framework. Average inflation over the last
20 years amounted to 1.8%. We never went through monetary reforms as many European
countries did in the past few decades. In fact, we still use the coins put into circulation in
1850, when the Swiss franc was created. There is no better proof of monetary stability.
•
Switzerland enjoys the lowest interest rate level in Europe. This situation has nothing to do
with the appeal of our bank secrecy, as many believe, but with the abundance of savings
and the high degree of price stability. Since the introduction of the euro in 1999, the average
interest rate on three-month euro deposits has been 3%, while the three-month Swiss franc
rate has been 1.4%. If we assume a difference of about 1% in the expected level of inflation
between the euro area and Switzerland, the Swiss real interest rate advantage accounts for
60 basis points.
• Switzerland is also a firm believer in flexible exchange rates. Our monetary regime has been
unchanged since 1973, when the peg to the US dollar was removed. Today, the Swiss franc
is freely determined by market forces. Our last foreign exchange intervention dates back to
1995 - and that was a coordinated action in favour of the US dollar!
•
And what about the European issue? As you know, we are not a member of the European
Union; nor do I foresee Switzerland joining the EU in the near future. The Swiss people
remain sceptical about the efficiency of the Union and are very aware of what they stand to
lose in terms of political rights and economic freedom in the event of integration. But our
relationship with the EU is of key importance, since Europe accounts for two-thirds of our
foreign trade. In order to secure our access to the European market and to avoid
discrimination, we concluded two packages of bilateral agreements with the Union - in 2002
and 2004. The present situation - with free movement of goods, capital and labour, but
without monetary and fiscal integration - is probably the best solution for us.
•
Since we are so well integrated, why don't we peg the franc to the euro instead of pursuing
an independent monetary policy? Wouldn't this help eliminate the exchange rate risk, without
giving up monetary flexibility entirely?
• There is no such thing as a free lunch in monetary affairs! It is not at all certain that a peg
would engender the foreign exchange stability that exporters dream of. We have learned
from our experience with flexible exchange rates that any explicit foreign exchange target
stimulates the appetite of speculators instead of calming the atmosphere. And this would be
especially true if our pegging decision were to be taken unilaterally, without the prospect of a
full and permanent integration into the euro area. Today, with global markets and global
speculation, it would be an illusion to believe that a central bank can defend a specific
exchange rate target unless there is strong convergence of economic fundamentals with the
economy whose currency it is pegging the domestic currency to.
Furthermore, a nominal peg against the euro would do little to stabilise the real value of the
Swiss franc - the only thing that matters for the international competitiveness of the Swiss
economy - or to stabilise the franc vis-à-vis third currencies, especially the US dollar.
Last but not least, if Switzerland were to give up its monetary independence by pegging the
franc to the euro or by joining the euro area, it would lose its privileged status and,
consequently, Swiss interest rates would increase to European levels. Since higher interest
rates mean lower asset prices and lower levels of investment, and also higher mortgage
rates, the Swiss are understandably not keen on giving up their national currency. Since any
major decision in Switzerland has to be approved in a public referendum, the prospect of EU
and euro membership in the near future is thus highly unlikely.
Given our exposure to global economic and financial shocks, and their arguably smaller
importance for the euro area, pegging the Swiss franc to the euro is not a realistic option.
Flexible exchange rates give us the room for manoeuvre we need.
•
What has our experience been of coexistence with the euro so far? Very positive. Rather
than crowding out independent currencies, the euro has stabilised the monetary scene in
Europe. In fact, the franc is less volatile today than it was before European monetary
integration. The price of the euro in Swiss francs these days is about 3% lower than it was in
1999, in other words, almost unchanged. We did have periods, however, when the franc was
under pressure, especially after September 11 and before the outbreak of the war in Iraq.
The safe-haven function of the franc then triggered a 10% appreciation in our currency
against the euro. As a consequence, we had to conduct a more aggressive interest rate
policy than the ECB in order to lower the attractiveness of our currency and give some
leeway to our economy. Things have normalised since then and we have already lifted
interest rates on four occasions in the last two years. As you can see, we conduct our
monetary policy independently of the ECB.
I'm sure you will agree, that Switzerland is most definitely not an isolated island, as many still believe.
It is clearly an open economy which has chosen to take up the challenges of the world economy.
Large Swiss firms invest more money and create more jobs abroad than at home. Switzerland has
become a major investor not only in Europe, but also here in the United States, as well as in Asia.
Today, there are 4.2 million jobs in Switzerland and we count 1.8 million people working in Swiss firms
abroad. Apart from Singapore and Hong Kong, there is no other country where foreign investments
play that kind of leverage role.
Actually, Switzerland is not an alpine fortress, but a home base for globally active industries...
...in keeping with the long-standing tradition of watchmakers and chocolate producers!