Mr Meyer gives a central banker's view from Switzerland
Speech given by Mr Hans Meyer, Chairman of the Governing Board of the Swiss National Bank, at
the Swiss-American Chamber of Commerce, in New York on 1 October 1999.
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Environment
The Swiss will remember the last few years as a time of important economic and social challenges
with mixed feelings.
If one attempts to put events into a larger context, the first thing that comes to mind is that in the
course of time, there have always been periods of intense change which were followed by calmer ones.
Such fluctuations can occur because different events, with their positive or negative consequences,
may have a more or less coincidental cumulative effect. As a rule, however, there is a remarkable logic
behind the way events unfold.
All things considered, it appears to be entirely logical that at the close of this century, we should have
reached an economic and social turning point. An era is coming to an end, which - in a broad sense -
we still associate with the post-war period.
During this period, our economic development was characterised by remarkably steady real growth.
Especially during the first decades following the Second World War, pent-up demand created
extraordinary dynamism. Economic output improved continuously not only in terms of quantity but
also of quality, leading to unprecedented growth as well as more widespread prosperity.
In the course of this development, the public sector witnessed a remarkable expansion. Here too, an
apparent backlog in demand had to be satisfied. Subsequently, developments became more complex.
In the face of increasingly scarce resources, the question arose as to what the optimal role of
government should be in terms of type, scope and implementation of its activities.
There is obviously also a dark side to this briefly outlined development. The pace of activities
increasingly overwhelmed many contemporaries and thus led to new tensions. The social fabric has
become less cohesive. Relations between individuals are more difficult. Environmental pollution is a
problem which we tend to repress. Finally, we have come to realise that an increasing economic
interdependence between individual countries entails opportunities as well as risks.
In short, we are today confronted with problems of a mature society. It is perhaps a small comfort, but
nevertheless important, to point out that we find ourselves in a similar position as our neighbours and
other comparable industrial states. Satisfaction with what has been achieved makes one forget all too
easily what was needed to advance so far and what will be needed to maintain - if not increase - this
level of prosperity. In the interests of innovation, flexibility and productivity, further adjustments are
imperative. They must, however, take place in a manner that will not put at risk social cohesion.
Demands should be made on the individual, but they should not be excessive.
The goal of our common effort is a development which assures security, freedom and general welfare
in a balanced way. In the economic area, we must create the human and material conditions to promote
appropriate growth, while keeping unemployment and inflation low. With regard to the human factor,
the necessary qualification must be coupled with an adequate motivation. This motivation can be
enhanced by an appropriate macroeconomic environment.
A gradual development of economic and social activities seems appropriate, since this is the only way
to ensure the necessary identification of individuals with the community.
Economic situation
In the course of this year, prospects for economic recovery in Switzerland have been improving,
bringing to an end an unusually long period of stagnation. The human and material costs of this
stagnation are of course regrettable.
The causes for this period of stagnation are manifold. First, one has to bear in mind that it followed
years of marked expansion. Other, more general reasons are the consequences of our past labour
market policy, which helped to maintain existing structures, as well as of insufficient competition in
the domestic economy. Last but not least, an already high level of achievement made it increasingly
difficult to provide the necessary punch for change.
The need for structural changes as well as the necessity to tackle remaining problems from the past -
notably in the construction sector, in agriculture and tourism - along with the repercussions of a weak
global economy, have led to a temporary decline in growth.
A sustained process of adjustment, but also favourable monetary conditions have subsequently
contributed to improve prospects. However, the impetus for take-off inevitably had to come from
outside.
Our economic problems were, and still are, neither confined to a sector nor a region. The line
separating positive and negative developments runs right across the economic landscape. It is still
quality of performance, characterised by innovation, flexibility and productivity, which determines
success.
Consolidating public finances remains important. Furthermore, efforts to promote competition must
continue even though considerable progress has already been made. In this context, we have to realize
that in many quarters, people are obviously sceptical about the concept of competition. The argument
has not yet sunk in sufficiently that when it comes to allocating resources, the free play of market
forces is well suited to achieve prosperity and economic welfare. This, however, is only possible
within a framework of general economic stability.
One of the most gratifying recent developments is a steady decline of unemployment. Since
imbalances in the labour market continue to exist, we must foster both know-how and motivation.
Sufficiently flexible working conditions and greater mobility are also essential.
Finally, it is important to remember that securing the right macroeconomic environment and its
exploitation by people participating in the economy is an ongoing challenge. Consequently, there are
no quick, simple or cheap solutions for the problems confronting us.
Monetary policy
The Swiss National Bank has the task of conducting a monetary policy in the interests of the country
as a whole. It must contribute to creating a framework which promotes a balanced economic
development, meaning adequate real growth, low unemployment and modest inflation.
Ensuring price stability is the primary goal of monetary policy. Our definition of price stability is a
consumer price index below 2%. This is obviously not an end in itself, but a means to an end. An
economic system which relies on the forces of the free market must be able to count on price stability
for its smooth functioning. In particular, price stability prevents undesirable distortions in the social
area.
Economic teaching and experience leave no doubt as to the connection between the money supply and
price stability. As economists tend to say: money matters. Whether the supply of money is adequate
depends on its relation to real economic development. Monetary policy is therefore able to make its
best possible contribution if it succeeds in bringing the supply of money basically in line with real
growth in the long term.
Three main problems have to be contended with in the conduct of monetary policy: the difficulty of
assessing the economic situation, the limited knowledge of the way a modern economy works and
foreign influences, over which we have little control. While knowing that these uncertainties exist
should not paralyse our ability to make decisions, it should nevertheless lead us to exercise appropriate
restraint. Both the basic interdependencies previously mentioned and current events, which are
reflected in the relevant economic indicators, must be factors influencing the decision-making process.
As a small and open economy, Switzerland is highly integrated in international economic relations. By
participating in international cooperation, the Swiss National Bank contributes to creating favourable
conditions for an international division of labour. In this context, stable currency relations are crucial.
Such relations are ultimately a result of sustained convergence of sound economic policies
implemented by individual countries.
With an increasing international integration of individual economies, the awareness of mutual
dependence has also grown. Accordingly, efforts to coordinate the behaviour of individual countries in
the field of economic policy have been reinforced. In this context, it is important to realise that the
stability of international economic and monetary relations is not primarily a matter of institutional
regulations. What is of the essence is the conduct of individual countries.
These considerations are also relevant for an assessment of the European Monetary Union. Creating
the Union at the beginning of this year meant a big step forward for the process of European
integration. With the European Monetary Union, the participating Western European countries are
trying to put their currency relations on a new footing in line with the changed environment.
If the European Monetary Union can be implemented according to plan, this will vastly improve the
preconditions for a balanced economic development in Europe. Freedom of movement for persons will
be facilitated along with the free flow of goods, services and capital. After what has been said, all will
depend on whether the participating countries can muster the discipline indispensable for sustained
and convergent stability-oriented policies.
In the context of the run-up to monetary union, significant progress has been made in individual
countries. Inflation has been brought under control. Budgets have been brought in line with lasting
effect. Both achievements did not fail to have a positive impact on the development of interest rates.
In view of the challenges that lie ahead, one must bear in mind that with the fixing of exchange rates,
individual countries have forfeited an element of flexibility. In the past, imbalances in economic
development were compensated with flexible exchange rates. Losing this possibility is significant,
because many countries already lack the capacity to adjust.
We note with satisfaction that the monetary concepts of the European Central Bank are largely in
conformity with our own. The chances are thus good that this will result in a sustained convergence of
stability-oriented policies and, as a consequence, basically stable exchange relations between
Switzerland and the new European currency area. Should, however, difficulties arise when the present
goals are implemented, we would have to expect some turbulence. This would be likely to result in an
upward pressure on the Swiss franc. The National Bank would, of course, have the possibility of
relaxing monetary policy to counteract such a trend. This might, however, conflict with our policy's
orientation towards stability.
The basic considerations on monetary policy outlined here also apply if we look beyond the European
environment.
The crisis-like developments in East Asia, Russia and Latin America may have their characteristic
features in individual cases. However, they also give rise to a number of comments of a more general
nature.
Imbalances in economic development, weak financial systems and insufficient supervision of financial
markets are merely symptoms of deeper-lying causes. In any case, most recent experiences tend to
confirm the opinion that a sustained economic development is only possible on the basis of social
coherence. Individual countries themselves bear the responsibility for creating this stability. In the
long run, outside help can only be meaningful if it is granted as help towards self-help.
These remarks are equally relevant for assessing the activity of the International Monetary Fund. The
chief task of this important institution in the area of international monetary policy is advising its
members in the conduct of economic policy. This is designed to create favourable preconditions for a
positive development of international monetary relations and, of course, also the world economy. The
second task is to provide credit facilities in order to support the necessary processes of adjustment.
Since its inception, the International Monetary Fund has thus held an intermediate position between
emphasising the self-responsibility of a country and granting adjustment aid. Its task is not made any
easier by the fact that it has no possibility of enforcing recommendations.
Whenever difficulties arise in shaping international monetary relations, a call is made for introducing
fundamental reforms. Experience has taught us, however, that bold visions hardly ever have a chance
of being realised. It seems to make more sense to implement what has been recognised as appropriate
in small, purposeful steps.
Reform of the monetary constitution
A monetary constitution comprises all regulations concerning the currency on a constitutional and
statutory level. Our present monetary constitution still dates largely from the time of the establishment
of the Swiss National Bank almost a hundred years ago. We are currently in the process of adapting it
to modern requirements. These endeavours bear a direct relation to the reform of our fundamental law,
the Federal Constitution, which was recently brought to an end.
A central issue of these reform efforts, to which I shall restrict myself in the following remarks,
concerns the severance of the Swiss franc's link to gold. In actual practice, this link has been outdated
for decades. It is, moreover, in direct contradiction to our commitments as a member of the
International Monetary Fund. With the severance of the gold link, we will be free to act according to
our own discretion with respect to the evaluation and utilisation of our gold holdings. The question
therefore arises how to use this freedom of action.
In attempting to answer this question, one must bear in mind that monetary reserves are of course
indispensable for a central bank in fulfilling its tasks. This is particularly true in the case of a small,
open economy with a significant financial sector. Currency reserves consist primarily of freely
disposable foreign exchange reserves and of gold holdings.
In retrospect, we have to remember that our freely disposable foreign exchange reserves have
undergone a substantial increase, particularly after the transition to freely floating exchange rates a
quarter of a century ago. At the beginning of the nineties, we therefore decided to limit future
expansion to the extent of nominal economic growth. By international standards, we thus have a
comfortable level of reserves.
As regards gold holdings, it must be decided what proportion will still be required for monetary policy
purposes in future or, conversely, what proportion should become available for other public uses. This
is basically a question of how an important part of our national wealth is to be usefully employed.
Both fundamental considerations and a comparison with other countries may be helpful. However, in
the final analysis there is a discretionary decision to take. We have come to the conclusion that it
would be appropriate to maintain around half of today's gold holdings of approximately 2,600 tons as
currency reserves.
In principle, we are in favour of removing the other half of this gold from our balance sheet. However,
we are willing to accept that, in a broader perspective, it may not be appropriate to outsource. In such a
case, the gold holdings would have to be managed according to special criteria by external specialists
under the responsibility of the National Bank.
We have of course always been fully aware that any discussion of these problems is a sensitive issue.
In consideration of the necessary legal adjustments on a constitutional and statutory level, we had no
other choice but to lay bare the situation in detail.
I should like to underline once more that we do not underestimate the significance of abundant
currency reserves. The sky, however, cannot be the limit. It will be in our own interest to exercise the
necessary diligence when converting part of our gold holdings into interest-bearing assets. This
includes close contacts with institutions with which we entertain friendly relations.
Financial centre
Let me conclude with a few reflections on Switzerland as a financial centre.
A financial centre is by definition the location in which the various financial market players combine
their efforts. Conforming to more recent developments, we no longer talk about regional centres in
Switzerland. We rather refer to the Swiss financial centre. In the forefront are of course activities of
banks and insurance companies. To these must be added a growing number of further providers of
financial services. In keeping with international developments, the dividing lines are gradually
becoming blurred.
The decisive criteria for assessing the substance of a financial centre are integrity, stability and quality.
These depend on various factors of a human and material nature.
On a human level, these factors are know-how and mentality. Integrity, loyalty, reliability and a
willingness to serve must go hand in hand with specialist knowledge as well as urbanity and a gift for
languages. Our social environment and our educational system basically provide a good starting point.
Nevertheless, gaps in specialised training and international experience are still cause for complaint.
On a material level, the primary factors are political and economic stability. Both are guaranteed to a
high degree. It cannot be overlooked, however, that other countries have made considerable progress
in this respect.
In the context of the legal order, banking secrecy is currently at the centre of attention. Applying it is,
and remains, a tightrope walk. What is basically undisputed is an adequate protection of the private
sphere. This should not, however, lead to such protection being exploited for dubious business deals.
In an international context, valid law takes account of this problem in the form of regulations on
mutual judicial assistance in criminal matters, which include insider transactions and money
laundering. One way or another, it cannot be overlooked that legal regulations must be supported by
an appropriate business mentality. Problems in the grey area between business as usual and
unlawfulness can also affect the integrity of a financial centre.
The relevant environment is, of course, also influenced by fiscal regulations. Here, too, one might
refer to a tightrope walk. The implications of subjecting financial transactions to fiscal charges and of
spreading the tax burden evenly must be weighed against each other. Aside from economic and
operational efficiency, exercising political discretion is indispensable. At the same time, it is clear that
growing international involvement restricts the room for manoeuvre.
More recently, endeavours by the European Union to close loopholes by taxing interest earnings on
capital invested in countries other than the tax domicile have gained attention. Under discussion is a
choice between a withholding tax and a reporting obligation. At this juncture, a consensus within the
EU is not yet foreseeable. Clearly, a convincing solution would have to include all major financial as
well as off-shore centres. If that becomes possible, we would hardly be able to refuse to cooperate in
the field of withholding tax. In the event of a comprehensive solution, the effects should be within
acceptable limits from a general economic perspective.
Finally, attention must be drawn to the organisational and technical infrastructure as an element of the
general environment. In this respect, conditions in Switzerland are favourable. Technologically
advanced and in some areas pioneering solutions guarantee quick, safe and cost-effective business
transactions. This is of great value for the integrity, stability and quality of the financial centre even if
the respective activities are largely hidden from the public eye.
Apart from the relevant factors already mentioned, the development of financial transactions will be
influenced to a considerable degree by changing customer needs and technological innovations.
As regards customer needs, changes in savings and investment habits of private and institutional
customers must be pointed out. To this must be added the changing financing requirements and
practices of enterprises. Such changes depend on economic developments, but also on trends of which
it is difficult to say if they will prove to be of lasting influence.
In the technological field, the primary concern is continued development in data processing and
communications. These have implications for the design of products, the conduct of business,
international integration and the development of costs and prices. The resulting consequences, for
example for the ideal size of an enterprise, are a matter of controversy.
As has already been pointed out, the dividing lines between individual suppliers are becoming
increasingly blurred. Moreover, new suppliers, notably among wholesale distributors and in the
consumer goods industry, are pressing into the financial area.
As regards retail banking, it may be assumed that the population of a highly developed industrial
country will still require financial services in the future. Straightforward transactions tied to a
particular location will be of primary importance. These should be carried out rapidly, reliably and
cost-effectively. For economic and technological reasons, there will be an increase in providers, and
this, in turn, will strengthen competition.
Trading and advisory services with their strong international orientation have shown an impressive
development in recent years. Experience has been that this is a line of business which not only offers
opportunities, but also involves considerable risks and is very much centred on people. It seems quite
remarkable that all major banks in industrial countries are currently concerned with their strategy in
this field.
The future development in portfolio management is of particular significance to us. This is the core
business of the Swiss financial industry. Further progress will depend in large measure on what the
outlined background conditions will look like in future. In this context, it is the overall situation that
counts rather than conditions in a certain area.
Outlook
At the turn of the century, Switzerland is economically and socially in good condition. Following
years of frequently painful adjustments to a changing environment, preconditions for a balanced
development are favourable. The quality and scope of these adjustments bear witness to the flexibility
of our economy and society. The years ahead will continue to be characterised by constant change. It
is therefore important to remain vigilant. On the basis of overall economic as well as social stability,
innovative power and flexibility must be preserved. In a mature society, this represents a particular
challenge.
By keeping our own house in order, we also make the best possible contribution to international
solidarity. In the narrower European context, our bilateral agreements with the European Union will
form a good basis for cooperation in the coming years. In Europe and beyond, Switzerland
traditionally has an extensive network of international relations which we shall continue to cultivate in
the future. As far as these relations are of a political nature, an appropriate social consensus is
necessary for doing so.
The further development of our financial centre will depend on whether we succeed in continuing to
guarantee the attributes mentioned earlier on: integrity, stability and quality. This requires efforts both
on an individual and on an overall economic level. A sustained commitment in both spheres will
permit existing opportunities to be used.