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.

Specifically, the US and Europe, the two largest markets for Asia’s exports, are still facing steep challenges in the adjustment process and the situation is still rather fluid. For the US, the rather sticky structural constraints such as high unemployment and depressed housing markets suggest that self-sustainable growth momentum remains uncertain when policy supports are withdrawn. In the case of Europe, while some progress has been made in resolving the sovereign debt issue, risks remain on whether certain economies can overcome the challenge without substantial debt restructuring. Looking ahead, external demand from these two markets is likely to remain subdued in the near future. Meanwhile, closer to home, the disastrous earthquake and the ensuing nuclear crisis hitting Japan, a key importer and exporter for many economies in the region, is adding further downside risk to export and production growth in the region. Last but not least, political instability in the Middle East and North Africa (MENA) region will likely keep oil prices elevated for some time. This in turn would drag on global economic growth, add upward pressures on inflation and heighten volatilities in the global financial markets. 4. All these complications are making life difficult for policy makers in the region. While Asia, having learned well the lessons from the Asian financial crisis, has managed to get through the recent global crisis relatively unscathed, we are now entering uncharted waters, and there are both imminent and longer-term policy challenges. 5. First and foremost, it is challenging to manage the large capital flows.