about the swiss economy, but to emphasize the fact that switzerland is very open to international trade, investment, and migration, and that our economy is very integrated in the global economy and intimately linked to the euro zone. swiss monetary policy with those facts in mind, you might wonder whether switzerland, a highly integrated country surrounded by trading partners sharing the euro, can still follow an autonomous monetary policy. what are the consequences of the introduction of the euro on the swiss franc and on the effectiveness of swiss monetary policy? and what are the effects of this new international monetary order on countries outside the dollar - euro block more generally? i will try to provide some insights on these questions today. first, i will present the change in monetary framework due to the introduction of the euro. then i will enumerate the main fears that we originally had regarding the effects of that transformation, and our experience with the new environment over the past 5 years. finally, i will share some lessons on the influence of the introduction of the euro for the international monetary system and for the autonomy of swiss monetary policy. 1. a new international framework january 1, 1999, constituted a true revolution for europe. many observers argue that the introduction of the euro represents the major postwar stage in european integration. they are right. the maastricht treaty, by removing national currencies and defining budgetary rules, lead to an important transfer of power from national capitals to european institutions. the french franc, the italian lira, and the german mark were all symbols of national identity. the euro is now playing an integrating role in people ’ s minds. in this regard too, the new currency brings a revolutionary dimension. is it not the case that national currencies were almost always and everywhere brought about by fundamental political changes? let us not forget that the greek drachma was launched after capodistria ’ s assassination and greece ’ s switch to a monarchy, the french franc was the “ franc germinal ”, the italian lira was created with the italian unification, and the reichsmark appeared in 1873 at the foundation of the german empire. these are very strong symbols indeed. for switzerland too, the introduction of the euro was a kind of revolution. for the first time in our history, our country was completely surrounded by a single currency area. in terms of population, switzerland, with its 7 million inhabitants, could be compared to missouri in the middle of the united states. just try to

’ s fluctuations, so that the pain of an appreciation of our currency relative to the greenback was exacerbated by a simultaneous appreciation of the swiss franc relative to the german mark. this double whammy effect, attributed to the narrowness of the swiss franc market, was highly penalizing for our export sector. since the introduction of the euro however, this pattern is no longer observed. thus, the evolution of the swiss franc sticks closer to our economic fundamentals. i will address this issue more extensively later on and argue that this trend can be generalized to apply to other currencies as well. ( b ) the euro as a means of payment those who thought that the euro would make the swiss franc obsolete as a means of payment were also mistaken. true, our atm machines have been adapted to provide euro banknotes, so that it is now possible to pay in euro almost everywhere in switzerland. yet, despite these efforts, the demand for euro notes is still weak and those notes do not circulate any more extensively than french francs, italian lira and german marks used to. in truth, it may well be that the expenses incurred to transform all those atm machines ended up being a misallocation of resources. in stores and restaurants, prices denominated in euros are usually not very attractive. obviously, small shop and cafe owners are not thrilled by the idea of accepting cash payments in euros. anyway, they cannot offer as good financial services as commercial banks or credit card companies! ( c ) monetary autonomy the last fear we had was related to the potential loss of monetary autonomy. could switzerland, a country completely surrounded by the euro zone, possibly hope to implement an interest rate policy different from the one of the european central bank? with the loss of its monetary identity, switzerland would have seen its interest rates, traditionally below german rates, converge to higher european interest rates causing severe pains to the swiss economy. fortunately, we did not experience this outcome. first, in the months following the introduction of the euro, it became apparent that markets were not anticipating a pegging of the franc to the euro. an expected peg would have generated a convergence in interest rates, which simply did not happen. second, and as could have been expected, the monetary needs of the swiss economy differed from those of the euro zone : • as an open economy strongly oriented towards global markets, the swiss economy felt more deeply the slowdown in global trade than the euro zone