mr roth remarks on the euro and swiss franc : two sister currencies? speech by mr jean - pierre roth, vice - chairman of the governing board of the swiss national bank, at the swiss business association annual general meeting, singapore, 24 february 2000. * * * for more than a year now, the euro has been a reality. it has crowned a decade long process of monetary integration in europe. the introduction of a common currency in eleven closely related, but independent countries is an unique experiment. it is still too early to assess all the far - reaching implications of this monetary revolution. therefore, the thoughts and remarks i am going to express today can only be intermediate and provisional. 1. consequences of the euro for the swiss economy switzerland is not part of the monetary union. it is nonetheless deeply integrated in its european environment through its geographic situation and its strong historical, cultural and economic links with europe. over 50 % of our exports go to countries of the euro - zone, while 70 % of our imports come from there. but, besides that, switzerland has strong traditional links overseas, too. the us, canada and japan account for 10 % of our imports and 15 % of our exports while emerging markets represent 4 % and 10 % respectively. although concentrated on europe, our foreign trade is geographically more diversified worldwide than that of other small open european economies such as austria, the netherlands or belgium. for the first time in its history, switzerland is surrounded by countries all sharing the same currency. even without being a member of the union, it is affected by this new monetary situation. de facto, our trade with europe is already taking place in one currency only - the euro - because the parities of the former national currencies have been definitively locked. that means that our foreign trade is less diversified by currencies than earlier and that fluctuations of the sf / euro exchange rate have an even stronger impact on the swiss economy than the former sf / dm or sf / ff exchange rates. at the same time, a common monetary policy for europe is likely to lead - over time - to a stronger synchronization of business activity in the emu member states. this, in turn, means that the impact of the european business cycle on the swiss economy will become more even and thus also stronger. more than ever, switzerland ’ s economic destiny will be linked to that of europe. today, switzerland benefits already from the technical simplification induced by the substitution of ten

offer an attractive way to counterbalance the risks born by large holdings of key currencies. our currency is thus less demanded as reserve currency and less involved in speculative capital movements. this is basically good news for the swiss economy. 3.... and what about the future? what conclusions can be drawn from the past? will the swiss franc remain stable vis - a - vis the euro, or will we see a more independent development of our currency? again, the answer to this question will depend crucially on economic fundamentals in switzerland and in the euro - zone. in both areas, the economy is now recovering from the recession, following a steady upward path. the expected growth rates for this year amount to 2. 2 % for switzerland and 2. 9 % for the euro - zone. the central question for the exchange market is to what extent the economic upturn could endanger price stability, and what kind of central bank ’ s reaction can be expected. 3. 1 uncertainty about lasting convergence in european and swiss fundamentals while europe is now growing faster, it still suffers from an unemployment rate of roughly 10 %. at first sight, one might think that this big labor reservoir would allow the economy to grow without tensions on the labor market and without large wage adjustments. inflation would remain subdued, and there would be no need for an all too restrictive monetary policy. this, however, is only the “ first sight ” scenario. european unemployment is largely structural, meaning that although there is a demand for labor on the part of the firms, this demand is not necessarily matched by the supply on the labor market. under these circumstances, the labor market could constitute a bottleneck for growth and lead to inflationary pressure. to prevent inflation from rising, the european central bank would have to further increase interest rates. clearly, structural adjustments are of the essence in europe. in the absence of flexibility, the unemployment rate cannot be lowered significantly and doubts exist about the actual room of maneuver of the monetary authorities. expected growth for switzerland, on the other hand, looks quite moderate by international standards. thus, one might think that there is little danger of inflation and that the swiss national bank should further support the seemingly fragile economic upturn. a look at the labor market, however, shows another picture. unemployment has fallen steadily since the summer of 1997 to a low rate of 2. 3 % only. its recent increase to 2. 6 % is due to seasonal factors. moreover, there are already