fritz zurbrugg : fiscal and monetary policy – interdependence and possible sources of tension speech by mr fritz zurbrugg, member of the governing board of the swiss national bank, at the university of lucerne, lucerne, 21 november 2012. * * * ladies and gentlemen, it is a great pleasure for me to be giving this presentation at the university of lucerne this evening. tonight ’ s topic is one that has interested me for some time. during my ten years at the international monetary fund, i repeatedly dealt with questions of fiscal and monetary policy and the interplay between them – albeit in a general and rather abstract way. over the past six years at the federal finance administration, my work was focused on fiscal policy, and in particular its implementation. this summer, i transferred to the governing board of the swiss national bank ( snb ), and now have the unique opportunity, and the privilege, to focus on monetary policy. although it is probably a little early for me to be making definitive speeches on both of these economic policy areas, i would like to share a few initial thoughts with you. introduction in some countries, the scope for fiscal policy action has recently come up against its limits. governments today find themselves in the position of being virtually unable to finance their normal range of activities, meaning that there is also no scope left for discretionary economic stimulus measures. this has raised expectations on monetary policy to do something to stabilise the economy and the financial markets. and indeed, central banks across the world have introduced unconventional measures, in order to fulfil their mandates even under these unusual circumstances. some of these measures have come in for criticism, because they encroach on the territory of fiscal policy. thus, there is currently tension between monetary and fiscal policy in a number of countries. how does this tension come about? which factors might exacerbate or mitigate it? and what is the current situation in switzerland? to address these questions, i will first review the goals and the division of responsibilities in these two areas of economic policy. in a second step, using the recent crisis as an example, i will highlight the importance of rules and a culture of stability for an economic policy that is both sustainable and tension - free. i will finish by describing the current situation in switzerland. fiscal and monetary policy goals and complementarity must there necessarily be tension between monetary and fiscal policy? this might be true if these two areas of economic

in question may benefit from lower interest rates. • on the micro - economic side, euroisation would lead to lower transaction costs, and might provide a boost to trade and financial integration. these benefits can, however, not be taken for granted. most of these benefits can indeed only be reaped if they are supported by sound economic policies. • for instance, inflation may still be running high in case of pro - cyclical fiscal and wage policies. accordingly, euroisation cannot be a substitute for stability - oriented policies. • again, this underlines the importance of having in place a stability - oriented macroeconomic framework, such as the one established at eu level. what are the possible costs and risks of euroisation? • first of all, the country in question may face an inappropriate monetary policy stance in case of diverging business cycles. the loss of an independent monetary policy and the exchange rate instrument may make it more difficult for the country in question to respond to idiosyncratic shocks, or to correct a loss of competitiveness. • the country in question could also run into logistical difficulties, since it would exclusively depend upon private arrangements with credit institutions for a number of key services, such as banknote handling and the execution of high - value payments. it would also render it more difficult to extend the lender of last resort function to its own credit institutions. • finally, the country would also lose seigniorage revenues. in short, unilateral euroisation is not a panacea. its benefits are uncertain, whereas the costs are real, and the risks serious. in particular, it should be stressed that euroisation is not a “ quick - fix ” for structural problems or external pressures. admittedly, euroisation would provide some shelter against adverse winds coming from the outside. in a way, the euro can be likened to the armours worn by knights during the middle ages. of course, an armour provides a shield against external hits. however, an armour can also limit the freedom of action and restrain flexibility. it can give a false sense of security. the effects of euroisation are similar. it can attenuate external pressures in the short run. but it does not solve the problems underlying these external pressures. if no action is taken to solve these problems, the pressures will be building up. what about a partial euroisation sponsored by the private sector, as opposed to an official euroisation? i will not dwell much on this issue. clearly,