the three - month swiss franc libor rate. the main goal has been, and will remain, price stability. price stability is considered to have been achieved if inflation, measured by the national consumer price index, is below 2 % in the medium term. in achieving this goal, the snb always takes account of the economic development. this is also stipulated in the draft of the revised national bank law. due to the strategy change from money supply targeting to inflation forecast - oriented interest rate steering, shifts in the demand for money have become less problematic, as they are being offset automatically. but although the money supply no longer serves as an intermediate target, its development is an important element duly considered – along with other indicators – in producing the inflation forecast. the centuries - old observation that sustained changes in the price level are linked to changes in the supply of money remains valid. 4. 2. the significance of the exchange rate another important variable in producing a medium - term inflation forecast is the exchange rate. the significance of the swiss franc exchange rate against the major currencies is due to the swiss economy being so small and open. the export share of the swiss gross national product ( gnp ) amounts to approximately 42 %, while the corresponding share is 29 % in germany and only 12 % in the united states. switzerland's major trading partners are the eu countries, which absorb 59 % of swiss exports. with regard to imports, the interdependence is even greater : 75 % of swiss imports come from the eu. via foreign trade, the exchange rate exerts an influence on aggregate demand and, therefore, also on the price level in switzerland. in addition, the exchange rate directly affects import prices. therefore, exchange rate movements have been, and will be, closely monitored by the snb. the rapid succession of interest rate cuts by the national bank since 11 september 2001 was also an expression of concern about an exchange rate - triggered threat to the economy. since price stability was not jeopardised, it was possible to considerably relax monetary policy. 4. 3. steering the exchange rate? although the snb takes account of the exchange rates when determining its monetary policy, it is sometimes called upon to do more than that. it is even requested to concentrate – at least temporarily – exclusively on the exchange rate. the underlying notion is that the national bank could aim at a lower swiss franc exchange rate and that exports would consequently pick up to the desired degree.

division of labour between the participating countries. instead of being evened out, differences between countries may thus become more acute. in fact, regional specialisation in the united states is more pronounced than it currently is in europe. major industries have joined together in national clusters - car manufacturers in detroit, software producers in silicon valley, the film industry in hollywood. one might argue, in this context, that the fed in washington faces the same problems as the ecb in conducting a common monetary policy that fits economically diverging regions. however, there are two remarkable differences between the united states and euroland. first, the us labour market exhibits a higher degree of flexibility, and second, the united states are a federal state with a large budget and fiscal policy power of its own. the european union ( eu ) is still far removed from all this. nevertheless, despite all the reservations, it should not be overlooked that a monetary union creates facts. the elimination of transaction costs and of exchange rate volatility helps to lower interest rates, stimulates trade and facilitates direct investment within the monetary union. the project of the european single market, which, among other things, also serves to encourage mobility among the workforce, is thus provided with further valuable stimuli. moreover, the stability and growth pact contributes to the harmonisation of economic policy. asymmetric shocks may thus become less important in the course of time. it is precisely this type of shock that has the most adverse effect on the functioning of a monetary union. 3. implications of the euro's launch for switzerland 3. 1. implications for the swiss economy and the swiss franc as a means of payment like many enterprises in the euro area, swiss companies benefit from the greater price transparency created by the euro for goods purchased from euroland. besides, this leads to enhanced domestic competitiveness with beneficial effects on national prosperity. a further positive effect for switzerland results from the reduction in the number of european currencies. hence, foreign currency management becomes easier. the danger of extreme exchange rate fluctuations such as the 70 % real depreciation of the italian lira between 1992 and 1995 has diminished drastically with the disappearance of the most volatile european currencies. nevertheless, in a system of flexible exchange rates fluctuations can never be ruled out entirely. a hedging strategy for swiss entrepreneurs would consist in using the euros that they earn for settling suppliers'bills or, in theory, even for paying wages and salaries in switzerland. in reality wage earners are likely