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Shadowing the euro is a hazardous course.

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UBS study on the future of the Swiss franc

Peter Buomberger, Chief Economist of the UBS Group, today presented a study on the future of the Swiss franc. The study - an attempt to chart the course of exchange rate policy after nearly two years of experience with the euro - concludes that it would be extremely risky to link the Swiss franc to the euro at present. If the CHF/EUR exchange rate were to remain constant, the Swiss franc's interest rate bonus would largely disappear. This alone could cost the country 0.5% of its GDP. If linked to the euro, the franc would also lose its attractiveness as an international investment currency, with further possible consequences for the economy. Linking to the euro would also result in Switzerland importing the risk of instability associated with the eastward enlargement of the European Union.

The Swiss franc moved in an extremely tight trading range throughout 1999-2000. The experience of this period has shown just how far the attractiveness of the franc as an international investment currency rests on its independence. Linking the franc to the euro would spell the end of the traditional Swiss interest rate bonus, and entail major disadvantages for the financial sector. The main loser in this scenario would be the securities issuing and asset management business. Asset management alone supports around 50,000 jobs in Switzerland and contributes some 6% to the country's GDP. If the franc were to remain independent, on the other hand, it could gain importance as an international diversification currency, particularly if other countries such as the UK sign up for Economic and Monetary Union. Studies conducted by the Swiss National Bank and the Economic Research Centre of the Swiss Federal Institute of Technology have demonstrated that higher levels of exchange rate uncertainty have no negative impact on foreign trade volumes.

The euro has brought significant benefits to many EU countries which have historically suffered from instability problems. Countries such as Italy and Spain have achieved a large measure of monetary stability within a short space of time. Such arguments do not apply to Switzerland, which has long been a bastion of probity in this respect. In fact, the opposite could be the case. The planned expansion of the EU involves substantial risks which Switzerland would import if it were linked to the euro by a fixed exchange rate. Admission of the newly transforming countries of Eastern Europe could result in the economic policy of Euroland losing efficiency and credibility. Moreover, increasing disparities within the euro area monetary union jeopardize macroeconomic stability.

Such major cost factors associated with linking the franc to the euro are sufficient, in the authors' view, to cancel out the potential advantages, the most significant of which is the reduction in transaction costs. For this reason, the best currency strategy for Switzerland is to maintain the independence of the franc.

By adjusting its monetary policy framework in December last year, the SNB has charted a course independent of the ECB. The target range for the LIBOR money market rate and the publication of the inflation forecast offer the SNB other ways of communicating with the market than the ECB with its refinancing rate. Since March, moreover, the Bank's resolutely independent approach has successfully convinced the markets that it is determined to go its own way. If the SNB continues to pursue a policy of preserving the franc's autonomy, there is every prospect that the currency will retain its interest rate bonus and diversification role.

Zurich/Basel, 24 October 2000