Global Agenda: Franc talk

The Swiss have given the world Swiss banking and the Swiss franc, two paradigms of financial stability.

By PINCHAS LANDAU
money good 88 (photo credit: )
money good 88
(photo credit: )
" ...and what have the Swiss contributed to civilization, in 500 years of peace? The cuckoo clock." The famous put-down of Switzerland by Orson Welles, as Harry Lime in Graham Green's "The Third Man," is unfair and certainly inaccurate. The Swiss have given the world Swiss banking and the Swiss franc, two paradigms of financial stability. That may be an intangible, but it's far from being immaterial. The Swiss franc has come to be, by far, the hardest currency in the world, making even the late and sadly missed Deutschemark look rather soggy by comparison. The record of the Swiss in matters of money has imparted considerable weight to the pronouncements of Swiss bankers on financial affairs. And, as the guardian of the national currency, the country's central bank - the Swiss National Bank - has a special status, even within the exclusive club of central banks. Although a minnow compared to the US Fed, the new European Central Bank and the Bank of Japan, the SNB punches well above its weight. It is therefore worth listening to the governor of the SNB, especially when he is talking about not only his but also your currency. This opportunity arose last week, when the current governor (since 2001), Dr. Jean Pierre Roth, was visiting Israel and spoke at the Hebrew University's Leonard Davis Institute for International Relations. His topic was "Autonomy on the Edge of a Large Monetary Zone: the Swiss Experience," which, in plain English, means "How is the Swiss franc faring in the era of the euro." Dr Roth's analysis was uncharacteristically forthright, by the standards of both central bankers and Swiss bankers. In essence, his answer was "It's great and we love it." For Switzerland, the advantages of not joining the euro, or even pegging the franc to the euro, but rather maintaining the franc's autonomous status, far outweigh the disadvantages. This is mainly because all the reasons that most of the small countries in Europe (and some of the big ones) had, and have, for joining the euro, simply don't apply to Switzerland: Its rate of inflation is lower than that of the EU as a whole and of virtually every country in it; its interest rates are consequently lower than those on the euro; and small economies need to be able to adjust their exchange rates in the event of "country-specific shocks" - i.e. negative events that occur in their country alone and that force economic policy to behave in a different way to that of the larger bloc to which the country belongs. In the case of Switzerland, the kind of country-specific shocks it suffers are not the sort most other countries experience. A negative shock normally would be associated with a sharp outflow of capital, stemming from a loss of confidence and resulting in devaluation. Switzerland, however, serves as a safe haven from the tsores of the rest of the world, so that after a major shock - 9/11 is a good example - a wave of capital flows into Switzerland because people regard it is rock-solid. This results in the currency rising rather than falling. The Swiss response is then to cut interest rates, if necessary to near-zero. Were the country to give up its monetary autonomy, this would be impossible and the Swiss economy would suffer. This is very interesting stuff to anyone following European or even global financial trends. But the subtext of Roth's title and talk was what should Israel do with the shekel, in the era of the euro. Ever since the late 1990s there has been a school of thought among some Israeli economists that believes that the shekel should at least shadow the euro, and that Israel should seek some kind of association agreement with the EU - Israel's largest trading partner - which would make the shekel a quasi, or unofficial part of the European Monetary Union. Roth, however, cut to the heart of this issue and poured scorn on the idea. First, unlike Switzerland, which is surrounded by the euro area, Israel is in the shadow of not one but two currency areas, namely the euro and the dollar. In his view, this makes it even less desirable for Israel to forgo its monetary autonomy because it has to juggle the balance of pressures generated by each of these mega-currencies. Furthermore, Israel is exposed to frequent external shocks and therefore needs the flexibility provided by its own monetary policy much more than Switzerland. Also like that country, it can benefit from the stability generated by the euro currency bloc while not itself being part of that or any other bloc. Israel, concluded Roth, has achieved all the necessary ingredients for the successful pursuit of autonomous monetary policy and it would be ill-advised - so the Swiss Governor strongly implied - to forgo that status in return for the dubious benefits of joining a currency bloc. landaup@netvision.net.il