Independently of its self-chosen isolation from the EU Switzerland is deeply affected by EU developments. Therefore it is quite obvious that the Swiss have every reason to look carefully at the likely effects of the creation of the EMU.
There are two Swiss studies currently available on this. One was produced by an Expert group of the Swiss Bankers Association (SBA) and was published in January 1996. The other study was worked out by an EMU Subcommittee of the Federal Commission for Economic Issues on behalf of the Federal Council and published in December 1996. Both studies concentrated on the macroeconomic questions related to the creation of the EMU, i.e., more specifically, the equally important microeconomic issues were either not treated at all or then only marginally. Among the microeconomic issues not too few are of particular interest to the financial industry. Since these matters have been taken up by another Expert group of the SBA just after the accomplishment of its first study, I shall be able to come back to them in the last part of my article.
Basically, two scenarios have to be separated. In the SBA's report we distinguished a 'world' called 'Stabilia" from another one called 'Permissivia'.
· 'Stabilia' stands for an EMU in which all its members satisfy the known and unchanged criteria of convergence according to the Maastricht Treaty. No concessions are made with respect to the suffering prestige of those EU member countries which would like to join but are not really prepared for such a step economically and politically. The European Central Bank (ECB), to be created in 1998, follows the model of the Deutsche Bundesbank, i.e., its independence from political pressure is secured and its policy is dominated by price stability. In this world the EMU is very attractive to the EU 'Out-countries' which increase their efforts to join the 'club'. Their policy brings them closer and closer to meeting the admission criteria. As a consequence, within the EMU but also in its EU neighbourhood, interest and inflation rates would gravitate towards the long-term averages of the former Deutschmark area.
· Compared with this 'world' that of 'Permissivia' is different. Here the EMU is also realised but under bleaker auspices. Members are admitted despite the fact that they are not satisfying some or all the Maastricht criteria. Increasing political pressure on the ECB damages its ability to pursue its initial policy of favouring price stability. As a result, in 'Permissivia' interest and inflation rates converge towards the long-term averages in the totality of the EU member states.
Obviously, Switzerland's macroeconomic environment is quite different depending on which of the two 'worlds' materialises. If the 'Gods' were benevolent to Switzerland, the future would be 'Stabilia's'. The interest rate differences between Switzerland and the EMU would not exceed the one the Swiss have become accustomed to in relation to the German economy. (5 % in Switzerland, 7 % in the EMU). The inflation rates and the public deficit quotas would also stay benign, i.e., equal at around 3 %.
Not so in the case of the 'Gods' being less than benevolent. Here, the combination of the traditional Swiss conditions with the economic conditions reigning in 'Permissivia' is bound to lead to growing divergence. A Swiss interest rate of 5 % would be combined with an EMU rate of 10 %, at least in a first phase. A Swiss rate of inflation of 3 % would be opposed by an EMU rate of 6 %. And a government deficit of Switzerland of 3 % of the GDP would be 'matched' with an EMU deficit of 6 %.
Quite clearly a scenario like this cannot possibly prevail over time. If markets are to expect 'Permissivia' the flight from future 'In-currencies' like the Deutschmark, that are more stable today than the Euro is expected to become later, into stable 'Out-out-currencies' like the Swiss franc, the US-$ or the Yen would be a most natural development.
On balance we might safely presume that particularly in the 'Permissivia' case a revaluation of the Swiss franc as well as of other 'Out-out currencies' is a likely outcome which might materialise anytime, i.e., as soon or as frequently as the markets' trust would turn away from the future Euro. The current year is prone to reveal the reality of this or any other expectation regarding exchange rates since, apart from the unlikely case of a slowing down of the Maastricht process, 1997 is the reference period for the Maastricht criteria, and in the second quarter of 1998 the European Council is due to decide on EMU membership.
Now, a revaluation is not necessarily a bad thing in itself. Also, a revaluation, especially if stimulated by changing expectations, is not a one-way track. The past year has proven this again for Switzerland. After an albeit very long period of almost three years of increasingly excessive revaluation, the Swiss franc exchange rate has finally started to climb down to levels more in line with the economic potential of the Swiss economy.
This development might show either one of two things. Firstly, the recent devaluation of the Swiss franc might mean that the markets are increasingly convinced that the most probable EMU scenario is the one of 'Stabilia'. In this case, they see no need to flee into the Swiss franc since, e.g., the Germans expect the Euro to be as safe as the Deutschmark or anything else. Secondly, the devaluation of the Swiss franc might reflect the markets' view that the Swiss franc is increasingly suffering from its own problems. The long and rather bad macroeconomic performance of Switzerland could be used as a justification. In addition, I feel obliged also to mention that, although it is true that up to now there is no sign that the current quite expansionary monetary policy course of the Swiss National Bank (SNB) threatens price stability, the SNB's ability to keep control in the future might be doubted by some market participants.
Sooner or later the exchange markets will have to accept the following lesson: If revaluation exceeds the productivity growth performance of an economy revaluation is bound to lead to trouble. First, the economy begins to stagnate, secondly a country's economic, fiscal and social difficulties begin to grow, and finally one can expect that even a central bank that is traditionally one of the fiercest inflation fighters will be forced to give in.
Seen in this perspective it is quite evident that Switzerland has every reason to pray to the 'Gods' that they save the EU from 'Permissivia'. This follows directly from an evaluation of Swiss self-interest and it also applies to bankers in Switzerland, some of which from time to time appear to interpret their chances in the markets differently. The reality of universal banking in Switzerland means that most of the banks are likely to be badly affected in their banking books by any serious macroeconomic downturn. In addition, no banker can deny that private banking, this great speciality of the Swiss, heavily depends on the political and economic stability of the country as a whole.
The SBA summarises its position in favour of a successful and stable EU including EMU as follows:
"Banks are a part of the economy; they belong to the
domestic as well as to the export sector. Without an economy that prospers
there are no banks that prosper."
2. The EMU as a Challenge to the Financial Industry
We do not know which way the 'Gods' will turn, but we have reason to expect that an EMU there will be. Let us assume that the reality will turn out to lie somewhere between 'Permissivia' and 'Stabilia'. In other words, I would like to suggest that there is life even after January 1st, 1999, i.e. after the introduction of the Euro as the common currency of the most important EU member countries. Then the question arises how to prepare oneself most effectively in order to master the challenges lying ahead of the financial industry in this country. The unofficial Swiss, but deeply British motto is: "Prepare for the worst and hope for the best!"
The SBA has started to investigate this question just after it finished its first study. The SBA's Board asked an Expert group to contribute to the SBA's members' preparation for phase III of the EMU process, i.e. 1999 onwards. The Expert group is expected to inform member banks on how they might best adopt their production processes and service standards to the exigencies following the introduction of the Euro. The resulting Manual will be published in Autumn.
At the level of the individual banks, there are two types of questions that absorb the Expert group's particular interest. The first type is of a legal nature, the second is related to the technical aspects of the securities operations. Since these issues are pretty the same elsewhere I refrain from summarising the state of the Experts' current discussion here.
At the level of the Swiss banking system as a whole, there are a number of rather more important issues that are not yet resolved. The first concerns the technical aspects of how to link the Swiss payments system with that of the EMU. In the first SBA study, special weight was attached to linking Swiss Interbank Clearing (SIC) to TARGET (Trans-european Automated Real-time Gross settlement Express Transfer system). This will be the system through which the ECB will operate its monetary policy. 'In-country banks' are able to participate directly in the system. The position of 'Out-country banks' and of 'Out-out-country banks', like the Swiss, is not yet clear. Should Great Britain refrain from joining the EMU its banks would become 'Out-country banks'. Since London is an extremely important financial centre, the London banks might still be admitted to participate in TARGET. This might increase the chances of the Swiss banks to link up, too.
But things could also go the other way. EMU country banks might oppose the sharing of eventual advantages with their competitors and some not yet fully clarified monetary policy arguments might serve as a pretext to keep 'Out-countries' out. Yet, since nobody knows whether TARGET will become a particularly efficient system the development of competing clearing systems might be preferable anyway.
A further progress report to be published by the European Monetary Institute (EMI) in July is expected to contain more information on the access to TARGET.
Nevertheless, the presumption is that the attachment of a Euro-SIC to the existing SIC in narrow co-operation with the SNB is currently by far the preferred option of the Swiss banks. At first, this would mean the execution of purely domestic payments in Euro. At a further stage, international Euro payments would also become executable through Euro-SIC. This would in principle allow for the execution of Euro payments at the same conditions as in the EMU area. This could be quite attractive for the clients of banks in Switzerland. It would also facilitate the listing and trading of shares in Euro at the Swiss Stock Exchange (SWX) as well as the clearing and settlement of these trades through SEGA, the Swiss banks' securities clearing and settlement house. As a consequence it would be possible to realise the principle of payment against delivery in Euro. This is particularly important since for the time being Switzerland is the only financial centre which can offer this specific quality of services.
If, on the other hand, the political obstacles mentioned above would materialise, i.e. if the SNB is not willing or not able to act as the central liquidity provider in the Euro-SIC, banks in Switzerland could be led to envisage the creation of a special private Swiss Euro-Clearing Bank (SECB) as a substitute. In order to limit the credit and the systemic risks the SECB would inevitably have to face, the so-called Lamfalussy standards would have to be maintained.
Banks in Switzerland think that this second approach,
i.e. the private approach to the project of an Euro-SIC is also viable,
although they clearly prefer the first approach, i.e. the one in which
the SNB would be the central liquidity provider.
3. The Swiss Financial Centre after January 1999
From this discussion it is only a very small step further and we might share together the following vision of the Swiss financial centre after January 1, 1999.
· The clients of banks in Switzerland are offered the totality of services in Euro as well as in Swiss francs.
· The banks in Switzerland can use 'Euro-SIC' which is efficiently linked to TARGET and/or its competitors.
· The Swiss Stock Exchange (SWX) offers listing and trading in Euro.
· The clearing and settlement services offered by SEGA are consequently adapted.
In addition we might imagine that existing structures which are not yet accessible very easily from abroad (SWX, SEGA, SIC) might be opened further. As a result of a persistent promotion of 'remote access' the Swiss financial centre would definitely become part of the otherwise already globalised financial markets.
The driving forces of globalisation are technology, the needs of a growing world economy for efficiency and the sweeping political changes after 1989. In the light of this, the EMU is but a catalyser.
If the banks in Switzerland and the related institutions are able to act swiftly and with imagination, this financial centre will be able to consolidate its leading position. It will do so not by concentrating on the traditional Swiss franc services and in reverting into an off-shore area coming under increasing pressure from the surrounding EU countries, but rather by offering its clients the full range of Euro services at conditions better than that of the competitors in the EU and elsewhere.