Besides Switzerland, I will also be looking at the Czech Republic, Sweden and – a special case – Denmark (cf. chart 1). These are all small open economies with strong trade links to the euro area. With the exception of Denmark, these countries chose to continue pursuing an independent monetary policy even after the introduction of the euro. Furthermore, the central banks of all these countries have in recent years implemented unconventional monetary policy measures. I will return to this point in more detail later. Two questions stand at the centre of my speech today. First, can countries bordering a major currency area pursue an independent monetary policy – and have events since the onset of the financial crisis in 2008 affected the answer? And second, how have unconventional measures helped these countries in the implementation of an independent monetary policy? I will argue that the first question – whether countries bordering the euro area can pursue an independent monetary policy – can essentially be answered with a yes. However, for these countries, managing monetary conditions arising from interest and exchange rate levels has become significantly more difficult in recent years. Regarding the second question – how have unconventional measures helped these countries in implementing an independent monetary policy – I will argue that negative interest, foreign exchange market interventions and quantitative easing programmes – instruments each tailored to suit a country’s specific needs – have helped these central banks to regain a certain room for manoeuvre.
Notwithstanding recent data that show consumers are borrowing again, four and a half years into the economic recovery, employment still has not reached its prerecession level, making this by far the slowest of the 12 post-World War II U.S. recoveries. One problem has been the sluggish pace of the recovery in the other advanced economies. The financial crisis was a global phenomenon, affecting advanced and emerging market economies alike. Yet the emerging market economies bounced back and in almost all cases have long since surpassed their precrisis levels of output. This has not been the case in the advanced economies. Europe and the euro zone, which have been hobbled by a series of sovereign debt crises in the wake of the financial crisis and the adoption of a single currency, remain important to the global economy, and problems there cannot help but have international repercussions. The good news is that European Central Bank (ECB) President Mario Draghi’s pledge in 2012 to “do whatever it takes” to stabilize the situation there seems to have worked and to have bought time for much-needed reforms. In conversations with President Draghi and the ECB governors last Friday, it was clear that recent data suggest the worst may be over. Meanwhile, in Japan, “Abenomics” seems to be succeeding in ending the decades-long deflation, though progress on structural reforms – crucial to restoring long-term growth – has been disappointing. There is an important lesson here, one to which I will return later: Monetary policy can only do so much.