Do you remember how the NASDAQ Composite Index reached its maximum on 10 March 2000 and within a year, lost half its value? As a consequence, global demand for capital fell sharply. The weakness in financial markets and the cooling in global economic sentiment were a real shock to the Swiss economy in general, because of its specialisation in the production of capital goods, and to its banking sector in particular. Within twelve months, our exports and investments contracted sharply. Facing a slowdown in economic activity and less pressure on the price front, we cut interest rates for the first time in March 2001, a few weeks after the Federal Reserve and just ahead of the ECB. September 11 and the war in Iraq were, from a Swiss central banker's perspective, new asymmetric monetary shocks. Both events caused a flight into the Swiss franc, which gained ground against the dollar and the euro. With a further deterioration of economic conditions and reduced inflation pressure, we cut rates twice by 50 basis points: the first time, in line with the Federal Reserve and the ECB, on September 17, and the second time, a week later. The ECB, by contrast, held rates stable until November 2001. A similar situation could be observed in the run-up to the war in Iraq. In 2002, the SNB cut interest rates on two occasions, while the ECB did not move until December.
BIS Review 46/2006  1  Consequently, economic fluctuations in the euro area are important for both Israel and Switzerland. But in the Swiss case – and this is a kind of paradox for a country that does not belong to the EU – the relations are especially close: Switzerland shows a higher degree of cyclical integration with the euro area than the individual euro members themselves! Indeed, over the last five years, Swiss GDP growth has shown a correlation of 86% with economic growth in the euro area, while within the euro area, growth rates have had a correlation of only 65%. Israel's growth has a correlation with euro area growth of 62%. The deep integration of Switzerland in the European markets is not a surprise, since we are located at the heart of the Union, next to its largest members, but also because we have signed several bilateral agreements with the EU giving us free access to the European goods and labour markets. Israel's situation is quite different in that respect, but it remains a fact that, in both countries, fluctuations on the real side are closely linked to those in the euro area. Regarding the level of growth, Israel, as a relatively young country with a growing population, has outperformed both the euro area and Switzerland, with an average growth over the last five years of 2% versus 0.8% and 0.6% respectively. Nevertheless, Israeli GDP per capita is still only roughly half of that in Switzerland.