Second, changes in the monetary policy of the euro area have repercussions. Interest rate cuts by the ECB usually lead to an appreciation of currencies in neighbouring countries. This dampens growth and lowers inflation. Third, uncertainty during the euro crisis precipitated capital flight towards neighbouring countries, thereby placing exceptional upward pressure on their currencies and thus rapidly changing their monetary conditions. The monetary policy of neighbouring countries must take into account the influences via these channels on domestic economic developments. The most significant advantage of conducting an independent monetary policy is that it allows the central bank to address the specific needs of its own economy. Countries which join a currency union relinquish this ability to control and stabilise in favour of other advantages – for example, by joining a currency union, a country may take on a more credible and therefore more successful monetary policy than its previous one. For Switzerland, however, the ability to pursue an independent monetary policy has clearly paid off. The structure of the Swiss economy is a singular combination of, first, a strong manufacturing sector specialised in producing high-quality, research-intensive goods (think of pharmaceuticals and watchmaking, but also the specialised machinery industry), and second, a major financial centre which, notwithstanding certain setbacks due to the financial crisis, has retained its global reach. Given this structure, the drivers of economic development in Switzerland are therefore often different to those of other European countries, so it makes sense to have an independent monetary policy.
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.