The recession of 1990-92 vividly illustrates the potential  BIS Review 60/2002  1  consequences of a single currency in regionally diverging economic situations. At that time, Britain and Italy withdrew from the European exchange rate mechanism and devalued their currencies. This measure permitted them to recover relatively quickly from the recession but they had to put up with higher inflation instead. Conversely, and at the same time, Germany had to contend with the inflationary effects of reunification. Therefore, the German Bundesbank had to raise interest rates to support price stability. What would have happened if the Monetary Union had already existed at the time and if Italy, Britain and Germany had been members of the Monetary Union? Italy and Britain would not have been able to devalue their currencies. The sole instrument would have been monetary policy. The European Central Bank (ECB), had it already existed then, might possibly not have increased interest rates out of consideration for Britain and Italy, or at least might not have permitted rates to rise to the extent that the Bundesbank considered necessary. This would not have served either Germany or Italy and Britain well. In the case of asymmetric shocks a uniform monetary policy is second best. Apart from this historical case in point, the general rule is that the costs of the loss of monetary independence will be progressively lower as the pace of economic adjustments increases.
A hedging strategy for Swiss entrepreneurs would consist in using the euros that they earn for settling suppliers' bills or, in theory, even for paying wages and salaries in Switzerland. In reality wage earners are likely to offer resistance to being made to bear the exchange rate risk. So-called natural hedging is a more obvious option. In this case, Swiss exporters use the euro amounts for paying for intermediate services, i.e. their suppliers from Euroland. Naturally, the Swiss financial centre, too, will not remain immune to the euro. The integration of the European financial markets propelled by the single currency will trigger waves of innovation and, in particular, of consolidation. As virt-x in London shows, financial markets are not tied to a specific location. A strengthening of locational competition on a global level represents a considerable but desirable challenge for the Swiss financial centre. Euro cash is also a welcome innovation that makes things easier. The introduction of the euro in its physical form has primarily affected the hotel and catering industry, retail trade and banks. In this connection, some observers have raised concerns that the euro might displace the Swiss franc as a means of payment. Obviously, the euro is now circulating in Switzerland. This will not lead to a new world, however. Numerous businesses and hotels, notably in border areas and in holiday resorts, have long-standing practical experience in accepting foreign currencies. But even though they provide a foreign-exchange service to their customers, this is definitely not where their comparative advantage lies.