This is true of both large and small currency areas. In smaller currency areas, an increase in exchange rate volatility can present monetary policy with additional, substantial challenges. In both the neighbouring countries of the euro area and the member states themselves, negative deposit rates and quantitative easing programmes have therefore been implemented to influence monetary conditions. Furthermore, the central banks of the Czech Republic, Denmark, Sweden and Switzerland are prepared to intervene in the foreign exchange market as necessary. This range of unconventional measures has extended the monetary policy options for the various central banks. My final message is that, despite the expanded set of monetary policy instruments available, the options are not unlimited. First, the effects of monetary policy measures can wane with duration and dosage. This is particularly the case if the solution to structural problems requires adjustments to economic policy. Monetary policy is no replacement for such adjustments. Second, the benefits of unconventional monetary policy measures always come at a potential cost. These costs must be continually evaluated and monetary policy adjusted if the long-term costs outweigh the short-term benefits. Third and finally, for small open economies in particular, monetary policy cannot cushion the impact of every negative development in the global economy or the international financial markets. Favourable conditions for the economy and a high degree of adaptability among companies play a key role in a country’s ability to overcome crises and disruptions.
chart 7). Before the onset of the global financial crisis, the euro area was regarded by financial markets as a more or less homogeneous unit. Hardly any distinction was made between country risk within the euro area. This was reflected in the fact that the government bond interest rates of most member countries were practically the same as those of the country with the lowest yields, namely Germany. During the course of the financial crisis, concerns over the stability of the euro area led to increasingly large divergences between the sovereign yields of the large member countries. Yields rose not just on Italian and Spanish bonds, but also on French sovereigns. In this environment, the growth and inflation outlook for the euro area again deteriorated. At the end of 2011, the ECB therefore reversed two of its interest rate hikes, those of April and July 2011. Market uncertainty resulted in renewed inflows to the Swiss franc, causing it to appreciate against a broad range of currencies (cf. chart 8). In 2007, one euro cost CHF 1.65 – by August 2011, the exchange rate had fallen to almost parity. The Swiss franc also gained markedly against the US dollar, which at the time was not regarded as safe haven due to discussions about the debt ceiling. In 2007, a dollar cost CHF 1.25 – in autumn 2011, it temporarily fell to 75 centimes. A rapid and substantial appreciation was also taking place against the other major currencies, with no end in sight.