Neither the EU, nor, as a matter of fact, Switzerland can be interested in such a development. Like any other country in Europe, Switzerland has a vital interest in EMU becoming a success. Switzerland’s economy is closely linked to the economy of the EU. High growth in Europe is essential for a sound economic development in Switzerland, whereas a lackluster economic situation in the EU contributes to sluggish economic growth in our country. The success or failure of EMU will thus directly affect our economic well-being. In fact, not only our economic well-being, but also our ability to conduct a relatively autonomous monetary policy will be affected. Market turbulence during the transition period, uncertainties about the future monetary policy of the ECB and unfulfilled expectations about the stability of the new currency and the degree of political independence of the ECB all have the potential to create an upward pressure on the Swiss franc. An appreciating currency would make it more difficult for our export-oriented companies to compete on the world market and would increase the competition faced domestically from abroad. Should the Swiss franc appreciate to an extent that economic activities in Switzerland were severely disrupted, we would have several courses of action open to us. The Swiss National Bank (SNB) could relax monetary policy in an effort to counteract the effects of the strong Swiss franc on the domestic economy. Attractive as this response may be, its major drawback is that we would have to walk a tight rope.
Although such relative price shocks do not necessarily affect inflation, prolonged short term impacts of sizeable relative price shocks could result, for instance, from adjustment frictions in the economy. Empirical studies for the euro area have tended to suggest a small dampening influence of trade openness on prices in the early part of this decade, though globalisation’s contribution to recent movements in commodity prices – particularly energy and food – has had a significant offsetting upward impact on prices. This warrants close monitoring, in particular given the risks of second round effects. In case of food related commodities, it also underlines the importance of efficient supply side adjustment in agricultural commodity markets. A separate but nonetheless potentially equally important channel through which globalisation can affect inflation involves the indirect price impact of increased competitive pressures, with two main aspects. First, in principle it could contribute to compressing firms’ price-cost markups as competitive forces resulting from trade openness would depress profit mark-ups of domestic firms competing with international firms. In practice, however, such effects have been hard to identify and, indeed, aggregate profitability has remained high. Second, in principle competition associated with globalisation could alter the responsiveness of prices to costs or measures of economic slack, or imply a greater role for foreign conditions in the inflation process.