It is not at all certain that a peg would engender the foreign exchange stability that exporters dream of. We have learned from our experience with flexible exchange rates that any explicit foreign exchange target stimulates the appetite of speculators instead of calming the atmosphere. And this would be especially true if our pegging decision were to be taken unilaterally, without the prospect of a full and permanent integration into the euro area. Today, with global markets and global speculation, it would be an illusion to believe that a central bank can defend a specific exchange rate target unless there is strong convergence of economic fundamentals with the economy whose currency it is pegging the domestic currency to. Furthermore, a nominal peg against the euro would do little to stabilise the real value of the Swiss franc – the only thing that matters for the international competitiveness of the Swiss economy – or to stabilise the franc vis-à-vis third currencies, especially the US dollar. Given our exposure to global economic and financial shocks, and their arguably smaller importance for the euro area, pegging the Swiss franc to the euro is not a realistic option. Flexible exchange rates give us the room of manoeuvre we need. 4  BIS Review 46/2006  Conditions for monetary independence Having reviewed the advantages of retaining our national currency and flexible exchange rates, I would now like to turn to the conditions necessary for successful monetary independence. I see three crucial factors here: credibility, transparency and efficiency.
Looking at our development over the last ten years, I do believe that price stability, due to monetary independence and flexible exchange rates, has been beneficial to the Swiss economy. It has maintained a low interest rate environment which has facilitated the private sector's adjustment to the rapid changes of the world economy. And what about Israel? I think that the arguments in favour of Switzerland's monetary independence apply even more to this country. While we at the SNB concentrate primarily on domestic developments and trends in the euro area, the Bank of Israel also has to take into account economic conditions in the US. Thus, there are three major sources of shocks that Israeli monetary policy has to respond to in order to achieve the goal of price stability. BIS Review 46/2006  7  Despite difficult circumstances, Israel was able to stabilise its monetary framework in the 1990s. The Bank of Israel now operates with an inflation target and will soon benefit from a new law that will modernise its decision-making process and strengthen its autonomy. All the necessary ingredients are now in place for the implementation of a successful independent policy in this country, as was once also the case in Switzerland. May I wish Stanley Fisher and his colleagues all the best in this endeavour. 8  BIS Review 46/2006