The past two years have been very disappointing from an economic perspective. Global growth forecasts have had to be downgraded repeatedly. The Swiss economy too has done very poorly. The reasons for this lacklustre performance are many. The US economy has been very hesitant, European — and particularly German — growth has been anaemic, investment and exports have been penalised by the worldwide capital overhang, and confidence has been undermined by geopolitical developments, accounting scandals, and the collapse the stock market. Today, most forecasters are cautiously optimistic, and they expect a gradual resumption of growth during the second half of 2003.

Policymakers face many challenges, though. Risks and uncertainties remain large, and they mostly point to the downside. On the bright side, one can note that the Swiss National Bank (SNB) has managed to maintain the purchasing power of the franc intact for the fifth year running. At the same time, Swiss monetary policy remains decisively expansionary. Over the past two and a half years, the SNB has lowered interest rates aggressively, and the Swiss economy is well placed to take full advantage of a global recovery when it will eventually materialise. There are limits to what monetary policy can do, however. In particular, it has no lasting hold on real variables. Although Swiss economic growth is probably underestimated by real GDP, there is no question that is has been deficient over the past two decades. The reasons for this counter-performance are mostly real, and more must be done to raise work incentives, to lift productivity, and to make the Swiss internal market more competitive.

The paper also argues that there is little point in trying to use monetary policy to control asset prices, and that deflation is currently not a serious threat in Switzerland. On the foreign exchange front, it is argued that the SNB is best off pursuing an independent monetary policy, one that is custom-made for Switzerland. Tying the franc to the euro, in particular, would not solve many problems and it would create an array of new ones. Thus, it would most likely lead to a rise in inflation and in interest rates, to a sharp drop in asset prices, and it would severely undermine investment and activity.