Israel and Switzerland are small open economies with a great deal in common. One of the major similarities is that both countries are highly integrated into the euro area.

Despite Switzerland’s geographical position in the heart of the euro area, there are still good reasons for retaining the Swiss franc as the national currency, one of which is the preservation of the country’s monetary independence. Firstly, this autonomy gives Switzerland the freedom to determine the average level of domestic inflation. Secondly, it allows the Swiss National Bank (SNB) to react to country-specific shocks. Thirdly, the interest rate advantage that Switzerland enjoys can only be maintained as long as the country has its own currency. And finally, the fact that the Swiss franc is not pegged to the euro keeps speculators at bay.

In order for monetary autonomy to be successful, it is important that a central bank be credible and financially independent. What is more, the communication of monetary policy goals and strategies needs to be transparent and the foreign exchange market has to function efficiently, as changes to monetary policy often translate into unwanted movements in the exchange rates.

Since the introduction of the euro, the SNB has repeatedly used its independence to react to shocks that had a far greater impact on Switzerland than on the euro area. For a small open economy with a credible central bank, retaining one’s national currency on the edge of a large monetary zone has clear advantages.