Switzerland will not take part in European Monetary Union (Emu) and will therefore not be part of the eurozone either. Even so, Switzerland's banks are making intensive preparations for Emu. From 1999, it will be possible to perform and settle euro-denominated banking transactions within and from Switzerland. Each bank will decide on its euro product range. For the Swiss economy, Emu will mainly mean tougher competition.

Banks will be affected sooner than any other sector of the economy and the impact on them will be greater and more direct as they will bear the brunt of the changeover costs. Not all Swiss banks will be affected by the euro to the same extent; consequently, not all will offer euro products. On the other hand, all will be affected by the conversion of Emu countries' shares and by the redenomination (conversion) of their bond issues.

It is difficult to predict how important the euro will be in payment transactions. It will undoubtedly play a dominant role as an invoicing currency in foreign trade, but its importance in domestic transactions is less clear. In any case, the banks are pre-paring for the possibility that the euro might also play a significant part in domestic business.

The banks, or at any rate those that are successful, are among the sectors that stand to benefit most from the introduction of the euro. A combination of the size of the market and competition will lead to a greater variety of products, greater liquidity in individual markets and low prices. Over the medium term, intermediation costs will continue to fall and claims will be increasingly securitised. This will also benefit the banks' customers.

The major banks want Switzerland to be a financial centre capable of handling the euro - in other words, they want to be able to offer and settle important euro-denominated transactions in Switzerland. The necessary infrastructure is being put in place or expanded. This primarily relates to payment transactions (euroSIC), the clearing and settlement of securities transactions (SECOM) and the stock exchange. The individual projects are being coordinated by the banks' joint ventures: the Telekurs Group, SEGA, Intersettle and the Swiss Exchange.

It is still uncertain to what extent the individual banks will ultimately avail themselves of the euro capability of the joint ventures. What is clear is that not all banks will offer euro products and services to the same extent - the banks and their strategies and customers are too different. Within the framework of the euro capability established by the joint ventures, each bank will be at liberty to pursue its own strategy. This makes it plain that the joint ventures will need to gear their operations to the most 'euro-friendly' of Switzerland's banks.

The fact that Switzerland will not be taking part in monetary union has both advantages and disadvantages. The advantages are as follows:

q Switzerland's banks start from a good position. This applies both to the quality of their infrastructure and to their competitive positions.

q The banks' product ranges can continue to include the Swiss franc, as a familiar and popular 'article' and one that should continue to sell well.

q Unlike banks in Emu states, they will not bear the full cost of conversion. They can concentrate on areas that promise commercial success.

q The banks will not share in the political and economic risk of monetary union to the same extent as their competitors in the eurozone. However, the same cannot be said of the Swiss economy; if Emu were to fail, the im-pact on Switzerland would be severe (for example, with a marked appreciation of the Swiss franc).

The disadvantages are as follows:

q Abroad, the Swiss and their banks will yet again be perceived as profiteers, eager to share in the benefits of European unification, but not prepared to bear the risks and costs.

q Further from home, the Swiss capital market could be perceived as a tiny Swiss franc island in the midst of a euro ocean. Wary of committing themselves to a niche, issuers and investors could therefore overlook Switzerland as a financial centre.

q If Switzerland were to join monetary union as a latecomer, smaller and medium-sized Swiss banks in particular could be at a disadvantage to foreign competitors.

q Part of our national pride is based on the strength and stability of our currency (although we may rarely admit it). It is possible the euro might prove a match for the Swiss franc in terms of stability, while carrying far greater economic and political clout into the bargain.

As far as the banks' customers are concerned, not much will change in 1999. Initially, it will only be possible to use the euro for cashless payments. For the time being, the only physical notes and coins in circulation will still be the national currencies.

Eric Sarasin is a partner in Bank Sarasin & Co in Basle. This article is written in conjunction with the Swiss Bankers Association