Central Bank of Iceland Governor says the krona has helped absorb shocks and euro adoption would require deep institutional reform

The Central Bank of Iceland published a conference presentation by Governor Ásgeir Jónsson on Iceland's currency options in which he argued that Iceland's inflation-targeting regime, floating krona and broader macroprudential framework have helped a small, open and shock-prone economy preserve stability since 2010. He presented euro adoption as offering lower transaction costs, deeper trade and financial integration with Europe, lower exchange rate risk and lower interest rates, but said it would also remove independent monetary policy and require other tools to manage shocks. Jónsson highlighted strategic foreign exchange intervention, restrictions on banks' use of foreign exchange futures, limits on foreign currency lending, borrower-based measures, and bank capital ratios of around 20% plus a 2.5% countercyclical capital buffer as key parts of Iceland's framework. He also argued that Iceland's high policy rate reflects real economic pressures rather than the currency itself, citing the post-Covid rebound, housing shortages, wage growth, external price shocks and volcanic disruption. On euro adoption, he said Iceland's real wages are about 30% above the European average and its natural real interest rate is higher than in the euro area, which could make the ERM-II transition unusually inflationary and lead to capital inflows, higher asset prices and lower real wages unless deeper institutional reform, especially in the labor market, and supportive fiscal policy are in place.