Governor Ásgeir Jónsson delivered a speech on 2 June at a conference on Iceland’s currency options. The conference was organized by the Ministry of Finance and Economic Affairs and was held in conjunction with the publication of a report on Iceland’s currency options prepared by a panel of international experts. In his address, the Governor discussed Iceland’s experience in maintaining economic stability in a small and highly open economy. He highlighted the extensive reforms made to the monetary policy framework in the years following the global financial crisis, including a stronger emphasis on macroprudential policy. These reforms have contributed to greater balance of payments stability while helping to contain credit growth and debt accumulation.
The Governor noted that the Icelandic economy had been exposed to a series of significant shocks over the past decade. He pointed out that movements in the exchange rate of the Icelandic króna since 2010 have largely reflected such real economic shocks rather than financial market disturbances. In this context, the króna had rather acted as a shock absorber than a shock amplifier.
The Governor also discussed the potential advantages and disadvantages of Iceland adopting the euro associated with possible EU membership. Among the benefits he cited participation in a larger currency area, lower transaction costs in trade with European Union countries, reduced exchange rate risk, and lower interest rates. However, he stressed that the loss of an independent monetary policy would require strengthening other economic policy tools to safeguard stability. Without such measures, adjustment to economic shocks would be reflected through changes in employment, economic growth, migration flows, and asset prices.
The Governor emphasized that Iceland’s current interest rate environment has clear economic explanations and should be viewed in the broader context of the country’s institutional framework. He noted that an important element of the Scandinavian model is moderate wage growth consistent with low inflation. In Iceland, however, attempts to transform temporary wage agreements into a lasting social contract have repeatedly fallen short.
He concluded by stressing that no monetary policy regime can be successful over the long term without an institutional framework and an appropriate fiscal policy that support economic stability. Whether Iceland retains the króna or adopts the euro down the road, the path to lower interest rates remains fundamentally the same. In either case, following the rules of the game is more important than what games is chosen.