The Sveriges Riksbank, Sweden’s central bank, recently published a staff memo outlining the potential impact of adopting a digital euro on the Swedish krona. The bank sees potential benefits in terms of a more robust and competitive payment system, but believes any impact on traditional bank deposits would be limited due to the proposed cap on individual holdings of digital euros. While the digital euro is designed for eurozone countries, there is a proposal that would allow non-eurozone members to potentially join the system through agreements with the European Central Bank (ECB), giving residents and businesses in those countries access to the digital euro on equal footing with those in the eurozone.
The ECB has launched a two-year planning stage for the digital euro project, with goals including finalizing rules, choosing private sector partners, and running tests and experiments. A draft proposal suggests significant advantages to having a digital euro, with potential downsides tied to not having one being substantial. The ECB has been given the authority to restrict how much money individuals can hold in digital form, with a possible limit of between 3,000 to 4,000 euros being discussed. This exploration of the digital euro by the EU could have implications for the stability of the Swedish krona, potentially leading to price swings and a weakening of the currency if businesses and individuals choose to hold more of their money in euros instead.
The Riksbank downplayed the impact of a potential digital euro agreement on the Swedish krona, emphasizing that institutional factors such as government payments in Swedish kronor and businesses preferring to charge customers in Swedish kronor will help solidify the currency’s position as the primary one in Sweden. The decision to launch a digital Swedish krona, or e-krona, hinges on the development of the digital euro, as an e-krona could bolster the Swedish krona’s position within Sweden and lead to smoother cross-border payments. Leveraging the technology and regulations developed for the digital euro could also significantly reduce the cost and complexity of launching an e-krona, making it a more feasible option for Sweden’s central bank.
Despite the potential benefits of a digital euro, the Riksbank remains cautious of the impact it could have on the Swedish krona. High inflation and price swings could lead businesses to switch to pricing things in euros, while individuals may choose to hold more of their money in euros due to its perceived stability. However, the bank sees potential opportunities for Sweden in adopting the digital euro, such as a more competitive payment system and the ability for residents and businesses to access the digital euro on equal footing with those in the eurozone. Ultimately, the decision to launch a digital Swedish krona will be influenced by the development and widespread adoption of the digital euro, with the potential for both currencies to coexist and benefit Sweden in terms of cross-border payments and technological advancements.
