Has the time come to join the Eurozone?

Danish Institute for International Studies
The global financial crisis has been of particular importance in Denmark because of its small, open economy and its exposure to global trade and investment. Related to this, Denmark’s economy, like that of the UK, tends to be further ahead in the economic cycle compared to the rest of the EU. Denmark was the first EU economy to enter technical recession in the 2nd quarter of 2008 and spent much of 2008 in recession.[1] The vulnerability of the Danish economy, based on global exposure and inflated housing sector, had been identified in 2007 as one of the three most fragile housing markets in the world, with similar vulnerabilities in its banking sector – in mid-2008 the official foreign reserves of the Danish National Bank as a percent of GDP were only about 10 percent (less than Iceland’s).[2]
The banking crisis hit Denmark with Roskilde Bank’s collapse in August 2008 – during 2008 nine small Danish banks were merged or wound up as liquidity tightened.[3] During 2008 the Danish National Bank was forced to repeatedly increase interest rates to support the Danish fixed exchange rate policy – by November 2008 the difference between the European Central Bank (ECB) and Danish interest rates were at an all-time high of 1.75 percent.[4] The Danish economic problems, downturn in housing market and consumer spending, and the relatively high interest rates have contributed to increased difficulties for domestic shop owners and Danish exporters with 2009 expected to be a particularly tough year for exports.[5]
Probably all small countries should join
The stagnating Danish economy, high interest rates, and banking risks all contributed to the attempts by the Danish Prime Minster, Anders Fogh Rasmussen, and the majority of parties in the Danish Parliament to move from a fixed exchange rate policy to full membership of the Euro. Mounting economic evidence reinforce the arguments for the Euro in Denmark, in particular the risks of being outside the Eurozone, the costs of maintaining the Krone, and the trade losses outside the Euro.[6] Paul Krugman, the Nobel Prize winner for economics, had commented in an interview that “the lesson of the crisis is that one should join the Euro […]. For good or evil should probably all the small European countries join”.[7] Sydbank’s Chief Economist, Jacob Graven commented that the financial crisis had “made it less attractive for investors to hold Danish Kroner rather than Euros”.[8] Niels Bernstein, the Danish National Bank Governor argued that “over a longer horizon, adopting the Euro will have a certain positive effect on growth in Denmark”.[9] The most comprehensive economic evidence came in January 2009 with the publishing of the SNS Economic Policy Group Report 2009 – EMU at Ten: Should Denmark, Sweden and the UK Join? which argued that Euro effect on exports (and analogously on imports) for Denmark joining can be calculated roughly as a 35 percent increase in trade.[10] The Report concluded that “Denmark is well positioned in terms of public finances, fiscal policy-making, labour market flexibility and the level of unemployment to participate in the monetary union. It has little or no monetary policy independence since it has tied the Krone to the euro. It would therefore clearly gain by joining the monetary union”.[11]
Beyond the discussion of Denmark fully joining the Euro, there has been relatively little Danish discussion of the EU response to the financial crisis and challenges of global governance, possibly reflecting Danish non-participation in EMU politics.[12] Prime Minister Rasmussen has argued that both the global finance and climate problems have the “same solution” – requiring “creating farsighted, long-term, sustainable green growth”, but without reference to the EU in this radical transformation already advocated in Brussels.[13]

[1] Robert Anderson: ‘Denmark heads towards recession’, Financial Times, 1 December 2008.

[2] Copenhagen Post: ‘Denmark is one of the top three most fragile housing markets in the world’, 1 August 2007; Willem Buiter and Anne Sibert: The Icelandic banking crisis and what to do about it, Centre for Economic Policy Research, CEPR Policy Insight No. 26, October 2008.

[3] Lex: ‘Bank failures: Roskilde’, Financial Times, 25 August 2008; Robert Anderson: ‘Denmark unveils bank loan package’, Financial Times, 19 January 2009.

[4] Copenhagen Post: ‘Central bank opts for interest rate rise’, 22 May 2008; Robert Anderson: ‘Danish PM seeks backing for euro referendum’, Financial Times, 4 November 2008.

[5] Politiken: ‘Shop owners want out’, 20 January 2009; Julian Isherwood: ‘Markets drop Danish goods’, 27 January 2009.

[6] Ian Manners: Small, open €uro economies, Danish Institute for International Studies, DIIS Brief, January 2009.

[7] Johan Anderberg: ‘Paul Krugman – Nobelpristagaren – nästan som en svensk betongsosse’, Sydsvenskan, 16 November 2008.

[8] Copenhagen Post: ‘Central bank opts for interest rate rise’, 22 May 2008.

[9] Joel Sherwood: ‘Danish Central Bank Reinforces Euro Adoption Support’, Dow Jones Newswire, 22 January 2009.

[10] SNS Economic Policy Group Report 2009: EMU at Ten: Should Denmark, Sweden and the UK Join? (Stockholm: SNS Förlag, 2009), pp. 86-87.

[11] SNS Economic Policy Group Report 2009: EMU at Ten: Should Denmark, Sweden and the UK Join? (Stockholm: SNS Förlag, 2009), p. 16.

[12] Berlingske Tidende: ’Krisen bringer det bedste frem i EU’, 12 December 2008.

[13] Copenhagen Post: ‘PM: Finance and climate problems have 'same solution'’, 27 January 2009.