Denmark Divided on EU’s Fiscal Pact as Presidency Approaches

Prime Minister Helle Thorning- Schmidt, who vowed to fight for European unity when Denmark takes over the bloc’s presidency next month, is battling a split at home over whether to embrace deepening fiscal ties.

Thorning-Schmidt is fending off calls for a referendum on adopting the fiscal compact proposed this month for the 17 euro nations that leaders say is crucial for the euro’s survival and that polls show voters in the non-euro country would reject. Foreign Minister Villy Soevndal, who heads the anti-euro Socialist People’s Party, said Denmark can’t adopt all the measures in the accord.

“She has to handle a government which is deeply divided on the EU,” Rasmus Joensson, an associate professor in political communication at Roskilde University in Denmark, said in an interview. “It will be a difficult task to unite the EU when your own government isn’t united.”

Denmark’s Socialist People’s Party, one of three groups in the ruling coalition, argues that joining the fiscal compact agreed on Dec. 9 would limit stimulus options as the country teeters on the brink of a recession. A referendum would probably end in defeat for Thorning-Schmidt, said Jens Nyholm, chief economist at Spar Nord Bank A/S. The 45-year-old led her Social Democrats to an election victory in September, ending a decade of Liberal-Conservative rule.

Photographer: Jock Fistick/Bloomberg

Denmark's Prime Minister Helle Thorning-Schmidt. Close

Denmark's Prime Minister Helle Thorning-Schmidt.

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Photographer: Jock Fistick/Bloomberg

Denmark's Prime Minister Helle Thorning-Schmidt.

End in Defeat

Denmark, which has opted out of the euro, will take over the EU presidency on Jan. 1 as the common currency hangs in the balance. The country, where voters have twice rejected the euro, faces a new debate over whether to strengthen ties to the bloc amid calls from opposition parties and the public for a vote on the proposed fiscal fix for the euro region’s debt woes.

EU leaders this month created a blueprint for a tighter financial union in their latest attempt to stem the region’s two-year-old debt crisis. Political discord has so far prevented the leaders from delivering a deal that convinces markets they have the means to contain the turmoil.

“Anything that’s got to do with the euro is going to get a ’No’ from Danish voters,” Nyholm said. “We’ve been following the rules while the guys inside the euro, they broke them.”

Danes are split on the pact and want the question put to a referendum, according to a poll commissioned by Ugebrevet A4, a Danish Confederation of Trade Unions newsletter. Of the 1,085 Danes surveyed by Analyse Danmark, 43 percent were opposed to joining and 33 percent in favor, according to Ugebrevet A4. Twenty-four percent were unsure.

‘Very Difficult’

Soevndal, in a Dec. 10 interview with broadcaster TV2 News, said that Denmark shouldn’t embrace the pact in its entirety because some provisions would hurt the economy.

“There will be things that are very difficult for Denmark,” said Soevndal, whose party campaigned against the euro in past referenda. It has gone silent on the subject since joining the coalition.

Thorning-Schmidt, a member of the European Parliament from 1999 until 2004, has warned Danes of the risks linked to following the U.K. and severing ties to the EU.

“It’s a major interest for Denmark to have a stable euro,” she said at a Dec. 13 press conference. “We can’t have a large gap between the level of discipline in the euro pact and the level we have in Denmark: The Danish economy wouldn’t be able to manage that over time.”

Debt Metrics

U.K. Prime Minister David Cameron’s refusal to back the agreement for tighter fiscal union has weakened the country’s political clout and credibility, according to Joan Costa i Font, professor of political economy at the London School of Economics.

Denmark’s opposition to euro membership reached a record high according to a poll published today by Danske Bank A/S. (DANSKE) The lead of the ‘no’ bloc widened to a record 44.1 percentage points in December from 23.3 percentage points in September, the poll showed, according to the Copenhagen-based bank. Of those polled, 59.2 percent were opposed to adopting the euro.

Denmark’s central bank, which defends a peg to the euro, has cut rates twice this month, bringing its benchmark to a record-low 0.7 percent, to offset a capital influx as investors flee euro-denominated assets.

Denmark’s government debt will be 44.1 percent of gross domestic product this year, compared with a euro-area average of 88 percent, the European Commission said Nov. 10. That’s attracting bond investors looking to escape Europe’s debt. Denmark pays about 16 basis points less than Germany to borrow for 10 years.

Maneuverability

The Nordic country has managed to maintain a lower debt ratio than the euro area on average even as it struggles to emerge from twin housing and debt crises. Gross domestic product shrank 0.8 percent in the third quarter, the statistics office said on Nov. 30 and output probably contracted in the three months through December, according to Danske Bank.

The government has pledged to propel Denmark out of its economic slump by bringing forward investment. Thorning- Schmidt’s Social Democrats have pledged fiscal responsibility while the Socialist People’s Party backs more welfare spending.

The government yesterday cut its forecast for growth this year and next to 1 percent, and predicted a deficit of 5.5 percent of gross domestic product next year, widening from 4 percent this year.

Keeping Opt Outs

Denmark has promised to contribute 40 billion kroner ($7 billion) as part of plan by EU countries to channel money to the International Monetary Fund to fight the crisis. Three other non-euro countries also pledged to add to the IMF war chest while Britain refused to commit, preventing officials from reaching the 200 billion-euro target.

Danish voters first rejected the Maastricht Treaty in a 1992 referendum and the country subsequently opted out of four elements of the treaty: the euro, European citizenship, defense cooperation and legal cooperation. In 2001, voters rejected euro membership in a second referendum.

The opt-outs will be respected if the country joins the EU pact, newspaper Politiken reported Dec. 16, citing a draft letter sent by EU President Herman Van Rompuy. The Danish People’s Party and the Red-Green Alliance, which together hold 34 seats in Denmark’s 179-seat parliament, have said the country should hold a referendum on the treaty.

The treaty, to be hammered out by late January and signed in early March, will take effect once ratified by nine of the 17 euro-area countries. EU states outside the euro will join as they ratify, with the U.K. alone so far in refusing to sign up.

Denmark will seek to participate in the pact to the “widest extent possible,” Nicolai Wammen, the country’s minister for European affairs, said at a conference in Copenhagen yesterday. The opt-outs need to be “respected” and the krone’s peg to the euro taken into account, he said.

To contact the reporters on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net; Christian Wienberg in Copenhagen at cwienberg@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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