Denmark Shelves Euro Goal Indefinitely as Crisis Scars LastPeter Levring
Denmark is shelving indefinitely its euro adoption goal as Prime Minister Helle Thorning-Schmidt says an exchange rate peg without full European monetary membership is proving the best currency regime for the Nordic nation.
A euro referendum “in this election term is unrealistic,” Thorning-Schmidt said yesterday in an interview in Stockholm. “I don’t think it makes any sense to discuss the option of a euro referendum in the next term” set to run from 2015 to 2019, she said.
Thorning-Schmidt, half-way through her first four-year term, said Denmark’s chosen model of an opt-out from the euro has shielded the economy from the worst of the crisis further south. The nation, which together with the rest of Scandinavia emerged as a haven from Europe’s fiscal turmoil, will continue to debate the question of whether Denmark should join the euro at some point, she said.
“The euro has been subject to a lot of uncertainty over the course of the last couple of years, actually many years, and the time isn’t ripe for a referendum on Denmark joining the euro,” Thorning-Schmidt said. “That doesn’t change the fact that Denmark will remain at the core of European cooperation.”
Danish aversion to the euro tested a record in March as voters watched the 17-nation bloc lurch from one bailout to the next. Central bank Governor Lars Rohde said a month later it probably won’t be feasible to hold a euro referendum for the “foreseeable future.”
“I’m sure many bond investors appreciate that Denmark is staying out of the euro for now,” Steen Bocian, head of economic research at Danske Bank A/S in Copenhagen, said in an interview. “In the long run Denmark will have to make up its mind to join the euro or give up the fixed-rate peg as very few countries have been able to maintain a peg as a permanent condition.”
The difference in yield on Denmark’s 10-year bond and equivalent German bunds narrowed to its smallest today since Jan. 31, to 10 basis points. Denmark pays less to borrow over 10 years than any euro member except Germany. The yield on its 1.5 percent note due November 2023 eased four basis points to 1.398 percent as of 11:27 a.m. local time.
Denmark, which last rejected the euro in a 2000 plebiscite, hasn’t set a date for a new vote. According to a poll published in March by Danske Bank, the no side would win by a margin of 42 percentage points, close to a record 44.6 points in December 2011. The debt crisis raging in the euro zone and near record-low Danish interest rates explain the poll outcome, Danske said.
“The way Denmark is linked to the euro is ideal,” Thorning-Schmidt said. “We’ve had a fixed currency rate regime for many years and that has served Denmark well and continues to do so.”
Denmark negotiated an opt-out from the euro in 1993 a year after Danes rejected full monetary union. The Danish central bank’s sole mandate is to adjust interest rates and currency reserves to defend the krone’s peg to the euro. Its efforts to stem a capital influx since last year have pushed the benchmark lending rate down to a record-low 0.2 percent. The deposit rate is minus 0.1 percent.
Thorning-Schmidt said a currency peg has proved a safer regime than a free floating krone. The framework has prevented exchange rate fluctuations such as those plaguing neighboring Norway and Sweden. Those two nations have struggled with appreciations that are hurting exporters and even causing bouts of deflation.
“There are many drawbacks to not having a fixed currency policy and I’m sure countries employing such a regime can subscribe to that,” she said.
Anders Borg, the finance minister of neighboring Sweden, said in an interview last week “the krona could become an issue, especially from the central bank perspective.” He referred to “risks you’ll see too much of an appreciation. That’s obviously one of the worries we have.”
Pegging Denmark’s krone to the euro has spared the nation such worries, Thorning-Schmidt signaled. Since the end of 2008, the krone has slipped 0.2 percent against the euro. Sweden’s krona has appreciated 28 percent in the period, while the krone of Norway is up 29 percent in the period.
Asked how Denmark is defending its welfare society even as economic growth sinks, the Prime Minister said voters must accept reforms to ensure the benefits they’ve come to expect remain affordable for the state.
Denmark’s economy shrank 0.7 percent in the final three months of 2012 and probably contracted last quarter, according to Danske Bank and Svenska Handelsbanken AB. While Danish consumers are the world’s most indebted, the state has managed to rein in expenditure and keep debt at less than half the euro-zone average. That’s supported Denmark’s stable AAA status and kept borrowing costs near record lows.
“We must always be willing to change,” Thorning-Schmidt said. “The operative words going forward will be change, reforms and modernization as no society will be able to stand still for years to come. That goes for Denmark, the Nordic countries and a number of other nations.”