Danish Economic Council Says EU Should Allow Deficit Leeway

Denmark’s government-backed Economic Council says the European Union should allow the nation to deviate from its structural budget requirements to create room for more stimulus needed to support a recovery.

“The economic situation warrants fiscal easing, and the assessment is that there’s room in the budget to support it,” the council, also known as the Wise Men, said in a report released today. “The scope for doing so within existing structural budget laws is very limited. It would therefore be best if the EU could allow nations with fundamentally healthy finances to deviate from its structural deficit rules.”

Denmark’s economy will grow just 0.2 percent this year after contracting 0.5 percent in 2012, the council said. That’s less than the government’s latest estimate, released yesterday, for 0.5 percent expansion in 2013. A decline in public investment and investment in inventories will be the primary drags on the economy, according to the council.

Reduced spending will narrow the public deficit to 1.5 percent of gross domestic product this year from 4.1 percent in 2012, the Wise Men estimate. House prices will rise 1.2 percent after sinking 3.4 percent in 2012, it said.

Capping Loans

Denmark is struggling to emerge from a burst property bubble that is depressing spending. The Danish central bank has recommended the mortgage industry phase out interest-only loans, which it has said contributed to inflated prices.

The Wise Men said today use of the loans, as well as adjustable rate mortgages, should be capped because of the risks they introduce to the economy. The council also supported recommendations for tougher capital and liquidity rules for too-big-to-fail banks.

Those positions drew the ire of the country’s banking associations, which warned limits on mortgages risks hurting the housing market. Strict requirements, imposed too quickly, would limit banks’ ability to support an economic recovery by making credit available, Tonny Andersen, chairman of the Danish Bankers Association, said in a statement.

Economy Minister Margrethe Vestager has ruled out further stimulus steps after the government pushed through 75 billion kroner ($13 billion) in measures including tax cuts and subsidized home refurbishments to revive the $300 billion economy.

Temporary Easing

“Fiscal policy shouldn’t be eased if it’s not possible to reach a common understanding with the EU,” the Wise Men said. “Any easing should be temporary and not be in conflict with the mid-term budget goal for 2020,” when it estimates a budget surplus equal to 0.4 percent of GDP.

The council’s economic forecast for 2013 represents a 1.4 percentage point cut from its November prediction. It kept its forecast that growth will accelerate to 1.8 percent in 2014.

Policies such as allowing companies to write off investments faster and paying out savings from an abandoned pension plan are cushioning the economy from fiscal consolidation in 2013, according to the Wise Men. Next year, public sector savings will cut gross domestic product by 0.75 percentage point, the group said.

Government Cut

The situation “abroad is placing limits on how fast growth can return” to Denmark, Vestager said yesterday. “For better or worse, our fates are intertwined with our trading partners’. But when things start to improve abroad, we’ll be ready.”

Denmark’s AAA rated government bond market emerged as a haven from the euro area’s fiscal crisis last year as the Scandinavian nation keeps public debt at less than half the average in the single currency bloc, relative to GDP. That’s pushed Danish borrowing costs lower and helped stimulate the economy as it struggles to surface from a housing slump.

The Danish central bank uses monetary policy to keep the krone pegged to the euro. It has kept its deposit rate below zero since July to counter a capital influx. The benchmark lending rate is 0.2 percent.

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