Denmark Criticizes Stimulus Addiction Missing Structural Fix

Denmark’s government said this month’s budget proposal won’t include a new stimulus plan, arguing additional aid can’t repair structural flaws that are holding back Scandinavia’s weakest economy.

“We can’t just stimulate our way out of structural problems,” Economy Minister Margrethe Vestager said in a telephone interview. “We shouldn’t engage in stop-go policies; they only create uncertainty.”

Denmark’s $355 billion economy stagnated in the first quarter after shrinking 0.5 percent in 2012. The nation has fallen behind neighboring Norway and Sweden, where smaller debt burdens and faster growth rates have underpinned demand. Danes, the world’s most indebted people, have hesitated to spend after house prices plunged 20 percent since their 2007 peak.

The Social Democrat-led coalition government won’t tolerate policies that put pressure on public finances, Vestager said. While private debt is 310 percent of disposable incomes, according to the Organization for Economic Cooperation and Development, government debt is less than half the euro-area average, supporting Denmark’s stable AAA rating.

“Our fiscal policy will uphold the 3 percent European Union budget limit,” Vestager said. “If there’s any leeway, we will put that into the economy.”

Challenging EU

The government-backed Economic Council said in May that the EU should allow Denmark to deviate from its structural budget requirements to create room for more stimulus needed to support a recovery.

The government on May 27 cut its growth forecast for this year to 0.5 percent from the 0.7 percent predicted in April. It kept its 1.6 percent growth estimate for 2014.

Vestager’s ministry is due to publish revised economic forecasts at the end of this month. She says fiscal restraint is enabling record-low borrowing costs. The central bank has held its deposit rate below zero for more than a year after Denmark’s haven status triggered a capital influx that threatened to strengthen the krone beyond the limits of its euro peg.

The monetary stimulus has so far failed to jumpstart growth. Danish unemployment, including people in vocational training programs, was 5.8 percent in June, compared with as low as 2.5 in 2008. Austerity policies in Europe have helped push unemployment in the common-currency area to a record 12.1 percent and to more than 20 percent in the hardest hit countries such as Spain.

Adjustment Years

“Things will get better when the Danish economy is ready to grow after years of adjustments, changes in property costs and general improvement in economic conditions,” Steen Bocian, chief economist at Danske Bank A/S, Denmark’s largest lender, said by phone last week. “Stimulus may be able to accelerate developments somewhat.”

The euro area is showing signs of emerging from its crisis. Gross domestic product in the 17-nation currency bloc grew 0.3 percent in the April-June period after a 0.3 percent contraction in the previous three months, the EU’s statistics office in Luxembourg said yesterday. That may help export-reliant nations such as Denmark recover. The Nordic nation relies on sales abroad for half its economic output.

“We’re seeing a turnaround in the Danish economy, albeit a slow one,” Vestager said. “There are no indications the economy is rushing ahead, but we’re no longer seeing any signs that things are getting worse.”

Educating Danes

Prime Minister Helle Thorning-Schmidt in February pledged to lift annual growth to 2 percent on average from 2014 through 2020, and unveiled plans to create 150,000 private jobs by 2020 through increased public spending and corporate tax cuts. The measures will cost the state 75 billion kroner.

The government will need to invest in education and make sure workers have the proper training, Vestager said.

“It’s is imperative that the money we’re investing into the economy is actually put to work,” she said.

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