Wednesday, 2 June 2010

EMU: Convergence programme Denmark

What if we should look less to the daily fluctuation of market sentiments and more to the mundane coordination of economic policy between the European Union and the member states?

The Council Opinion on the convergence programme of Denmark has been published in the Official Journal of the European Union (OJEU):

COUNCIL OPINION on the updated convergence programme of Denmark, 2009-2015; published OJEU 28.5.2010 C 138/6.

Council Regulation 1466/97

The procedure refers to Article 9(3) of:

COUNCIL REGULATION (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies; link to the consolidated version of 27 July 2005.

Council Regulation 1466/97 sets out the rules covering the content, the submission, the examination and the monitoring of stability programmes and convergence programmes as part of multilateral surveillance by the Council so as to prevent, at an early stage, the occurrence of excessive general government deficits and to promote the surveillance and coordination of economic policies (Article 1).

Each participating (eurozone) state submits a stability programme (Article 3). There are now 16 euro area member states, which at some point reached the third stage of economic and monetary union (EMU), and Estonia has been proposed to introduce the euro currency from 1 January 2011.

Each non-participating state (which has not adopted the euro) submits a convergence programme (Article 7). Of the 11 member states outside the eurozone, nine have an obligation to join and two have opted out, leaving the door open for later changeover.

Article 9(3) concerns the examination of updated convergence programmes.

Denmark has not adopted the euro currency and it is one of the two EU member states to have opted out of the obligation to introduce the euro (the UK being the other one).

Economic background

The Council starts its examination of 26 April 2010 of the updated Danish convergence programme, which covers the period 2009 to 2015, with the following observations about the economic background:

The economic crisis hit the Danish economy hard in 2009, pushing Denmark into its deepest recession since the end of the Second World War. Denmark entered the crisis from a relatively comfortable position after a period of sustained strong growth with substantial surpluses in the current account and government finances and low public debt. The downturn began in 2008 when the housing bubble burst and was aggravated by falling exports, reflecting the collapse in world trade and declining investment on the back of receding final demand and tighter financing conditions. Despite disposable incomes still rising, private consumption weakened significantly, as the bleak economic outlook, falling real estate prices and rising unemployment affected consumer confidence. In response to the sharp fall in output, the Danish authorities adopted several large fiscal stimulus measures in line with the European Economic Recovery Plan (EERP) comprising tax cuts, investment projects and raising public consumption expenditures. On top of the fiscal support to economic activity, two bank rescue packages were adopted, providing guarantees and capital injections. These measures are expected to turn a comfortable budget surplus in 2008 into a deficit as from 2009 that is set to exceed the 3 %-of-GDP reference value of the Stability and Growth Pact between 2010 and 2012. Public debt, while moving up in parallel, is still expected to remain below the 60 %-of-GDP reference value. The exchange rate has been stabile throughout 2009 and the interest rate spread vis-à-vis the ECB has come down substantially. In order to ensure a sustainable development of public finances, a key challenge will be to ensure continued reform to increase labour supply. Another challenge for the Danish authorities will be to ensure that the scaling back of stimulus measures takes place in a timely manner once the recovery is self-sustaining.

As we see, the financial crisis and the severe economic downturn strained even the most robust economies.


After a detailed discussion, the Council invited Denmark to:

(i) reinforce efforts ensuring that the planned breach of the 3 %-of-GDP reference value would remain contained as well as to swiftly correct the projected excess of the deficit over the reference value, and to

(ii) specify the measures to underpin fiscal consolidation for the MTO [medium-term objective] to be reached by 2015 as planned.

Ralf Grahn