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14 December 2011

Nils Bernstein: The European debt crisis – from a Danish perspective


Mr Nils Bernstein, Governor of the National Bank of Denmark, touched upon the European debt crisis from a Danish perspective.

There is a clear division among the EU Member States: countries, with relatively sound public finances and external balances before the crisis are performing better than countries with internal and external imbalances. But over the past couple of months even euro area Member States with sound economies have been affected by rising interest rates. There is considerable volatility, and three groups in the euro area seem to have been formed. The first group with the narrowest spreads to Germany includes Finland, the Netherlands, Austria and France. The second group consists, among others, of Belgium, Spain and Italy, and the third group is Ireland, Portugal and Greece. Denmark stands out by having a negative yield spread of 15–20 basis points to Germany.

In the current situation, policymakers are, to some extent, pointing the guns at the markets and rating agencies. This means shooting the messenger rather than addressing the underlying imbalances. In fact, it is positive that the market reaction forces policymakers to take action. In other words, the problem is not that the markets are reacting by demanding higher interest rates; the problem is that they did not react sooner – before the problems escalated to the current level.

We are caught in a dilemma. On the one hand, fiscal stimulus to the economy – by expanding government spending – seems reasonable. But market pressure makes this strategy untenable. The market demands fiscal consolidation, and that the states address the structural shortcomings of their economies. And there is no doubt as to which stance will prevail: that of the markets. But that is not necessarily a bad thing. If policymakers react properly, this can boost consumer, business and investor confidence – and the current crisis is, to a large extent, also a crisis of confidence. If, on the other hand, there is a lack of political action, the volatility will spread to more and more countries.

If the euro Member States decide between themselves a stronger and more binding framework for the economic policy, including fiscal policy, then Denmark as a small open economy with a fixed exchange rate regime vis-à-vis the euro has no other option than either to take part in as much of the agreement as we can, respecting our euro opt-out, or place us as close as possible at the new euro compact without formal participation.

In other words, a stronger discipline in the economic policy in the euro Member States should result in just as tough conditions for Denmark, irrespective of whether or not we decide to participate in the new agreement. In reality we will hardly get a higher degree of manoeuvrability in the economic policy by staying outside – quite the contrary. If we decide to stay outside, we have to make sure that it is not mistakenly seen as a signal of less commitment to sustainable economic policy.

Many euro area Member States fear that the sovereign debt crisis will turn into a banking crisis, as the banking sector holds a large percentage of the government bonds of the highly-indebted countries. Again, Denmark is not severely affected. The exposure of Danish banks to the most debt-ridden euro area Member States is limited and even major write-downs of sovereign debt would be manageable.

Full speech



© BIS - Bank for International Settlements


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