The Euro-Zone Crisis 201

Well, the Greek time bomb has officially been kicked down the road for a while. But what influence is the Euro zone crisis having on Denmark and the Danish economy?

Before I answer that question, it’s necessary to make three points. First, there is a huge cultural divide within western Europe. While Latin-based cultures (ie, Italy, Greece, Portugal) have a reputation for poor work ethic, low productivity and limited innovation, Germanic countries have a reputation for being much more innovative and productive. Despite weakness within the Euro-zone, the German economy remains fundamentally sound. As the largest exporter in the world (think BMWs, Mercedes, Siemens trains, etc), it has benefited tremendously from the weaker Euro resulting from the Greek crisis which makes German goods cheaper outside of Europe. As Germany is Scandinavia’s largest trading partner, this has significantly helped reduce the effects of the crisis in Denmark.

Secondly, none of the three Scandinavian countries are members of the Euro zone. As a result, none are on the hook to pay for Greek, Portugese or Irish bailouts and also have more tools to control the effects of the crisis on their economies. However, it also means that they have no say in the decision-making process.

Thirdly, Scandinavian countries are considered “safe-havens” for investors. Although the Danish economy remains soft and the government is running large deficits, the country’s fundamentals remain strong with low unemployment, a low debt-to-GDP ratio and a AAA credit rating. The Swedish economy is in even better shape and Norway, well Norway has oil. As a result, investors are willing to loan Scandinavian governments money at virtually no cost because of the region’s perceived safety. Danish bond yields are at their lowest levels in decades at 1.66% for 10 year bonds, suggesting that markets feel they are a safer investment than US, Canadian, and German bonds despite Denmark being only a fraction of the size.

All is not rosy however. Because of the perceived safety of the Scandinavian economies, investors are taking money out of the euro and piling it into (buying) kroners, much like they are doing to the Swiss franc. The problem is that the market for kroners is very small, putting significant upwards pressure on the currency and making it difficult for the Danish Central Bank to maintain its peg to the Euro (1 euro = 7.45 DKK). A stronger currency would make Danish exports more expensive. With it’s high cost of labour, that would only make it more difficult for the Danish economy to compete globally. The Swedish situation is somewhat similar although their currency is not pegged to the euro, giving them even less control over the situation.

The normal way Central Banks reduce pressure on a currency and stimulate an economy is to reduce interest rates. However, interest rates are already so low (because of the 2008 economic crisis) that there is little room to reduce rates further. The only other real option is for the Danish Central Bank to begin printing more kroner, effectively diluting the currency. This powerful tool is one of the primary weaknesses of the Euro zone. Countries such as Greece and Portugal lost this option when thye joined the Euro zone and it is one of the reasons why one or more of these weaker economies may ultimately have to leave the Euro zone.

If all of this makes your head spin, CONGRATULATIONS, you are part of the 99% who think that economics is mind-numbingly boring. If you found it interesting, welcome to the club; you are officially a nerd!

In general, all EU member states (including Denmark) have and will continue to suffer from the Euro zone crisis. However, the effects are much less severe in Scandinavia and Germany given their better fiscal position, diversified economies and productivity compared to southern European countries. Furthermore, the social safety net of Scandinavia is so extensive that it can be argued that the average Dane has been largely unimpacted by the crisis.

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About Canadianindenmark

A Canadian expat working in the biotechnology industry in Copenhagen, Denmark
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