On 28 September the people of Denmark will vote on whether or not to sign up for Europe’s Economic and Monetary Union. But whatever their verdict, while British exporters continue to struggle with the continuing weakness of the euro, Denmark has escaped a similar impact by pegging its exchange rate to that of its European neighbours.
The EU is Denmark’s largest export market and, unlike sterling, the Danish krone has remained in the European exchange rate mechanism since the 1980s. Since 1982 it has also been pegged to within 2.25% of the value of the Deutschmark, and more recently to the euro.
Memories of sterling’s humiliating 1992 exit from the ERM mean many are wary of pegging the pound at a fixed rate. But with 60% of British exports going to the EU, what lessons could the UK learn from Denmark? The system has protected the Danish krone from currency speculation, and provided the country’s economy with stability. A spokesman for the Danish government says that, while the euro can obviously fluctuate the krone will at least be part of those fluctuations, rather than in an unpredictable position.
Jorn Henrik-Rasmussen, economic adviser at the Confeder-ation of Danish Industries, says a fixed exchange rate makes life simpler for manufacturers, particularly smaller firms that cannot afford to employ a team of specialists to find the best transaction exchange rates. ‘The companies really prefer to have stability, and know what the exchange rate will be,’ he says.
Such a system does demand a tight fiscal policy, however, as inflation can easily be ‘imported’ from other countries. ‘I believe it is the best system for a country like Denmark, and also possibly for the UK. But you have to pay the price, and that is to have a tight fiscal policy. Otherwise the market would not accept the fixed exchange rate,’ says Henrik-Rasmussen.
He believes joining the EMU is now the next logical step. ‘We have decided to use this fixed exchange rate, and the step from where we are now to the euro is really small,’ he says.
Soren Lindgaard, group vice president and head of finance at Danish-owned FLS Aerospace, says pegging the krone to within 2.25% of the euro has given the company a clear advantage, and he would now favour entering the EMU. He adds: ‘Joining the euro would reduce the administrative burden of dealing with different currencies.’
Thriving economy Whether the Danes will vote to adopt the euro remains to be seen. The two sides are neck and neck, with many unconvinced by the economic argument – the currency is already so closely tied to the euro they see no need to switch – and are sceptical of the political implications of a single European currency.
Denmark’s economy is thriving outside the eurozone. It has the European Union’s highest per capita income, and extremely low unemployment. The economy is also benefiting from the newly-opened Oresund Bridge and tunnel between Denmark and Sweden, which has created a region with a population of 3.5 million people within an hour’s drive of Copenhagen. This area already has one of the highest economic growth rates in Europe.
Helge Pedersen, chief economist at Danish bank UniDanmark, says that whatever the decision on 28 September the fixed exchange rate is likely to remain: ‘Joining the EMU will benefit manufacturers in the sense that they will no longer need to pay transaction costs for exchanging their revenues into Danish krone. So that will give them a minor advantage, but it will not be as significant as going from another exchange rate altogether,’ he says.
Opinion is divided on whether the Danish approach could work in the UK. Pedersen believes the importance of the US dollar to the UK economy would mean British manufacturers would not necessarily gain the same advantages as those in Denmark.
Charles Bean, professor of economics at the London School of Economics, says the close synchronisation of the Danish economy to that of Germany means a common monetary policy is not problematic. ‘This is not the case with the UK, which is a larger economy with stronger economic ties outside the EU.’ In addition, the UK’s exper-ience in synchronising its ex-change rate with that of others within the EU is hardly encouraging. During the 1980s, Nigel Lawson successfully set sterling to shadow the Deutschmark, but this meant having a loose monetary policy, which led to excessive growth in demand and increased inflation. Sterling later joined the ERM at too high a rate, triggering a recession.
However, Karsten Bierre, senior economist at the Danish BG Bank, says that, although Denmark’s monetary policy is very different, the country’s cyclical economic outlook and performance are similar to both the UK and US. ‘We are benefiting from the weakness of the euro, which is necessary for Danish industry as we are struggling, as you are, with relatively high wage and price inflation, compared with the core countries in the EMU.’ Whichever way the Danes vote, few in the country are disputing the benefits of a fixed exchange rate, says Bierre. ‘It has never been a question of whether to maintain our fixed rate policy or not, it’s a question of how to eliminate the small fluctuations in the exchange rate, vis-a-vis the euro. It’s just a matter of what kind of fixed exchange rate policy we will have.’