One Foot In, One Foot Out: Denmark's Economic Situation

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The offices of the Danish central bank, or Danmarks Nationalbank, stand in Copenhagen, Denmark. In late 2011, the bank weakened the krone in order to abide by the European Exchange Rate Mechanism.

Of the 28 member countries of the European Union, 19 are in the Eurozone. Those 19 countries use the euro as their official currency. This system was designed to achieve financial integration throughout Europe, and is subject to oversight from the European Central Bank. Countries within the Eurozone, such as Germany, still maintain their own central banks (like the Deutsche Bundesbank in Germany), but these banks mainly serve as holders of currency reserves and oversee financial regulations. Countries not in the Eurozone, such as the Czech Republic, still maintain their own currency (the Czech koruna), but are expected to adopt the euro. The process of expanding the Eurozone into countries like the Czech Republic has been slowed, mainly as a result of the 2008 financial crisis and subsequent 2010 European Sovereign Debt Crisis. When countries decide to abandon their national currency and adopt the euro, they spend two years in an exchange rate mechanism (ERM), which sets a semi-fixed exchanged rate between the euro and their national currency. Currently, only one country, Denmark is in this ERM. However, Denmark has no plans to switch from the krone and adopt the euro, and has been in ERM since 1999. 

How is this possible? When the Maastricht Treaty (which created the E.U.) was negotiated in 1992, Denmark somehow managed to receive an opt-out clause, allowing them not to join the Eurozone. Several referendums in the years since have proposed adopting the euro, but all have failed. Prior the Sovereign Debt Crisis, major political parties in Denmark supported adopting the euro. When the crisis occurred, Denmark’s unique position perfectly suited them to escape the economic disaster that plagued the Eurozone. They were, however, required to donate to some, but not all of the Eurozone stability funds, but still, the krone strengthened during this time.

During the course of the crisis, investment in government securities and mortgage bonds grew, while yields on government securities dropped to historic lows. The krone strengthened against the euro, because investors viewed the krone as a safe haven currency. In fact, the krone got too strong, breaking the terms of the ERM that the krone roughly stay within 2.25% of a 7.4:1 krone to euro ratio. To remedy the issue, the Danish National Bank (Danmarks Nationalbank) had to step in and weaken the krone.

Currently, there are no plans to call another referendum in Denmark to adopt the euro, but it would be a mistake to abandon the krone. While critics argue that Denmark struggles to attract foreign investment because they have not adopted the Euro, the events of 2008 and 2010 show that having one foot in and one foot out of the Eurozone can actually help the economy. Contrary to the critics, Denmark can attract foreign investment by advertising their safe haven economy, which has strong ties to the European markets through ERM, but at the same time, the independence of their own currency and central bank.

RELATED: E.U. Eurozone Denmark