Denmark´s decision not to join the European Economic and Monetary Union and its consequences for the country.

CRISTINA BOAL HERNÁNDEZ

DECEMBER,2014

Throughout this essay about the Danish economy I am going to focus on why although Denmark is a member of the European Union it has decided not to join the European Economic and Monetary Union (EMU) and I am going to expose the positive and negative consequences of Denmark joining the EMU that I have analyzed through some articles that I have read.

The Economic and Monetary Union (EMU) is a term for the group of policies aimed at converging the economies of all member states of the European Union at three stages. Both the 18 eurozone states and the 10 non-euro states are EMU members. Denmark is currently a member of the European Union (EU) and due to this fact its legislation and regulations conform to the EU standards on almost all issues. However, although Denmark has studied the criteria to join the European Economic and Monetary Union, so far Denmark has decided not to join it. Along this essay you will find some of the advantages and disadvantages that had made Denmark not to join the EMU.

Denmark is not participating in the third stage of EU Economic and Monetary Union (EMU), the third stage of the EMU is the introduction of the euro single currency. This is one of the consequences of the country’s initial “no” vote on the Maastricht Treaty in a 1992 referendum.

A subsequent referendum in 1993 resulted in a majority in favour of the modified version of the Treaty among the otherwise “EU-sceptic” Danish population.

In 2011, Copenhagen joined the Euro Plus Pact, an agreement to apply reforms to improve the fiscal strength and competitiveness of member states. In 2012, it signed the Fiscal Compact Treaty, an agreement that introduces stricter controls on deficits and debt.

It has been argued with increasing intensity that Denmark should give up its reservations, especially regarding the third stage of EMU. However, it has not yet been settled when, or if, there will be a new referendum on Denmark joining the euro.

First, according to some opinion polls that had been carried out, the Danes are deeply split in their views on the euro. A survey conducted in 1996 indicated that just fewer than 50% of the population did not think that the single currency would create any increased economic growth, while just over 50% believed in this growth potential as a result of monetary union. The general attitude among Danes was that the country’s reservation regarding the euro should be maintained. Therefore, it caused a considerable agitation when opinion polls at the beginning of 1999 indicated that there was an overwhelming majority in favour of the euro. Indeed, the figures showed the highest-ever support for a referendum on Denmark’s position in the European Union. These figures suggested that a Danish referendum on its euro “opt-out” might be imminent.

However, in the elections to the European Parliament held at the beginning of June 1999, it was confirmed that EU scepticism is still strong among Danes. In broad terms, the opponents of the EU won another seat so that they now hold six out of the 16 Danish seats in the Parliament. This has caused several observers to state that a referendum on Denmark’s possible full participation in monetary union is probably not as imminent as many people otherwise tended to think.

Second, the discussion of whether Denmark should be part of the “eurozone” in future is often based on economic considerations. In spring 1998, the Ministry of Economic Affairs (Økonomi Ministeriet) published a report on the consequences of being outside the cooperation on the euro. Around 50% of Denmark’s foreign trade is with the eurozone, and if Sweden and the UK join the euro, the figure will rise to around 75%. Barriers to free trade such as exchange rate fluctuations and transaction costs have been eliminated between the euro countries. The new price transparency and the resulting competition would also be an advantage to Danish enterprises, but overall the report concludes that Danish enterprises will not achieve advantages as significant as their competitors in the Eurozone. Denmark must also expect a slightly higher real interest rate if it remains outside the euro.

According to the Trade Union Views (1999), on the part of wage earners, the Danish Federation of Trade Unions (Landsorganisationen i Danmark, LO) has, so far, maintained that it respects the Danish reservations, including the reservation regarding monetary union. However, at the same time, LO has made it clear that it will closely monitor developments in the eurozone and evaluate what consequences non-membership may have for Denmark. For this purpose, LO has, among other measures, set up an EMU committee on which there are representatives from all the large trade unions. The committee aims first and foremost to examine the economic consequences of Denmark’s non-participation in the euro. While focusing on these issues, the committee has also chosen to implement a study of the conditions on the labour market in the USA, examining what consequences the existence of a single currency has had in this large geographical and economic area.

Finally, political costs of being outside the euro: In LO, it has been acknowledged that the euro will be of importance to the cooperation between trade unions in Europe, and that Danish unions risk losing political influence in relation to the countries in the eurozone. This may be seen as an indication that the core countries in the eurozone are forming closer ties, whereas discussions with representatives from Danish organisations are not of such great interest.

One of the paradoxes of Denmark’s reservation regarding the third stage of EMU is that virtually everyone agrees that Denmark will be forced to meet the convergence requirements which have been laid down for the countries participating in the euro, and to follow the  decisions which the euro countries may make, in order not to create financial and monetary policy instability in Denmark. In other words, it could be argued that a “small” currency such as the Danish krone has become a “shadow member” of the eurozone at the same time as the Danes have sidelined themselves from influence on the development of that zone.

The Danes’ general lack of enthusiasm for the EU puts the social partner organisations in a dilemma. They have the possibility of participating in setting the agenda at European level, but, to a great extent, they feel constrained to proceed cautiously because of the wide scepticism among Danish workers. There are admittedly polls which show that a majority of Danes, as well as a majority among, for example, members of LO, generally want Denmark to be a part of the eurozone. However, there is much to indicate that this is a majority which may evaporate quickly the further we move on from the “europhoria” which characterised the introduction of the single currency at the beginning of 1999. The recent elections to the European Parliament were a signal that general EU scepticism remains strong among the Danes. (Søren Kaj Andersen, FAOS)

To sum up, while Denmark probably will enhance its cooperation with the European Union on justice and defense, Danish adoption of the euro remains highly unlikely. However, Because of its current opt-outs, Denmark does not participate in EU decisions related to defense issues and does not contribute troops to missions conducted by the European Union. According to the Danish Ministry of Defense, removing this opt-out would enable the country to save money on defense, since Denmark would share some of its military burden with the European Union. For example, Danish ships are constantly the target of pirates in the Gulf of Aden, and maintaining a constant military presence in the region is expensive for Copenhagen. Joining EU defense projects would enable Denmark to reduce costs.

Most social partner organizations had called for a “yes” vote to the euro. The labour movement was divided on the question, with trade union leaders strongly recommending a “yes”, but many rank-and-file members voting “no”. “We in the trade union movement must now reconsider our European policy and we take note of the fact that many member groups within LO have voted ‘no’ (…) because it is difficult to grasp the European project,” said Mr Jensen (The LO President). He added that it was necessary to engage the “no” voters in a constructive dialogue about future European cooperation: “If the ‘no’ of the Danes develops in the direction of opposition towards any further participation in European cooperation, then the effects will be disastrous for Denmark.

Joining the EMU and introducing the euro as the Danish currency presents more advantages that disadvantages such as: price transparency, competition in Danish entreprises, stable economic policy to ensure a continued basis for investments and employment or the importancy of the euro to the cooperation between trade unions in Europe. To conclude, the Danish should rethink about the possibility of joining the EMU and introducing their euro as its currency.

 

REFERENCES

Eurofound. (1999). Social partners consider advantages and disadvantages of the euro. 1 December 2014, EurWork web site: http://eurofound.europa.eu/observatories/eurwork/articles/other-business/social-partners-consider-advantages-and-disadvantages-of-the-euro

Carsten Jørgensen (2000). Denmark votes no to the euro. [ONLINE] Available at: http://eurofound.europa.eu/observatories/eurwork/articles/denmark-votes-no-to-the-euro. [Last Accessed 1 December 2014].

The world factbook staff. (2013). Denmark economy overview . 2014, de Central intelligence agency Sitio web: https://www.cia.gov/library/publications/the-world-factbook/geos/da.html

The World Factbook 2013-14. Washington, DC: Central Intelligence Agency, 2013 .

Rafiq, M. S. (2011). Understanding the Interaction between International and Euro Area Output Volatility. Bulletin Of Economic Research, 63(1), 53-81.

Reitz, S., & Taylor, M. P. (2013). The Danish krone-euro exchange rate and Danmark Nationalbank intervention operations. Studies In Nonlinear Dynamics & Econometrics, 17(3), 239-249. doi:10.1515/snde-2012-0016

Wikipedia (21 October 2014). Economic and Monetary Union of the European Union. [ONLINE] Available at: http://en.wikipedia.org/wiki/Economic_and_Monetary_Union_of_the_European_Union. [Last Accessed 1 December 2014].

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