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Denmark Thinks about Joining the Euro

March 16, 2011
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The Danish Prime Minister, Lars Lokke Rasmussen, last week broached the idea that he was considering holding a referendum this summer on whether Denmark should become more integrated in the EU.  Currently, Denmark has opt-outs from the euro, EU defense policy, and justice and home affairs, but this referendum would allow voters to decide if they wanted to end these exceptions.  Demark had previously held a referendum on joining the Eurozone in 2000, but the electorate rejected the idea, making Denmark is only one of three EU members that had decided to not commit to joining the euro (the others are the UK and Sweden).  However, polls indicate that Danes are now more open to the idea of greater integration (especially on a package of all three policies), and Denmark will hold the rotating EU Presidency for the first half of 2012, making this an opportune time for the country to become more linked to the EU.

 

Of course, why would Denmark want to join the Eurozone while doubts remain about the viability of the euro?  This question was again highlighted today as Moody’s downgraded Portugal’s debt.  In fact, joining the euro could make sense for Denmark, as it is somewhat similar to the Eurozone’s newest member, Estonia (see Estonia to join the Euro despite Financial Crisis).  For instance, both are relatively small economies, as Denmark is the 12th largest economy in the EU while Estonia is 26th.  Also, the Danish krone is pegged to the euro; so while the krone/euro exchange never changes, the Danish government has no control over the krone’s exchange rate vis-à-vis other currencies.  In addition, Denmark has a very open economy.  In 2009, Danish exports were worth almost 30 percent of GDP despite the financial crisis, while imports were closer to 26 percent, with Denmark’s second largest trading partner being Germany (northern neighbor Sweden remains number one).

 

Besides economic considerations, there are now bigger political considerations.  Germany and France are talking about “competitiveness pact” and deeper integration as the solution to the euro’s woes.  This plan is already starting to take shape, as the heads of government of the 17 countries that use the euro met on March 11 to discuss this proposal.  While a bigger country like the UK might be willing to remain outside of a stronger EU in order to protect its economic policies and interests, it would be harder for a small open country like Denmark to do the same, especially when its economy is tied to euro-using neighbors such as Germany and the Netherlands.

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