Single currency, multiple opinions

Detractors and proponents both say Denmark should change its relationship to the euro. But that’s where the agreement ends

WIth the Eurozone being sucked down by the massive debt issues facing Greece, Spain, Italy, Portugal and Ireland, adopting the single currency would, in the words of MEP Morten Messerschmidt, be like jumping on the Titanic once it had already hit the iceberg.

But many experts are arguing for just that. The first suggestions that Denmark adopt the euro began in November, but the question has taken on new precedence after European leaders decided in December to forge even closer ties between Eurozone members.

While such proposals would appear to defy political and economic logic, they are one way for the country to move out of a euro no-man’s land where Denmark has no influence over the euro, yet is very much affected by it.

The essential problem for Denmark is that is that while the krone is pegged to the euro, Danish decision-makers do not have any input into the decisions which affect its value. The Danish central bank, Nationalbanken, has set a target exchange rate of 7.46 kroner but allows it to fluctuate by 2.25 percent either way – a setup that leaves Denmark tied to the euro’s fate without having much say.

The other argument, championed by Euro-sceptics, but with support in the pro-EU camp as well, is that Denmark cut all its ties to the euro.

“I think Denmark should have chosen to have a floating exchange rate like Sweden,” Zsolt Darvas from Bruegel, a Brussels-based think tank said. “Having a fixed exchange rate while not sitting on the inside is the worst possible monetary arrangement a country could have.”

Darvas is not alone with this assessment. According to John Bo Northroup, managing editor of the weekly economic newsletter Økonomiske Ugebrev, Denmark is in an unfortunate situation.

“We obey all the rules but we don’t have any political influence. We saw this in the aftermath of the crisis when Danish civil servants and politicians were physically excluded from the negotiations,” Northroup said. “This came as a shock because so far Danish politicians have been used to being on the outskirts of the negotiations and used to knowing what’s going on. But now we lack any political influence.”

And the situation might just get even worse. The new fiscal compact treaty which was agreed upon this December will pave the way for closer fiscal integration of Eurozone members. The treaty is designed to tackle several things, but most importantly it will set limits on government deficits with automatic penalties for countries who violate the new rules.

Non-Eurozone countries can choose to enact the reforms, and after the meeting in early December, all EU member states, except the UK, appeared prepared to do so. In doing so, their governments hope to send the signal to the financial markets that they are prepared to do what it takes to keep the economies in check.

For Denmark, though, there’s a hitch: its euro opt-out might mean the country would have to hold a referendum in order to pass the reforms. With voter support for anything related to the euro at all-time lows, a referendum on the opt-out would be unlikely to pass. That would leave Denmark in the position of not being able to implement the reforms and it would send financial markets an unclear message.

To some, however, the tight spot that Denmark is in is only makes the argument for staying out of the euro even more compelling.

“I think it would be foolish to join. As it stands now, [German chancellor] Angela Merkel is basically in charge of the European economy, so even if we did join now and get a voice, it would only be a small voice,” Rina Ronja Kari from Folkebevæglsen Mod EU (The People’s Movement Against the EU) said. “We would lose a lot of influence over our own economy.”

Kari agrees with Darvas that Denmark ought to un-peg from the euro and have a floating exchange rate like Sweden. Some economists have argued that this would allow Denmark to devalue the kroner and stimulate its economy by making its exports cheaper.

According to Darvas, though, Denmark would ultimately be best served by joining the euro. But no matter what the economic arguments are, if it can’t be sold to the electorate then that’s an unlikely scenario.

“I don’t think Danish voters are going to change their mind. They were against the euro before and I think the management of the Eurozone crisis makes them believe their decision was the right one,” Darvas said. “There’s no way to convince Danish voters. “