A Study On The Danish Economy

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On the first of may, 2004, 10 new countries joined the European Union. Begin 2007, 2 more countries joined. Eventually all these new EU members are forced to join the EMU (Economic and Monetary Union), by using the euro as official currency. The euro has already been introduced in Slovenia, Slovakia, Malta and Cyprus. Denmark, Sweden and the United Kingdom still have their own currency. Before a country may introduce the euro, it has to meet the so called convergence criteria. In this essay, we will unravel if Denmark meets these criteria and if it is capable of introducing the euro. So, does Denmark fulfil the European convergence criteria? This is the main question we will be answering. Before we can answer it, we will have to study the Danish economy.

First of all we will study several aspects of the Danish economy. For instance the Danish export, social safety and unemployment.

After giving information about these topics, we will see if Denmark actually meet these criteria:

Requirement of price stability:

This requirement means that a Member State's rate of inflation (consumer price increase) must not exceed the inflation rate in the three Member States which have the lowest inflation by more than 1.5 percentage points.

2. Requirement of sustainable public finances:

There must not be an excessive deficit in the public budget. This means that as a general rule the annual public deficit must not exceed 3% of gross domestic product. Exceptionally, this may be accepted if the deficit has been reduced substantially and continuously and has reached a level that is close to 3%, or if a small breach of the 3% level is exceptional and temporary.

3. Requirement with regard to public debt:

The ratio of gross public debt to gross domestic product must as a general rule not exceed 60% at the end of the preceding financial year. An exception may be made if the deficit has diminished sufficiently and is approaching 60% at a satisfactory pace.

4. Participation in ERM II in the preceding two years:

The Member State must have participated in the European Monetary System's exchange rate mechanism (ERM II) for the preceding two years without severe fluctuations and must also not have devalued its currency in that period.

5. Requirement with regard to the long-term interest rates

The Member State's nominal long-term interest rates must not exceed the corresponding interest rates in the three Member States which have achieved the best results with regard to price stability by more than two percentage points.

Source: http://www.eu-oplysningen.dk/euo_en/spsv/all/75/

If Denmark meet all these criteria, we can conclude that Denmark can introduce the euro. However will Denmark still meet all the criteria after the recent economic crisis?

General Information

Denmark is a country from the total of eight countries of Northern-Europe. Its capital city is Copenhagen, a city with more than 1.1 million inhabitants. The total number of inhabitants in Denmark is 5.515.575 million people. Around 33.3% of these people live in the five biggest cities of Denmark; Copenhagen, Århus, Odense, Aalborg and Esbjerg.

Denmark is an international prosperous country. Most of the people are international orientated, however the most spoken language is Danish. The second language of Denmark is Faroese: a Western-Scandinavian language which is spoken by only 48.000 people. The country is divided into different regions. The most important region is the Jutland. It is not only the biggest region, but also the only region of Denmark which is a peninsula, whereby it is joined to the European continent. A lot of people in Denmark are religious. 89% of the Danish inhabitants are Lutherans. The other 11% are Catholic or are non-religious.

Denmark is part of the European Union since 1973, however there is some euro-scepticism in the country. An important exception is the actual currency of the country; The Danish Krone is the national currency of Denmark at the moment. They still do not have the Euro as their national currency, since the inhabitants of the country determined to hold the Krone during a referendum. During this referendum, 87.6% of the people voted against the Euro. Originally, this was not aloud. The so called Maastricht Treaty wanted all the members of the European Union to change their currency to the Euro, once their economical situation sufficed to the criteria. The addition of another treaty, named the Edinburgh Treaty, made it possible for Denmark to hold their currency. This treaty excepts countries to hold their own currency when these countries are not interested in the Euro.

At the moment, Denmark had a population growth of 0,285% in 2009. However, the percentage is reducing, as the country had a population growth of 0,34% in 2005.

Denmark belongs to the top ten of the richest and most economic developed countries in the world. Also, the prosperity of the country is well developed. This is an important reason why the country has a relative low unemployment rate. From the 5.51 million people in Denmark, the labour force exists out of 3.47 million people, which is 63%. In 2010, only 4,2% of the labour force was unemployed. The percentage was significantly lower in 2007, when it was only 2,8%, so the country has an increasing unemployment. Mainly because of the economical crisis in 2009.

Social Security

Denmark has one of the most extensive social securities of the OESO-countries. However, it is questionable if the extensive net is a good or a bad thing. Because of the capacious social security, Denmark has to expense twice as much on it than the OESO average. Since the social security is a cause for the high tax level in Denmark, the Danish government introduced an additional tax. Even with this new tax, there are doubts if the current social security can be maintained.

The main reason for these doubts is the shrinkage of the labour force. It has been estimated that more people will retire than join the labour force, causing the working population to shrink. This diminishing population may effect the social security premium. Less people have to pay for the same amount of people, making the tax price per person higher. This problem is also occurring in the Netherlands at the moment. However the Dutch government is already taking measurements by raising the retirement age. Denmark is trying to use the same measurement in an effort to improve the supply of labour and to ensure it's budget surplus in the coming decades.

Social Security: Premiums

Having such an extensive social security causes high expenses on it. These security expenses were mainly being funded from regular taxes. However in 1994 Denmark introduced an additional premium, the so called 'labour contribution'. This premium is introduced mainly to finance maintenance for illness, unemployment and retirement. The premium is 8% of the gross salary of employees.

Social Security: Unemployment Allowance

The unemployment security is the only social security which is not mandatory. The unemployment funds are connected to the labour unions and are organized per sector. Denmark has 35 of these funds, of which two are for entrepreneurs. To be able to join a fund, an employee has to be able to demonstrate before the inclusion that:

- He or she was in the industry of the funds.

Or - He or she was an entrepreneur.

Or - He or she helped with the entrepreneur activities of his/her wife/man.

Or - He or she the military conscription.

Or - He or she was mayor, alderman, member of the Danish parliament,

government or European parliament.

The unemployment benefit is 90% of the last earned salary, with a maximum of 570DKK per day. For entrepreneurs the benefit is calculated by taking the average income of the last five years.

To gain an unemployment benefit someone has to be unemployed and has to be registered at an employment office. Usually the right for an unemployment benefit arises after one year of subscription at a recognized labour funds. The employee also has to worked an full year with a minimum of 37 hours a week. If someone meets all these criteria, he or she can gain a benefit for 2 years.

Social Security: Retirement pension

The general retirement pension consist of a basic amount and a pension bonus. The basic amount depends on the incomes of labour of someone. To gain a full retirement pension, a person has to be living and working for 40 years in Denmark.

Each inhabitant of Denmark between 16 and 67 is covered by the so called ATP-system. This is a system to ensure the additional retirement pension for employees. The premiums for this pension are being paid by the employee (1/3 of the premium) and his/her employer (2/3 of the premium). The part of the premium of the employee is restrained from his/her salary by the employer, since the employer is responsible for the payment of the premium. The ATP-system also works for entrepreneurs, however they have to pay the full premium their self. After paying premiums for years, the ATP-bureau will pay retirement pension for the rest of the retired person his/her life, mostly from the age of 65. However it is possible, under certain conditions, to have an early pension. Not only an earlier pension is possible, when an employee waits with his pension till the age of 67 the amount of it will be raised with 10%. It is possible to wait longer, raising his/her pension with 10% per year (till the age of 70).

Convergence Criteria

Convergence Criteria: Requirement of price stability

This requirement means that a Member State's rate of inflation (consumer price increase) must not exceed the inflation rate in the three Member States which have the lowest inflation by more than 1.5 percentage points. This means Denmark must have an inflation percentage of less than 1.5 percent.

The graph to the right shows that Denmark has a higher percentage of inflation. However this does not directly say that Denmark does not meet the convergence criteria. If the inflation can be reduced to 1.5 percent in a short amount of time, Denmark still meets the criteria.

The Danish inflation has been increasing the last years. There are various reasons for the increase of inflation. For instance the

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