A quiet economic success in the North

Date: 05/03/1998

By Tim Jones

DENMARK will not join Europe's single currency bloc from January next year.

This simple fact seems to make the Danish economy invisible when plaudits such as 'Celtic tiger' and 'Dutch miracle' are being handed out.

The Netherlands is repeatedly acclaimed for achieving that 'unique' combination of creating employment while flattening inflation and cutting state spending.

Yet just north of Germany lies a country where the budget is in surplus, the ratio of public debt to national income is just over 60&percent; and falling, inflation is under 2&percent; and unemployment is heading below 5&percent; of the workforce, as measured by the EU.

And all this has been achieved under a highly centralised system of wage bargaining and while maintaining an extraordinarily generous welfare system.

Denmark went through a very painful period of adjustment. In 1970, the country had full employment. But a marginal growth in net jobs over the decade was insufficient to absorb inflows to the labour force and unemployment surged to 7&percent; by 1980.

When the last recession finished in mid-1993, it marked the end of seven years of slow growth and unemployment had hit 350,000 - 12.4&percent; of the workforce.

The US economist's remedy would be to cut taxes, take on the labour unions, introduce flexibility to bargaining over wages and conditions, and remove the disincentives to hire.

Most of this advice was followed, but only slowly and through negotiation.

Even now, wages are largely set nationally, through contract negotiations between the Confederation of Trade Unions and its affiliated national bodies on one side and the Danish Employers' Confederation on the other.

These set the pattern for the whole labour market, even though the contracts apply directly to only one third of union members.

Over the past few years, these deals have kept wage rises down in return for non-wage benefits.

Over the lifetime of the Rasmussen government a series of reforms to the tax and labour market, supported in key areas by Conservatives and Liberals, has fed through into jobs growth.

Between 1994 and 1998, the government cut the 70&percent; tax rate on any additional income gained by top-earners to 60&percent; while, for average earners, this marginal tax rate was reduced from 50&percent; to 42&percent;. These changes were made as part of a fiscal reform package which saw 'green' taxes introduced on carbon dioxide emissions, petrol and water use. Denmark remains, nevertheless, along with Belgium, one of the EU's top taxers.

The Danish success story is intensely frustrating for those working in the Copenhagen political establishment. They have done everything they can to qualify for EMU, but they simply cannot sell it - yet - to the Danish people.

At least for the first few years, Denmark will have to make do with establishing a currency peg whereby the krone will shadow the euro to such an extent that the country might as well join.

One day, perhaps in 2002 when euro notes and coins start to appear and under the cover of a British application, the Danish authorities hope they can sneak in.