Euro enters Denmark by back door

Date: 04/06/1998

The Danes may have voted 'yes' to the Amsterdam Treaty, but the next big issue - whether or not to accept a single currency - is coming upon them by stealth. Tim Jones reports

HAVING toyed with the idea of making their political masters sweat, Danish voters chose not to make history repeat itself as farce.

Causing an international crisis over the Amsterdam Treaty was hardly worth the effort.

Whatever they thought of the Maastricht Treaty, nobody could deny that it marked a significant step forward for the EU which was worth rejecting in a referendum.

It would be hard to say the same for a treaty which hands over incremental powers to the European Parliament and brings border and police cooperation within the Union's structures, and which was only agreed in the early hours of a June morning last year because it did not offend any government.

The Danes, in their fifth referendum since they voted in 1972 to join the European Community, decided by a margin of 55% to 45% that they too were not offended. In doing so, they revealed three key pointers to the future.

Firstly, more than a third of eligible Danes will vote against anything which they deem to 'come from Brussels'; secondly, the majority of voters did not listen to the siren voices of the far-right warning them of marauding immigrants; and, finally, a future plebiscite on joining the single currency zone would be deeply divisive and hard to win.

All these factors have been taken on board by a chastened political class.

The tone of the debate during the Amsterdam campaign was more than usually depressing for the Copenhagen establishment. One of the posters of the 'no' campaign, albeit hastily withdrawn, read "Welcome to 40 million Poles".

The populist right, led by the charismatic Pia Kjærsgaard and her Danish People's Party, hijacked the campaign as a vehicle for playing on the fears of white Danes.

They claimed that by agreeing to open Denmark's borders through the Schengen free-movement accord, the country would be overrun by thousands of Yugoslavs, Somalis, Turks, Pakistanis and Poles all in search of a social security paradise.

Irrational though it may seem, opinion polls provided shocking evidence of the right's success, with nearly half of the population citing immigration as the number one issue on the domestic agenda.

The centre-left avoided the trap of trying to outflank the right, but Prime Minister Poul Nyrup Rasmussen was forced into playing populist games himself, and issued a series of statements attacking Brussels' 'fat cats'.

They should, he thundered, listen to the home-spun wisdom of the ordinary Dane. "Europe is not to be a business-class project but a project for us all," he said. "We should have an orderly European policy anchored in popular support."

There would be no more 'integrationist' treaties, he promised, and no referendum on euro-land membership for at least three years. Rasmussen's words may have been calculated to appeal to the sceptical voter, but they contain more than a grain of truth.

Even Ireland, which held a referendum on the Amsterdam Treaty last month, approved it by just 62% - the lowest 'yes' figure recorded for an EU referendum in the country.

It is hard to deny the assertion that most other voters would behave like the Danes if they were given the chance.

Copenhagen's centre-left coalition, most of whose members would love to be in the first wave of economic and monetary union, will be loathe to give Danes the chance to vote on EMU until they are more than 50% certain of winning it. They have learnt to be patient.

"Let us see the baby grow in the coming years and see how it is functioning," said Rasmussen immediately after the Amsterdam vote last week. "Let us take good time to evaluate things; nobody should be stressed. In or out of EMU, the Danes and the country will anyhow need to pursue a strong and responsible economic policy."

Indeed, the way policy is shaping up, the Danes - unlike the British or the Swedish - may as well be in EMU now as out of it. After the referendum vote, the gap between the interest rate on ten-year government bonds in Denmark and Germany narrowed to less than 0.2 of a percentage point.

For the past five years, ever the since the collapse of the old tight-band Exchange Rate Mechanism in the summer of 1993, the Danish central bank has pursued a policy of pegging the krone to the deutschemark at around 3.8150 per mark.

All monetary policy is dedicated to this end. At least for the record, the bank takes no account of inflationary pressures and assumes that pegging the currency to the hard deutschemark - and soon to the hard euro - will do the same job indirectly.

Two weeks ago, the bank surprised the foreign exchange markets by raising interest rates. This was not done to deal with a pick-up in inflation at home, but simply because the krone was coming under pressure in the run-up to the referendum and after a general strike.

With the removal of uncertainty after the vote, the key discount rate was cut from 4% to 3.75% as foreign currency flowed back into its reserves.

However, this is not enough for the government. Copenhagen wants to sign a currency agreement with the European Central Bank (ECB) as soon as possible which will formalise this peg and narrow its ability to fluctuate to as little as 2% either side of the established rate.

"Nobody should expect a devaluation or a revaluation," says Thomas Ekeli, a Denmark analyst at London-based investment bank Lehman Brothers. "The only question will be the width of the bands."

A deal which would commit the ECB to buy krone if it came under sustained speculative attack is expected by mid-summer.

The ECB pledge will not, however, come duty free. In return, the Danish government will be expected to stick to the tough budgetary policy it has pursued since the early Nineties, effectively bringing Copenhagen within the rules of the euro-zone's stability pact.

Earlier this week, Finance Minister Mogens Lykketoft announced a programme of strict control of local government spending including sanctions to ensure it does not exceed stated targets.

The 1999 state budget, which will be announced in August, will be even tougher.

Not only does this reflect the demands of the stability pact, but also the need to simmer down a successful economy. "Growth in Denmark has been stronger than the average in core Europe for the past four years, especially in 1997," says Jan Poulsen, an economist at BG Markets' treasury department.

Denmark's economic council of 'wisemen' warned last week that a fiscal tightening was needed to prevent a resurgence of inflation and an erosion of the country's current account surplus.

The wisemen expect growth of 3% this year and next, with private consumption making the strongest contribution fed by 4.5% wage growth.

Having lost the power to deal with domestically generated inflation with higher interest rates, the government must step in to cool down the economy with spending cuts and tax increases and, in an increasingly interdependent single European market, the cabinet will wish to avoid the latter.

In the coming four years before any EMU referendum, the Danes will find their 'Nordic model' changing before their very eyes.

Such change will not, however, be caused by hordes of immigrants, but rather by the early arrival of the euro by the back door.

Major feature.