Denmark: Down But Not Out
The Kingdom of Denmark is the southernmost and the smallest of the Scandinavian countries and borders the Baltic and the North Sea. Denmark was one of the first European colonial powers controlling Iceland, Greenland, and parts of Asia and Africa. Today, Denmark is a highly developed welfare state ensuring free health care and promoting secure public sector employment. It has been ranked first in the European pension barometer survey. The large public sector, which forms around 30% of the entire workforce, is financed by the world’s highest taxes, overtaking Sweden. Denmark’s current income tax average is 47.4%. Denmark has few natural resources, but manages to keep itself self-sufficient in energy. Its principal exports are machinery, instruments and food products, with the U.S. being its biggest non-European trader accounting for 5% of total trade volumes.
Of Kings and Vikings
Denmark was peopled by reindeer hunters during the melting moments of the last Ice Age, and the post-glacial period saw the growth of settlements and the creation of deep fjords which are some of the most beautiful places in the country today.
With the arrival of the fierce Vikings from Norway around 800 AD, Denmark entered the European historical scene. The Danish monarchy, which is the Western world’s oldest, traces its roots back to the Norwegian Viking chieftain Hardegon’s son, Gorm the Old, who established his reign early in the 10th century. Gorm’s son, Harald Blataand, completed the conquest of the Danes, speeding their conversion to Christianity. The word “Bluetooth” is the anglicized version of Blaatand’s name and is popularized today through the eponymous electronic device. Blataand, whose biography is recorded on the famous carved Jelling rune stones, was responsible for uniting the Danes. Under his leadership, Denmark emerged as an independent state. The Viking Age lasted for three centuries and during this time they settled in Iceland, Greenland and Newfoundland. This time was crucial for the establishment of Denmark’s identity, and transformed the country from an unknown heathen land to an organized kingdom.
|The murder in 1086 of Canute the Holy (Canute IV) by the Danish nobles put an end to the great Viking Age and medieval Denmark underwent dark upheavals until the momentous marriage of King Valdemar’s daughter Margrethe to the King of Norway, Hakon IV. Margrethe was soon appointed Queen of Denmark in 1387 after Hakon’s death, and she successfully united Denmark, Norway and Sweden forming the Kalmar Union.
However, in the 16th century the Union dissolved and the Reformation ravaged the country with burnt churches and massive civil wars all around. This movement lasted until the powerful Catholic Church was ousted and the Danish Lutheran Church was established in its place, with the monarchy at its head. Denmark was involved in numerous wars for almost two centuries, but it recovered and prospered during the latter half of the 18th century.
A constitution is laid
|Democratic movements in Denmark led to the adoption of a constitution in 1849, which created a constitutional monarchy. But the country was forced to give up Schleswig in southern Jutland to Germany after its inhabitants, people of both Danish and German heritage, revolted against the new constitution. The 19th century was not just a time for political revolution but also a time of economic and cultural changes. The Industrial Revolution changed the face of Denmark by modernizing agricultural equipment and bringing railroad networks. The world famous Tivoli amusement park was established in 1843. Hans Christian Andersen’s stories began to be popular and Søren Kierkegaard’s existentialist philosophies launched new ways of thinking.
Denmark maintained its policy of neutrality during both the World Wars. But during World War II, the country was stormed by “Operation Weserübung” in 1940, and submitted to the Germans. Even as Germany took control of Denmark, the Norwegian colonies of Iceland, Greenland and the Faroe Islands now began to break away from Danish dominance. Iceland declared its complete independence from Denmark in 1944 and although Greenland and the Faroe Islands still come under the purview of the Kingdom of Denmark, they are essentially self-governing.
Win some, lose some
Post-war Denmark became one of the founding members of the United Nations and NATO, and in 1973 joined the European Community (now the European Union). The Danes have always been hesitant in supporting the expansion of the EU. Denmark rejected the EU’s ratification of the Maastricht Treaty, which established the terms of a European economic and political union. Many surmise that Denmark is simply wary of losing its political independence and national sovereignty.
A global meeting point
Denmark has something for everyone. Copenhagen delights people with its sultry nightlife, while the city of Aarhus pleases with its music festivals and performances. History buffs can scout around the city of Roskilde, which echoes the time of the Vikings, while swimmers and surfers can hit the Skagen shores. Sport enthusiasts can go cycling, as Denmark is quite cycle-friendly with wide and extensive biking routes laid throughout the country. The more sedate can go canal hopping since much of Denmark is built along canals, and shoppers can walk along Stroget, the longest pedestrian shopping area in Europe.
Denmark’s icons range from golden beer and Legos to deep fjords and fairy tales. The ubiquitous Lego bricks had humble beginnings and were originally invented in Denmark in 1932 by a carpenter. The name Lego comes from the Danish phrase “leg godt” which means “play well”. Hans Christian Andersen wrote his stories sitting in a house in Odense on the island of Funen, which makes for an enriching visit. Danish architects of the last century such as Arne Jacobsen, Jørn Utzon, Hans J. Wegner and Børge Mogensen are revered icons of the design world. Boasting Danish modern design, it is common to see minimalist cafes dotting the cityscape and funky buildings made of an assortment of materials lining the harbors and squares.
: Sausage wagons, which are common quick food alternatives
: The Danish open sandwich where smør og brød, means “butter and bread”
The Danish economy witnessed great growth during the 19th century, outperforming most other European countries. Denmark began as an agricultural economy, and the arrival of industrialization in the 1870s served to accelerate and improve the agricultural sector. With the gaining popularity of cooperatives starting in the 1880s, creameries began to be set up where steam driven cream separators were used, hastening the process. This gave birth to the iconic Danish dairy. The Danish dairy industry captured over a third of the rapidly expanding British butter-import market, establishing a reputation for consistent quality that was reflected in high prices. Today, Denmark is among the world’s top five exporting nations for dairy products.
In the 1960s, several major developments took place. Denmark joined the European Free Trade Association (EFTA) created under the British, its largest trading partner. Denmark then went through a high growth period as the importance of agriculture waned and the share of employment in the public sector began to grow rapidly. The modern Scandinavian welfare state began to reprise when public expenditure as a share of the GDP exceeded that of most other countries. The public health care system and education expanded, both free for all citizens even today. With the expansion of public facilities for the aged and children in day care, the number of public employees increased as married women were now able to join the workforce.
In the 1980s, interest rates rose to over 20% and national debt ballooned drastically. But a host of policy measures including a tight income policy, the reining in of public expenditure, and the reworking of exchange rate policies brought a turnaround to the economy by 1986. The steep interest rates slid with the deregulation of capital movements between Denmark and other countries, which in turn led to ballooning property prices, rising private consumption and an increase in investment activity. From 1983 to 1986, annual economic growth averaged over 3.5%, and unemployment fell to below 8% in 1987, the second-lowest level in the EU. As such, the country achieved a public budget surplus in 1986-87 for the first time since 1975. Then Denmark tried the “potato cure3” , which consisted of a package of direct and indirect tax hikes, to counter erosion of competitiveness. This led to a very high current account deficit and a surge in overseas debt. Growth in private consumption and investment was curbed and the potato cure miraculously healed the imbalanced economy leading to a substantial drop in property prices.
In 2006, Denmark was voted the most competitive and dynamic economy by the World Economic Forum. The Danish economy reaped multiple benefits from globalization and its export-oriented economy profited from the general expansion in international trade. Denmark’s exports of products and services now constitute approximately 50% of GDP and around 75% of the exported goods include a wide range of industrial products. Machinery and instruments comprise the largest individual category. Services make up around 74% of GDP while industry represents 24.6%. Foreign trade is very important to the Danish economy, and 65% of the trade is engaged with other EU countries, with Germany as the country’s most important trading partner.
Over the last decade, Denmark has had fiscal surpluses, with the country’s public debt coming down drastically from 81% of GDP to around 26%. The country’s fiscal surplus, which amounted to nearly 5% of the GDP from 2005-2007, was among the highest in Europe for several years. Denmark, an oil exporter and a shipping nation, also benefited from the rising oil prices and higher freight rates during this period.
: Potatoes have been used as a traditional medicine around the world against different kinds of diseases. A potato water cure is especially popular in Denmark as an effective treatment for arthritis.
An idea whose time has come
A somewhat skeptical member of the European Union, Denmark has been reluctant to adopt the euro, dragging its heels despite its own krone being pegged to the EU’s single currency. Concerned about relinquishing its financial independence, Denmark chose to vote out a proposal to embrace the euro in 2000. Notably, Finland has been the only Nordic country to adopt the currency so far. But the financial crisis, which rattled the country in the latter half of 2008, rekindled the debate. The credit crisis also drove home the point that no single country can afford to go it alone in an increasingly globalized world.
With the government serving as protector during this economic recovery period, the timing might be right for the country to adopt the euro as it gradually emerges from the recession.
Dream run comes to an end
Denmark had been partying since economic growth gained momentum in 2004, and the upturn continued through 2006. However, the financial crisis caught up with the country in the second half of 2008. Denmark became the first European Union member technically in recession in 2008 when it announced two consecutive quarters of negative growth, the final quarter of 2007 and the first quarter of 2008. The ending of the property boom and the collapse of global trade hit the country hard. The consumption-driven upswing slowed down, pulled down by the credit crisis, which increased borrowing costs. Strangely, the fall in GDP was not as sharp as experienced by some neighboring countries.
The country’s abysmally low unemployment rate has become a thing of the past with the sharp rise in bankruptcies. Like many of its peers, the country’s financial sector suffered, though it has shown signs of returning to normalcy. Profits of banks have slumped, while loan losses have surged. Tighter lending standards and low demand for credit have led to slower lending growth by financial institutions. The sharp fall in equity prices and housing downturn took a heavy toll on household incomes. Now, the mortgage debt taken by households could weigh heavily on consumption growth essential to any economic recovery. The country’s economic recovery could also be hampered by the loss of competitiveness over the past few years due to rising wages. Since a jump in employment is expected to be weak due to a reduction in working-age population, the potential for the economy to expand will remain subdued for a number of years. As a result of these factors, the country’s output growth has declined 1.7% on average over 2006-08 and is forecasted to fall 0.5% in 2009-10 and 1.1% between 2011 and 2017.
The Road Ahead
The Danish economy is experiencing one of its longest and deepest recessions. The small, open economy has been hit hard by the collapse of the world trade. Notwithstanding the government’s wholehearted efforts to rev up the economy, the Danish central bank has warned the administration that it would not be advisable to consider any additional fiscal easing in light of the deterioration in public finances. The bank also called for reforms to increase the labor supply, which is a daunting proposition considering the rising unemployment. Not heeding these concerns, the government has been advocating tax cuts and increases in public spending to arrest the downturn. The Danish government has also declared its intent to launch large infrastructure projects despite the fiscal pressures.
However, the booming Danish farm sector seems to be the silver lining in the dark recessionary cloud. According to a study, the dairy industry in particular has experienced rapid growth during 2005-2009. Moreover, 148 new agricultural businesses were created in 2008, a jump of 43%.
Performing a balancing act
In the wake of the recession, the government’s past expansionary fiscal policies during the economic boom years of 2004-07 have come under attack. Critics are quick to point out that these policies have led to high wage growth and have resulted in a loss of export competitiveness. The Danish central bank has stated that the country’s international competitiveness has deteriorated by about 25-30% since 2000. Weak growth in productivity and a strong krone exchange rate have also undermined the country’s competitiveness in global trade. Adding fuel to the fire, the deterioration in public finances is more severe than the government had previously projected. The budget deficit, which currently remains at 1.3% of the GDP, is expected to rise to 3.3% of GDP in 2009.
Bowing to political pressure, the Danish government has increased spending on ambitious public infrastructure projects such as a high-speed railway line between Copenhagen and Ringsted. However, the minority coalition government in power runs the risk that it will have a tough time restoring public finances once the country fully emerges from the recession. The Danish administration is also faced with the prospect of diminished revenues in the wake of shortfall in tax revenues as personal incomes shrink and corporate profits dwindle. The government may be forced to borrow more, which would lead to an increase in public debt. Thanks to years of economic prosperity, the country’s unemployment rate had fallen significantly, before rising to 6.9% in October 2009 compared to a meager 3.6% a year ago. Strong wage increases during the period also undermined Denmark’s international competitiveness.
Going forward, economists agree that the country is in need of labor reforms which would ensure medium-term fiscal sustainability. Labor productivity could be raised through initiatives in research and development, entrepreneurship, and product market regulation. Education has traditionally been a stronghold of the Danish economy, though the country needs to raise the contribution of human capital to productivity growth. The government should keep tabs on the high dropout rates in secondary education segment and encourage students to make the most of the training imparted to them at higher levels of study. As it emerges from the recession, the country would need to restore sustained robust growth beyond the projected cyclical recovery.
Despite getting rattled by the financial crisis, Denmark has been able to maintain its rankings in Global Competitiveness and Human Development indices. The country’s unemployment rate still remains among the lowest in the European region. Denmark has the distinction of being the most networked economy, the happiest country, and the best place to do business in Europe, according to the World Bank. Its capital, Copenhagen, has been voted the most livable city and the best design city for its easy navigation and urban life-enhancing systems. For the fun-loving Danes, these accomplishments come naturally in their pursuit of hygge, (pronounced hoo-guh), a word roughly translated as a warm, cozy, snug and a comfortable feeling of well-being. Although reaching hygge is relative to an individual and it can be anything from soaking in the lightness of a chilled beer or sharing an evening by the fireside with family. Ultimately, it is a way of reaching personal peace. As a country then, Denmark has embraced hygge and has arrived.