June 7th, 2012

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Denmark’s banks are so sick that they are unable to carry out their most important task: channelling foreign capital into the economy. Meanwhile export growth, which had been the only bright spot, is just about out of steam. And with it, it is more likely that consumer spending will decrease rather than increase, and we should ready ourselves for higher unemployment in the coming months. If that happens, consumer spending will decline further as people’s concerns about their financial futures grow.

During its first year in office, the Socialdemokraterne-led coalition has followed a responsible economic policy, showing considerable restraint when it comes to public spending. Given that this is a left-leaning government, this is no small achievement. Part of the reason why it has been able to act this way is that there was no pressing need to stoke the economy. During the first months of the term, it appeared that the global economy was on the mend, and that this would eventually spread to Denmark.

Unfortunately, things haven’t turned out that way, and no matter what happens to southern Europe’s debt-plagued states, we can expect Europe’s economic turbulence to continue for the foreseeable future. Denmark won’t escape Europe’s troubles, even if we do find ourselves in the unique situation of having a balance of payments surplus and a manageable deficit. 

It’s also worth noting that the Danish state can still easily pay off the interest on bonds it sells abroad. The interest rate on Danish ten-year treasury bills is under 1 percent, which is less than in Germany. Nationalbanken, the central bank, is awash in foreign currency because investors are drawn to the krone as a safe haven at a time when there is increasing uncertainty about the future of the euro. 

Given all the pressures facing the economy, there’s a good reason why the government and parliament should agree to stimulus measures. It’s important, though, that they do so wisely and take steps to make businesses more competitive. There is good reason to believe that the proposed tax reform will put more money into the pockets of working people. That’s something that, in and of itself, can stimulate private sector spending. 

Unfortunately, it’s hard to see any direct effect the reform would have on competitiveness. The government should be focusing on ways to make it less expensive to do business – both when it comes to wage levels as well as when it comes to the cost of lending. It should also give better incentives for people to start new businesses. 

A first step would be to improve competition by getting people to work longer for the same amount of money. We can only hope that the three-party talks between the government, labour organisations and management representatives come up with specific plans of action. Up to this point, however, there has been little reason for optimism.

Next, the government should stimulate private sector growth by being a more active lender at a time when a moribund banking sector is preoccupied with cleaning up is own affairs. The current plan to set up a state-operated agricultural bank is an obvious first choice, but such a move is neither grand enough, nor broad enough to have a major impact. Most of all, the measure seems primarily to be a way to help banks. What’s needed are forward-looking measures that can help stimulate businesses.

Another important step is to take advantage of the untapped potential of our enormous number of entrepreneurs and start-ups. Under the current system, parliament treats them like the second-class citizens of the corporate world by creating one useless public funding programme after another. Companies seeking to benefit from these programmes are hindered by a jungle of requirements, liability clauses, demands on equity and positive evaluations from banks that neither can nor will run the slightest amount of risk.

The two most prominent sources of capital, both managed by Vækstfonden, a state-operated investment fund, are too narrowly targeted to have an effect. What is needed is an effort to direct foreign capital to Danish businesses. This plan should be thought up not by private bankers but by commercial bankers, whose purpose in life is to make loans to businesses. 

Such an effort could include the establishment of a state-run bank, owned by Financiel Stabilitet, the public authority responsible for assuming the operation of troubled banks. Such an institution could help alleviate the credit crunch while the banking sector gets back on its feet. Once banks are back to health, the state-run bank could either be privatised or sold off. 

The government needs to consider creative solutions to the current economic malaise – including giving a tax benefit to private investors who put money into small companies. But no matter what steps it takes, it must make a decision now, while it still has time to decide its own course of action. 

The author is the editor-in-chief of Økonomisk Ugebrev, a weekly financial publication