Nils Bernstein: Denmark's thoughts on the euro - a central banker's view
Statement by Mr Nils Bernstein, Governor of the National Bank of Denmark, in connection
with the euro consultation of the European Affairs Committee of the Folketing (Danish
parliament), Copenhagen, 22 January 2009.
The spoken version is the final version.
* * *
Danish participation in the euro can be expected to lead to slightly lower interest rates, a
small increase in foreign trade and lower transaction costs. In normal, calm periods, interest
rates will be only marginally lower than under the current fixed-exchange-rate regime. In
turbulent periods such as the present one, the spread widens, often at a rather inopportune
time, since the widening may go hand in hand with other negative factors affecting the real
economy.
Over a longer horizon, adopting the euro will have a certain positive overall effect on growth
in Denmark. But it is difficult to quantify this effect, which is hardly likely to be felt in the short
term.
Since the introduction of the euro in 1999, Denmark has performed well outside the euro
area. This is due to our stability-oriented economic policy with focus on medium-term
objectives and reforms to improve the structure of our society, not least the labour market. It
is important that Denmark continues along this path - even if we eventually join the euro.
The main reason for establishing the euro was to create a foundation for sustainable
economic growth by way of stable prices and an area with irrevocably fixed exchange rates.
With its fixed-exchange-rate policy vis-à-vis the euro, Denmark has benefitted from this
foundation.
In the current situation with a financial crisis and a global economic slowdown, the Economic
and Monetary Union demonstrates its strength. The single currency and single monetary
policy are stabilising factors that prevent the individual member states from seeking their own
- often mutually competitive - monetary solutions to the crisis. This would only make it
escalate further, as we saw in the 1970s.
It is and has been the general view of Danmarks Nationalbank that Denmark's adoption of
the euro is a natural extension of our fixed-exchange-rate policy and would not involve major
economic upheavals.
For Danmarks Nationalbank, Danish participation in the euro would mean joining the
Eurosystem, which comprises the central banks of the euro area member states. The
Chairman of the Board of Governors of Danmarks Nationalbank would be given a seat on the
Governing Council of the ECB. This would give us a say in relation to monetary policy and
other key decisions concerning monetary conditions in the euro area.
Today, I am a member of the General Council of the ECB, which meets every three months.
This is mainly a forum for discussing and exchanging analyses of recent economic and
monetary trends.
Denmark's status as a non-euro area member state excludes us from a number of decisions,
even though they are highly relevant to us. This applies to interest-rate decisions, of course,
which affect us directly owing to our fixed-exchange-rate policy. It also applies to e.g. the
agreement with the Federal Reserve to provide dollar liquidity to euro area banks at an early
stage of the financial crisis. It took some time before we were able to present a similar
agreement for the Danish banks.
I could list a number of other examples. Recently the Governing Council has thus agreed on
standard-setting recommendations for the structure and pricing of government guarantees
and capital injections in the banking sector. Likewise, the Governing Council has laid down
rules for how EU central banks can deposit money in publicly owned banks. And decisions
have been made concerning financial assistance from the ECB to Eastern and Central
Europe.
These examples show that not only interest-rate decisions, but also many other decisions
made by the Governing Council have a direct impact on us - and yet we have no influence
on these decisions, or even insight into the rationale behind them.
In addition, the ECB is responsible for the second-largest currency in global terms and is
therefore increasingly represented in international forums, where it influences global
monetary issues.
The regulatory consequences of the financial crisis are being debated strongly at the
moment - in the ECOFIN Council and the Eurogroup, in the Basel Committee, in the
Financial Stability Forum, in the IMF and in G7, G20, etc. The outcome of these discussions
will have a major impact on the structure of the financial markets and regulation and
supervision of financial institutions, including the whole issue of supervising cross-border
banks, funds and so forth.
It would definitely be in Denmark's interest to participate in, influence and be informed of
such discussions. The ECB is an important actor on this stage. I am aware that our
opportunities to exert influence should not be exaggerated, but needless to say the
opportunities are greater if we actually take part in the discussions.
Participation in the Governing Council is not limited to merely safeguarding Denmark's
interests. It is a question of putting a Danish fingerprint on the key discussions and decisions
that are shaping and developing the monetary-policy framework for the euro area and this
area's influence on global economic policy in a broader sense.
The Governing Council of the ECB has decided that when the number of euro area member
states reaches 19, i.e. three more than at present, it will introduce a rotation system in
relation to voting in the Governing Council, as is already the case in the Federal Reserve.
When this system is introduced, the central-bank governors of all euro area member states
will, for short periods, be unable to vote in the Governing Council, but they will all participate
fully in the meetings and be entitled to speak. In my assessment, this system will not
significantly reduce the influence of the individual central-bank governors in the Governing
Council.