COUNCIL OPINION of 1 December 1998 on the Convergence programme of Denmark, 1998-2005 (1999/C 3/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(1) and (2) thereof,

Having regard to the recommendation of the Commission,

After consulting the Monetary Committee,

HAS DELIVERED THIS OPINION:

On 1 December 1998 the Council examined the Convergence programme for Denmark which covers the period 1998-2005. The programme envisages a budget surplus of 2,6 % of GDP by 2001 and of 3,5 % of GDP by 2005. The Council considers it appropriate that the programme focuses on budgetary consolidation underpinned by continued structural reform. Moreover, the Council considers that the programme is consistent with the Broad Economic Policy Guidelines.

The programme is built upon a macro-economic forecast showing a deceleration in the strong domestic demand led growth of recent years towards real GDP growth of slightly over 2 % towards the end of the projection period. For the macro-economic scenario to materialise, and given the high capacity utilisation and tight labour market in Denmark, continued growth in labour supply through labour market reform is essential. The Council notes that the realisation of the growth scenario appears realistic but requires, inter alia, continued reform of the supply-side of the Danish economy.

With respect to inflation, Denmark continues to fulfil the convergence criterion with some margin. The fixed exchange-rate towards the euro is an important condition for maintaining low inflation expectations. However, domestically induced underlying inflation has clearly been accelerating during 1998 and given Denmark's advanced stage in the business cycle and the tight labour market, there are risks to the future inflation outlook. Any inflationary threats should be dampened via fiscal policy and, above all, through further structural improvements in the labour market.

Denmark has met the convergence criterion on the long-term interest rate for extended period of time. This underlines the credibility given by markets to the exchange rate target of Danish monetary policy. The Council notes with satisfaction that Denmark's participation in the ERM2 will allow Denmark to further strengthen the credibility of its monetary policy.

The Council welcomes the programme's strategy of increasing the general government budget surplus over the projection period towards a surplus of 2,6 % of GDP by 2001 and 3,5 % of GDP by 2005. This will be achieved via a moderate easing in the tax burden more than outweighed by a reduction in primary expenditure and reduced net interest payments. In this context the Council considers that stricter control of government expenditure is called for.

The Council notes that the government gross debt ratio in Denmark is expected to fall below 60 % in 1998. The Council welcomes the envisaged further reduction of the gross debt ratio to below 40 % of GDP by 2005. The Council notes with satisfaction that the reduction in the gross debt ratio will be brought about by significant surpluses in the primary balance.

The Council notes with satisfaction that the current underlying budgetary position of Denmark is already consistent with the requirements of the Stability and Growth Pact. The programme foresees further improvements in the government surplus, thereby widening the safety margin, thus allowing room for the operation of the fairly large Danish automatic stabilizers. Denmark's non-participation in the single currency might indeed call for such a wider safety margin.

The Council welcomes the structural reforms included in the programme. The tax reform, which will be implemented in the 1999-2002 period, should increase private savings and diminish distortions in the present tax system. Labour market reform, already proposed by the government, will be essential for further improving the functioning of the labour market. The Council encourages the Danish government to take further measures if the proposed reforms should turn out to be insufficient.

(1) OJ L 209, 2.8.1997, p. 1.