Council Opinion

of 28 February 2000

on the updated convergence programme of Denmark for the period 1999 to 2005

(2000/C 98/06)

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(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 28 February 2000 the Council examined Denmark's updated convergence programme, which covers the period 1999 to 2005. The updated convergence programme envisages budgetary surpluses of above 2 % of GDP over the entire programme period and projects the gross debt to be further reduced to 36 % of GDP in 2005.

The updated programme is based upon a macroeconomic scenario which assumes that, following a slowdown in 1999 to 2000, the Danish economy will grow at an average rate of about 2 % per year between 2001 and 2005. The Council notes that, while such a growth scenario appears realistic, it is based on an ambitious target for employment growth while the assumed gains in labour productivity seem moderate. Moderate productivity increases as assumed in the programme combined with relatively high wage rises could lead to a further erosion of cost competitiveness of Denmark vis-à-vis its trading partners, in particular in the euro-area, on top of those experienced already in the recent past.

Despite a considerable increase in consumer prices in the course of 1999, due mainly to strong wage increases and a rise in energy taxes, Denmark continued to fulfil the convergence criterion on inflation. The updated convergence programme notes, however, that there is a risk that inflation temporarily exceeds the reference value by a small margin in the first half of 2000. Although inflationary pressures should ease in the course of 2000 as the slowdown in domestic demand feeds through, the Council encourages the Danish government to monitor inflation closely and reiterates its recommendation to take further actions if needed(2). Moderate wage developments are of utmost importance in this regard and this year's wage negotiations at company level might prove challenging.

The Council notes with satisfaction that Denmark continues to fulfil the convergence criterion on the long-term interest rate and that the exchange rate has been stable vis-à-vis the euro. This indicates that Denmark's participation in the ERM II has further strengthened the credibility of its monetary policy.

The Council welcomes the Danish government's strategy of continued budgetary surpluses of above 2 % of GDP over the entire programme period. Denmark should thus - with a comfortable margin - continue to fulfil the requirement of the Stability and Growth Pact of a government position of "close to balance or in surplus". In view of the healthy situation of Danish government finances the Council also welcomes the lower weight of public finances in the economy in the forthcoming years as this would increase economic incentives and contribute to a more favourable medium-term outlook for growth and employment.

The Council notes that the government gross debt ratio in Denmark is expected to be further reduced over the programme period and considers this priority commendable in facing the future budgetary challenges arising from the ageing population.

The Council encourages the Danish authorities to keep up the momentum which its comprehensive structural reforms. In particular, the recent reforms regarding the tax system and the labour market, which are in line with the Broad Economic Policy Guidelines, are essential stepping stones in the achievement of the policy aims of the updated convergence programme. However, given that Denmark currently experiences its lowest level of unemployment since the 1970s, the reforms already undertaken in the labour market may need to be complemented by further measures to reach the ambitious target on employment growth set in the programme. Finally, in view of the future budgetary challenges deriving from the ageing population in Denmark, further structural labour market reforms may prove necessary in the medium term to keep public finances on a sustainable path.

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

(2) Council opinion of 14 December 1999 on the convergence programme of Denmark, 1998 to 2005.