Report from the Commission - Denmark - Report prepared in accordance with Article 126(3) of the Treaty
Date: 2010-05-12
Institutions: European Commission
Subjects: Denmark, Economic and Monetary Union, budget deficit, economic recession, report, stability pact

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EUROPEAN COMMISSION 

Brussels, 12.5.2010 
SEC(2010) 585 final 

REPORT FROM THE COMMISSION 

Denmark 

Report prepared in accordance with Article 126(3) of the Treaty 

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REPORT FROM THE COMMISSION 

Denmark 

Report prepared in accordance with Article 126(3) of the Treaty 

1. 

THE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS 
SITUATION 

Many  EU countries are presently facing general  government deficits  above the  3% of GDP 
reference value set in the Treaty. The often strong deterioration in the budget balance as well 
as the debt positions must be seen in the context of the unprecedented global financial crisis 
and  economic  downturn.  Several  factors  are  at  play.  First,  the  economic  downturn  has 
brought about declining tax revenue and rising social benefit expenditure (e.g. unemployment 
benefits).  Second,  recognising  that  budgetary  policies  have  an  important  role  to  play  in  the 
current  extraordinary  economic  situation,  the  Commission  called  for  a  fiscal  stimulus  in  its 
November  2008  European  Economic  Recovery  Plan  (EERP),  endorsed  by  the  European 
Council  in  December.  The  Plan  foresaw  that  the  stimulus  should  be  differentiated  across 
Member States to reflect their different positions in terms of public finance sustainability and 
competitiveness and should be reversed when economic conditions improve. Finally, several 
countries have taken measures to stabilise the financial sector, some of which have impacted 
on  the  debt  position  or  constitute  a  risk  of  higher  deficits  and  debt  in  the  future,  although 
some of the costs of the government support could be recouped in the future. 

The  Stability  and  Growth  Pact  requires  the  Commission  to  prepare  a  report  such  as  the 
present one whenever an actual or planned deficit of a Member State exceeds the 3% of GDP 
reference  value.  This  report,  which  represents  the  first  step  in  the  “excessive  deficit 
procedure” (EDP), analyses the reasons for the breach of the reference value with due regard 
to the economic background and all other relevant factors. The amendments to the Stability 
and Growth Pact in 2005 aimed specifically at ensuring that in particular the economic and 
budgetary  background  was  fully  taken  into  account  in  all  steps in  the  EDP.  This  means  for 
instance that, if an “excessive deficit” is deemed to exist, adequate consideration needs to be 
paid to the economic background and outlook when making recommendations on the pace of 
the correction. In this way, the Stability and Growth Pact provides the framework supporting 
government policies for a prompt return to sound budgetary positions taking account of the 
economic situation. 

2. 

LEGAL BACKGROUND  

This  report,  which  assesses  recent  and  current  budgetary  developments  in  Denmark  and 
reviews the short- and medium-term prospects in the light of overall economic conditions and 
policy action taken by the government, is prepared according to Article 126(3) of the Treaty 
on the Functioning of the European Union (TFEU). 

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Article  126  TFEU  includes  the  provisions  for  an  excessive  deficit  procedure  (EDP).  This 
procedure is further specified in Council Regulation (EC) No 1467/97 “on speeding up and 
clarifying  the  implementation  of  the  excessive  deficit  procedure”1,  which  is  part  of  the 
Stability and Growth Pact. According to Article 126(2) of the Treaty, the Commission has to 
monitor  compliance  with  budgetary  discipline  on  the  basis  of  two  criteria,  namely:  (a) 
whether  the  ratio  of  the  planned  or  actual  government  deficit  to  gross  domestic  product 
(GDP)  exceeds  the  reference  value  of  3%  (unless  either  the  ratio  has  declined  substantially 
and continuously and reached a level that comes close to the reference value; or, alternatively, 
the excess over the reference value is only exceptional and temporary and the ratio remains 
close to the reference value); and (b) whether the ratio of government debt to GDP exceeds 
the reference value of 60% (unless the ratio is sufficiently diminishing and approaching the 
reference value at a satisfactory pace). 

Article 126(3) stipulates that, if a Member State does not fulfil the requirements under one or 
both of these criteria, the Commission has to prepare a report. This report also has to “take 
into account whether the government deficit exceeds government investment expenditure and 
take  into  account  all  other  relevant  factors,  including  the  medium-term  economic  and 
budgetary position of the Member State”. 

According to data notified by the Danish authorities in April 20102, the general government 
deficit is planned to reach 5.4% of GDP in 2010, thus  exceeding the 3% of  GDP reference 
value, while general government gross debt would amount to 45.1% of GDP, below the 60% 
of GDP reference value, but higher than five years ago and on a rising trend.  

Table 1: General government deficit and debt a 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

2011 

COM 

DK 

COM 

4.8 

5.2 

5.2 

2.1 

3.4 

General 
government 
balance 
General 
government 
gross debt 
Note: 
a In percent of GDP. 
Source: Eurostat, Commission services’ spring 2010 forecast, the April 2010 EDP notification.  

44.5 

37.1 

32.1 

27.4 

46.0 

34.2 

41.6 

-5.5 

-2.7 

-5.4 

-4.9 

45.1 

49.5 

The planned figure in the notification for the deficit in 2010 provides prima facie evidence on 
the  existence  of  a  planned  excessive  deficit  in  Denmark  in  the  sense  of  the  Treaty  and  the 
Stability  and  Growth  Pact.  The  Commission  has  therefore  decided  to  initiate  the  excessive 
deficit  procedure  for  Denmark  with  the  adoption  of  this  report.  Section  3  of  the  report 
examines the deficit criterion and section 4 deals with public investment and other relevant 

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OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation 
of the Stability and Growth Pact and guidelines on the format and content of Stability and Convergence 
Programmes”, endorsed by the ECOFIN Council of 10 November 2009, available at 
http://ec.europa.eu/economy_finance/sgp/legal_texts/index_en.htm. 
According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, 
twice a year, their planned and actual government deficit and debt levels. The most recent notification 
of Denmark can be found at: 
http://epp.eurostat.ec.europa.eu/portal/government_finance_statistics/procedure/edp_notification_tables 

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factors.  This  report  takes  into  account  the  Commission  services’  spring  2010  forecast, 
released on 5 May.  

3. 

DEFICIT CRITERION  

According  to  the  April  2010  notification  of  the  Danish  authorities,  the  general  government 
deficit is planned to reach 5.4% of GDP in 2010.  

Well in excess of 3% of GDP, the planned deficit is not close to the Treaty reference value. 

The planned excess over the 3% of GDP reference value can be regarded as exceptional. In 
particular,  it  results  from  a  severe  economic  downturn  in  the  sense  of  the  Treaty  and  the 
Stability and Growth Pact. According to the Commission services’ 2010 spring forecast, real 
GDP in Denmark is projected to recover at 1.6% in 2010 after the sharp contraction of 4.9% 
in 2009. The 2009 recession reflected the abrupt decline in private investment, consumption 
and  foreign  trade  in  the  export-oriented  manufacturing  sector  as  a  consequence  of  the 
financial crisis and the global slowdown, in particular the much lower growth prospects of the 
main trading partners (Germany, United Kingdom, Sweden and Norway). The deficit in 2010 
is a consequence of both the economic downturn and the stimulus measures taken in line with 
the EERP by the Danish authorities. 

The excess over the 3% of GDP reference value can not be regarded as temporary in the sense 
of  the  Treaty  and  the  Stability  and  Growth  Pact.  The  Commission  services’  spring  2010 
forecast  projects  that,  taking  into  account  the  measures  adopted  in  the  current  year  for  the 
2010 budget, the deficit would decline to 4.9% of GDP in 2011 on a no-policy change3 basis. 
According  to  the  February  2010  update  to  the  convergence  programme,  the  deficit  is 
projected to decline to 4.1% of GDP in 2011 and to decline further in 2012 to 3.1% of GDP 
before reaching 1.8% of GDP in 2013, based partly on already implemented measures such as 
the financing elements of the 2010 tax reform and normalisation of public investments.  

Table 2: Macroeconomic and budgetary developments a 

Real GDP (% change) 
Potential GDP (% change)  

Output gap (% of potential GDP) 

General government balance 

Primary balance 

One-off and other temporary measures 

Government gross fixed capital formation 

Cyclically-adjusted balance 

Cyclically-adjusted primary balance 
Structural balance b 

Structural primary balance 

   2004
2.3

1.2 

-0.3 

2.1

4.4 

0.0 

1.9 

2.3 

4.6 

2.3 

4.6 

2005

2006

2007

2008

2009 

2010 

2011 

2.4

1.3 

0.8 

5.2

7.1 

0.0 

1.8 

4.7 

6.5 

4.7 

6.5 

3.4

1.7 

2.5 

5.2

6.8 

0.0 

1.9 

3.5 

5.2 

3.5 

5.2 

1.7

1.6 

2.6 

4.8

6.3 

0.0 

1.9 

3.1 

4.7 

3.1 

4.7 

-0.9

1.4 

0.2 

3.4

4.8 

0.0 

1.8 

3.3 

4.7 

3.3 

4.7 

-4.9 

0.4 

-5.1 

-2.7 

-0.7 

0.0 

2.1 

0.6 

2.6 

0.6 

2.6 

1.6 

0.4 

-3.9 

-5.5 

-3.4 

-0.2 

2.4 

-3.0 

-0.9 

-2.7 

-0.6 

1.8

0.6 

-2.7 

-4.9

-2.7 

0.0 

1.9 

-3.1 

-1.0 

-3.1 

-1.0 

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The no-policy change forecast takes into account the (partial) withdrawal of measures of extraordinary 
nature linked to the crisis. 

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Notes: 
a In percent of GDP unless specified otherwise. 
b Cyclically-adjusted balance excluding one-off and other temporary measures. 
Source: Eurostat, Commission services’ spring 2010 forecast, the April 2010 EDP notification. 

In  sum,  the  planned  deficit  in  2010  is  not  close  to  the  3%  of  GDP  reference  value  and 
although  the  excess  over  the  reference  value  can  be  regarded  as  exceptional  it  is  not 
temporary in the sense of the Treaty and the Stability and Growth Pact. This analysis suggests 
that the deficit criterion in the Treaty is not fulfilled. 

4. 

RELEVANT FACTORS 

Article 126(3) of the Treaty provides that the Commission report “shall also take into account 
whether  the  government  deficit  exceeds  government  investment  expenditure  and  take  into 
account other relevant factors including the medium-term economic and budgetary position of 
the Member State”. These factors are further clarified in Article 2(3) of Council Regulation 
(EC)  No  1467/97,  which  also  specifies  that  “any  other  factors  which,  in  the  opinion  of  the 
Member State concerned, are relevant in order to comprehensively assess in qualitative terms 
the  excess  over  the  reference  value  and  which  the  Member  State  has  put  forward  to  the 
Commission and to the Council” need to be given due consideration.  

In  view  of  the  above  provisions,  the  following  four  subsections  consider  in  turn  (1)  the 
medium-term  economic  position;  (2)  the  medium-term  budgetary  position  (including  public 
investment);  (3)  other  factors  put  forward  by  the  Member  State  and  (4)  other  factors 
considered relevant by the Commission. 

4.1. 

Medium-term economic position 

Cyclical  conditions  and  potential  growth.  Prior  to  the  current  global  crisis,  Denmark  had 
benefited  from  an  extended  period  of  rapid  growth,  building  up  a  substantial  surplus  in  the 
current account and in the government finances. This has allowed Denmark to implement a 
large discretionary fiscal stimulus amounting to about 3½% of GDP over 2009-2010 and to 
allow  the  full  operation  of  automatic  stabilisers,  which  to  some  extend  has  cushioned  the 
effect  of  the  crises  on  the  domestic  market. The Commission services' spring 2010 forecast 
projects a Danish GDP growth of 1.6% in 2010, driven by a rebound in private consumption 
and stockbuilding. In 2011, the moderate recovery is set to continue, with real GDP growth 
reaching 1.8%, as investments begin to pick up. The output gap turned strongly negative in 
2009 and 2010. According to Commission services' calculations, potential output growth was 
below its long-run average of 2% in the last 3 years, and is projected to abate further to ¾% in 
2010 and 2011, reflecting a decrease in labour contribution and lower capital accumulation as 
a result of a drop in investment. 

Recent  structural  reforms.  At  a  microeconomic  policy  level,  Denmark's  National  Reform 
Programme  2008-2010  (NRP)  outlines  as  a  priority  the  strengthening  of  the  educational 
system and the research and development environment. Cornerstones of the national reform 
programme  are  ambitious  goals  to  have  95%  of  a  youth  cohort  have  an  upper  secondary 
education and 50% to have a tertiary education by 2015 and increasing spending R&D in the 
public  sector  to  1%  of  GDP.  According  to  the  2009  NRP  spending  on  public  R&D  would 
reach 1% of GDP in 2010 and with private spending at about 2% of GDP total spending on 
R&D stands at about 3% of GDP, which is in line with the Lisbon Strategy for Growth and 
Job's objective. The 2009 tax reform significantly lowered the tax burden on labour income 

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and  strengthened  incentives  to  work  and  save.  At  the  same  time  e.g.  tax  on  energy 
consumption or excise duties were raised. 

4.2. 

Medium-term budgetary position 

Structural  deficit  and  fiscal  consolidation  in  good  times.  Between  2006-2008  Denmark 
was  clearly  in  economic  good  times,  as  assessed  in  terms  of  strong  GDP  growth  and  a 
positive output gap. However, the structural balance worsened markedly by 2.7 pp in 2009 to 
0.6%  of  GDP  and  is  expected  to  deteriorate  further  to  -2.7%  of  GDP  in  2010.  One-offs, 
according to the Commission services’ estimates, amount to 0.2% of GDP deficit reducing in 
2010  due  to  a  capital  transfer  stemming  from  a  reform  of  the  pension  yield  taxation.  The 
output gap turned negative in 2009 at -5.1% of GDP and is expected to improve to -3.9% in 
2010,  which  suggest  that  Denmark  is  experiencing  economic  bad  times  in  both  2009  and 
2010. Denmark's medium-term objective (MTO) is to achieve a structurally balanced budget 
by  2015.  The  structural  balance,  as  recalculated  by  the  Commission  services'  using  the 
commonly agreed method, is projected to be slightly negative by -0.4% in 2015. According to 
the Commission services’ 2010 spring forecast, the structural deficit is expected to increase 
by  2.1  p.p.  in  2010  and  increase  by  0.4  p.p.  in  2011,  suggesting  that  the  fiscal  stance  is 
expansionary in 2010 and in 2011. 

Public investment. Government investment (as a share of GDP) averaged slightly below 2 % 
of GDP from 2005 to 2009, increasing to just above 2% of GDP in 2009 and is expected to 
increase  to  about  2½%  of  GDP  in  2010  on  account  of  the  fiscal  stimulus  measures  taken. 
From 2011 government investments are expected to begin normalising as fiscal consolidation 
takes hold and gradually return to previous levels. The general government deficit is therefore 
expected  to  exceed  total  public  investments  in  both  2010  and  2011.  The  structural  budget 
balance  according  to  the  Commission  services'  2010  spring  forecast  is  expected  to  show  a 
deficit  of  2.7%  of  GDP  in  2010  and  3.1%  of  GDP  in  2011.  Government  investments  are 
therefore not expected to exceed the structural budget balance in both 2010 and 2011.  

Quality of public finances. General government expenditure fell from about 55% of GDP in 
2000  to  50.9%  in  2008.  Driven  by  the  measures  in  response  to  the  economic  and  financial 
crisis and additional expenditure due to automatic stabilisers, the expenditure-to-GDP ratio is 
expected to increase by 6.8 percentage points to 57.7% of GDP in 2010. The February 2010 
convergence  programme  acts  as  an  update  of  the  Danish  macro-fiscal  framework,  the  2015 
plan, and puts forward the fiscal requirements for long-term sustainability of public finances. 
According to the convergence programme, part from the financing elements of the 2010 tax 
reform and the normalisation of public investments, fiscal consolidation will take hold from 
2011 through expenditure constraints while ruling out tax increases. The programme targets 
zero real growth in public consumption expenditure from 2011 to 2013. 

Long-term  sustainability  of  public  finances.  In  its  opinion  of  26  April  2010  on  the  most 
recent  convergence  programme,  the  Council  assessed  the  long-term  sustainability  of 
Denmark’s  public  finances  as  follows.  The  long-term  budgetary  impact  of  ageing  is  clearly 
lower than the EU average. The budgetary position in 2009, as estimated in the programme, 
contributes to the reduction of gross debt. Ensuring high primary surpluses over the medium 
term would contribute to reducing the risks to the sustainability of public finances which were 
assessed in the Commission 2009 Sustainability Report as low. 

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4.3. 

Other factors put forward by the Member State 

The authorities of Denmark have submitted a list of relevant factors according to Article 2(3) 
of Council Regulation (EC) No 1467/97. The list is replicated below. 

The  global  financial  crisis  affected  the  Danish  economy  significantly.  The  fiscal  balance  is 
expected to deteriorate from a surplus of 3½ per cent of GDP in 2008 to a deficit of close to 
5½ per cent of GDP in 2010. Close to 2/3 of the deterioration in public finances reflects the 
direct  budgetary  impact  from  the  economic  slowdown,  notably  the  operation  of  automatic 
stabilisers, which are large in Denmark. A good 1/3 reflects expansionary fiscal measures of a 
total of 3.5 per cent of GDP in 2009 and 2010, including public investments and tax reform, 
in  line  with  the  EERP  to  cushion  the  effects  of  the  crisis  on  economic  activity  and 
employment. The Danish economy is expected to recover gradually in 2011-2015. 

Denmark has a strong track record of sound public finances, including consolidating public 
finances in good times. Fiscal surpluses amounted to 4.6 per cent of GDP on average in 2005-
2008,  with  structural  surpluses  of  1.8  per  cent  of  GDP  on  average  during  the  same  period. 
Denmark has a track record of largely countercyclical fiscal policy as measured by the fiscal 
effect. The key fiscal policy target is to achieve structural balance on public finances by 2015, 
which  is  Denmark's  MTO.  Balance  in  2015  will  halt  debt  accumulation  and  allow  fiscal 
policy to fulfil the long-term requirement of fiscal sustainability. The planned improvement in 
the structural balance of 1½ per cent of GDP from deficit of around 1½ per cent of GDP in 
2010 will bring the structural fiscal position close to balance in 2013. The planned structural 
improvement  will  thus  be  an  important  step  on  the  way  towards  the  primary  objective  of 
structural balance in 2015. 

The concept of fiscal sustainability has been a key focus in fiscal planning since the 1990's 
and form the basis of the government's medium term plans. Besides consolidation, structural 
reforms  contribute  to  sustainability.  Thus,  the  welfare  agreement  of  2006  includes  a  major 
pension  reform,  which  significantly  supports  long-term  fiscal  sustainability.  The  2009  tax 
reform significantly lowers the tax burden on labour income and strengthens the incentives to 
work and save, while raising taxes on energy consumption, excise duties etc. The reform is 
fully financed over time in terms of direct revenue effects and strengthens public finances in 
the  long  run  by  0.3  per  cent  of  GDP.  The  Government  will  initiate  the  preparation  of  a 
comprehensive plan which will outline key structural and fiscal policy requirements towards 
2020 aiming at maintaining the overall objective of long-term fiscal sustainability. 

Apart from the deficit on public finances and rising unemployment, the Danish economy does 
not suffer from other imbalances. Denmark has a current account surplus estimated at 2.9 and 
2.4  per  cent  of  GDP  in  2009  and  2010  respectively  and  low  inflation.  Even  though  gross 
public debt has risen due to the public finance effects of the crisis, it remains on a relatively 
low  level  and  net  debt  –  which  includes  all  financial  assets  and  liabilities  of  the  general 
government – stood at a net asset position of 3.8 per cent of GDP in 2009. In a recent analysis 
the  Commission  has  found  that  Denmark  is  among  the  Member  States  with  the  strongest 
fiscal  framework.  Expenditure  rules,  in  combination  with  (structural)  balance  rules  and 
revenue rules (tax freeze) have been effective in reconciling fiscal discipline and stabilisation. 
The long-term interest rate spread vis-à-vis Germany has remained on low levels and below 
most euro area member states. While the public sector retains risks on guarantees extended to 
the  financial  sector,  including  individual  loan  guarantees  after  the  expiry  of  the  current 
scheme  covering  all  bank  creditors,  no  loss  events  leading  to  the  guarantees  becoming 

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effective  have  occurred  so  far.  Currently  it  is  expected  that  there  may  be  a  limited,  one-off 
public sector surplus from the bank guarantee scheme. 

4.4. 

Other factors considered relevant by the Commission 

In  its  opinion  on  the  most  recent  update  of  the  convergence  programme,  the  Council 
considered  that  the  budgetary  outcomes  in  the  medium  term  could  turn  out  worse  than 
projected in the programme. While the risks in the short run are limited as the latest forward-
looking indicators confirm a continuous recovery of consumer and business confidence, the 
budgetary  outcome  in  the  outer  years  may  be  worse  than  projected  given  the  favourable 
growth  assumptions  underlying  the  budgetary  projections.  Given  the  track  record  of 
expenditure  frequently  exceeding  targets,  the  assumed  zero  real  growth  in  public 
consumption  expenditures between 2011 and 2013 appears  optimistic. In addition, although 
the  financial  sector  appears  stable,  the  rescue  measures  enacted  during  the  crisis  have 
increased  the  government's  risk  exposure  to  the  sector.  The  Council  therefore  invited 
Denmark  to  reinforce  efforts  ensuring  that  the  planned  breach  of  the  3%-of-GDP  reference 
value would remain contained as well as to swiftly correct the projected excess of the deficit 
over the reference value, and to specify the measures to underpin fiscal consolidation for the 
MTO to be reached by 2015 as planned. 

5. 

CONCLUSIONS 

The general government deficit in Denmark is notified to reach 5.4% of GDP in 2010, above 
and not close to the 3%-of-GDP reference value. The planned excess over the reference value 
can be qualified as exceptional within the meaning of the Treaty and the Stability and Growth 
Pact. However, it cannot be considered temporary. This suggests that the deficit criterion in 
the Treaty is not fulfilled. 

General  government  gross  debt  remains  well  below  the  60%-of-GDP  reference  value.  This 
suggests that the debt criterion in the Treaty is fulfilled. 

In line with the Treaty, this report has also examined “relevant factors”, which, according to 
the  Stability  and  Growth  Pact  -  can  only  be  taken  into  account  in  the  steps  leading  to  the 
decision on the existence of an excessive deficit if the twin condition - that the deficit remains 
close to the reference value and that its excess over the reference value is temporary - is fully 
met.  Considered  on  their  own  merit,  the  relevant  factors  in  the  current  case  seem  to  be 
relatively favourable.  

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