COMMISSION STAFF WORKING DOCUMENT In-depth review for DENMARK in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
Date: 2013-04-10
Institutions: European Commission
Subjects: Denmark, building speculation, competitiveness, economic growth, economic recession, economic reform, indebtedness, macroeconomics, property market, public debt, wage indexing

EUROPEAN 
COMMISSION 

Brussels, 10.4.2013  
SWD(2013) 115 final 

COMMISSION STAFF WORKING DOCUMENT 

In-depth review for DENMARK 

in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP 

Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

{COM(2013) 199 final} 
{SWD(2013) 113 final} 
{SWD(2013) 114 final} 
{SWD(2013) 116 final} 
{SWD(2013) 117 final} 
{SWD(2013) 118 final} 
{SWD(2013) 119 final} 
{SWD(2013) 120 final} 
{SWD(2013) 121 final} 
{SWD(2013) 122 final} 
{SWD(2013) 123 final} 
{SWD(2013) 124 final} 
{SWD(2013) 125 final}

EN 

   EN 

 
 
 
 
 
  
 
 
 
 
CONTENTS 

EXECUTIVE SUMMARY AND CONCLUSIONS ................................................................. 3 

1. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

2.5. 

3. 

3.1. 

INTRODUCTION ....................................................................................................... 6 

MACROECONOMIC SITUATION AND POTENTIAL IMBALANCES................ 6 

Macroeconomic scene setter ........................................................................................ 6 

Sustainability of external positions .............................................................................. 7 

Competitiveness and trade performance ...................................................................... 9 

Private sector indebtedness ........................................................................................ 10 

Asset market development ......................................................................................... 12 

IN-DEPTH ANALYSIS OF SELECTED TOPICS................................................... 15 

Competitiveness and export performance.................................................................. 15 

3.1.1.  Cost competitiveness and changes in unit labour cost ............................................... 16 

3.1.2.  Export market shares and geographical composition of exports ............................... 19 

3.1.3.  Product market composition and developments in exports of goods......................... 21 

3.2. 

Household debt .......................................................................................................... 24 

3.2.1.  Risks to financial stability.......................................................................................... 24 

3.2.2.  Risks to economic stability ........................................................................................ 25 

3.2.3.  Measures taken to reduce risks going forward........................................................... 31 

4. 

POLICY CHALLENGES .......................................................................................... 33 

2 

 
 
 
 
EXECUTIVE SUMMARY AND CONCLUSIONS 

In  May  2012,  the  Commission  concluded  that  Denmark  was  experiencing  macroeconomic 
imbalances,  in  particular  as  regards  developments  related  to  external  competitiveness  and 
household indebtedness. In the Alert Mechanism Report (AMR) published on 28 November 
2012,  the  Commission  found  it  useful,  also  taking  into  account  the  identification  of  an 
imbalance  in  May,  to  examine  further  the  persistence  of  imbalances  or  their  unwinding.  To 
this end this In-Depth Review (IDR) takes a broad view of the Danish economy in line with 
the  scope  of  the  surveillance  under  the  Macroeconomic  Imbalance  Procedure  (MIP).  The 
main observations and findings from this analysis are: 

• 

• 

• 

• 

• 

The continued losses in export market shares in goods seem to be linked to the 
deterioration of Denmark's cost competitiveness over the last decade. Denmark 
is a country with a significant current account surplus, which is forecast to persist. At 
the  same  time,  Denmark  experienced  sustained  losses  in  export  market  shares  in 
goods  over  the  period  2000-2010.  These  losses  were  larger  than  both  the  weighted 
average  losses  of  other  EU  Member  States  and  the  corresponding  losses  of 
neighbouring countries such as Germany or Sweden. The losses appear to be linked 
to a deterioration in Denmark's cost competitiveness and recent improvements in this 
regard have not yet been sufficient to compensate for the cumulative losses over the 
past decade. 

Denmark's  losses  in  export  market  shares  relative  to  its  main  competitors  are 
also  due  to  an  unfavourable  geographical  destination  of  its  exports.  Continued 
losses  of  market  shares  in  the  face  of  the  recent  improvements  in  cost 
competitiveness  suggest  that  non-cost-related  factors  may  also  play  a  role.  One  of 
these factors is the geographical destination of Danish exports, which do not seem to 
be sufficiently represented in high-growth emerging markets. On the other hand, the 
product composition of Danish exports has partly counterbalanced the impact of the 
unfavourable geographical destination. 

The  deterioration  in  Denmark's  cost  competitiveness  over  the  past  decade 
reflects  both  relatively  high  wage  growth  and  weak  productivity  growth 
compared with its trading partners. Furthermore, nominal effective exchange rate 
movements have been unfavourable for Danish competitiveness. While the effect of 
wage  growth  has  been  attenuated  to  some  extent  by  favourable  terms  of  trade 
developments, the low productivity growth has been a cause for concern. The factors 
underlying  the  sustained  weak  performance  of  productivity  are  not  yet  fully 
understood.  

Unit labour costs have fallen in more recent years, partly reflecting moderating 
wage growth but also a cyclical catch-up in productivity growth. In the coming 
years, wage growth in Denmark is expected to remain below that of its competitors, 
thereby  contributing  positively  to  cost  competitiveness.  At  the  same  time,  the 
government has taken initiatives to address the problem of weak productivity growth. 
Continued  focus  on  wage  moderation  and  raising  productivity  growth,  resulting  in 
further improvements in cost competitiveness, should help limit the losses in export 
market shares in goods in the future.  

High  household  gross  debt  is  a  structural  feature  of  the  Danish  economy  but 
concerns have arisen due to developments in the housing market, which caused 

3 

 
 
the  debt  to  move  beyond  levels  that  can  be  explained  by  structural  factors. 
Furthermore,  the  composition  of  mortgage  loans  has  changed  since  2003,  with 
deferred-instalment  (i.e.  instalment-free  in  the  initial  years  of  the  loan)  and 
adjustable-rate  loans  gaining  in  popularity  over  fixed-rate  loans  with  instalment. 
Thus, for a given debt level, households are now more exposed to interest rates hikes 
and  fluctuations  in  property  prices  than  they  were  a  decade  ago.  Consequently,  the 
2012  In-Depth  Review  concluded  that  the  household  debt  level  in  the  aftermath  of 
the house price correction represented an imbalance that posed increased economic 
risks,  in  particular  through  potential  effects  on  the  financial  sector  and  on  private 
consumption. This conclusion remains valid even though the analysis in the present 
review notes certain improvements. 

In the current fragile financial and macro-economic environment the high level 
and  the  composition  of  mortgage  debt  have  increased  the  exposure  of  the 
financial  system  to  adverse  developments.  Yet  recent  research  on  Danish 
household debt indicates that risks to financial stability from household indebtedness 
are relatively contained. This is due, in particular, to the large proportion of overall 
household debt held by high income households which are better equipped to service 
their  debt  in  the  event  of  rising  interest  rates.  Consequently,  even  if  interest  rates 
were  to  increase  quite  substantially,  the  potential  amount  of  loans  that  households 
would not be able to service does not seem to pose a threat to the financial stability 
of  the  economy.  Nevertheless,  the  simultaneous  materialisation  of  risk  factors  such 
as rising interest rates, a further fall in house prices and continued low growth and 
rising unemployment, while of low probability, could provide a testing background 
for the mortgage system in Denmark. 

Housing  market  developments  and  high  debt  also  have  affected  the  economy's 
macroeconomic performance. A consequence of excessive swings in house prices 
and high debt has been large fluctuations in private consumption, which are currently 
constraining  the  economy's  capacity  to  recover  as  households  are  deleveraging. 
However,  since  the  household  debt  imbalance  appears  to  be  in  the  process  of 
unwinding and the impact of the deleveraging process on the economy has remained 
relatively  contained  the  existence  of  imbalances  does  not  seem  to  be  a  cause  for 
significant concerns at this juncture.  

• 

• 

This  In-Depth  Review  also  discusses 
the  policy  challenges  stemming  from 
developments and possible policy responses. A number of elements can be considered: 

these 

• 

Concerning  the  challenge  of  improving  external  competitiveness  a  number  of 
different  issues  can  be  considered  in  relation  to  price-cost  competitiveness  factors 
and  non-price  cost  competitiveness  elements.  The  key  aspect  to  safeguarding 
competitiveness  is  to  ensure  that  wage  cost  developments  do  not  contribute  to  a 
deterioration  of  the  external  price/cost  competitiveness  position  and  that  Danish 
exports show flexibility and adaptability in order to be able to adjust to future global 
demand  developments,  in  terms  of  both  product  composition  and  geographical 
destination.  Improving  productivity  growth  by,  for  instance,  removing  obstacles  to 
competition, in particular in the services sector, and by removing barriers for firms’ 
use of knowledge and education, will also be of importance. 

• 

Concerning  the  challenge  linked  to  the  high  level  of  household  debt  and  the 
implications  for  the  real  economy,  a  number  of  measures  can  be  considered  to 

4 

 
 
strengthen  the  stability  of  the  housing  market  and  financial  system  in  the  medium 
term.  This  In-Depth  Review  investigates  the  recent  and  planned  measures  that 
Danish  authorities  and  the  mortgage  credit  institutes  have  taken  to  improve  the 
robustness of the mortgage credit system, to limit policy incentives to take up debt 
and to reduce the risk of an unsustainable build-up of household debts. While these 
measures go in the right direction, close monitoring will be required in order to judge 
whether they have the desired impact. 

5 

 
 
1. 

INTRODUCTION    

On  28  November  2012,  the  European  Commission  presented  its  second  Alert  Mechanism 
Report (AMR), prepared in accordance with Article 3 of Regulation (EU) No. 1176/2011 on 
the  prevention  and  correction  of  macroeconomic  imbalances.  The  AMR  serves  as  an  initial 
screening device, which helps to identify Member States that warrant further in depth analysis 
to determine whether imbalances exist or risk emerging. According to Article 5 of Regulation 
No. 1176/2011, these country-specific “In-Depth Reviews” (IDR) should examine the nature, 
origin and severity of macroeconomic developments in the Member State concerned, which 
constitute,  or  could  lead  to,  imbalances.  On  the  basis  of  this  analysis,  the  Commission  will 
establish  whether  it  considers  that  an  imbalance  exists  and  what  type  of  follow-up  it  will 
recommend to the Council. 

This is the second IDR for Denmark. Based on the previous IDR, which was published on 30 
May  2012,  the  Commission  concluded  that  Denmark  was  experiencing  macroeconomic 
imbalances,  in  particular  as  regards  developments  related  to  external  competitiveness  and 
indebtedness. Overall, in the AMR the Commission found it useful, also taking into account 
the identification of an imbalance in May, to examine further the persistence of imbalances or 
their unwinding. To this end, this IDR takes a broad view of the Danish economy in line with 
the scope of surveillance under the Macroeconomic Imbalance Procedure (MIP). 

Against  this  background,  Section  2  of  this  In-Depth  Review  looks  more  in  detail  into  these 
developments  covering  both  the  external  and  internal  dimensions,  followed  by  a  specific 
focus on external competitiveness and household debt in Section 3. Section 4 discusses policy 
considerations. 

2. 

MACROECONOMIC SITUATION AND POTENTIAL IMBALANCES 

2.1.  Macroeconomic scene setter 

The Danish economy recorded almost uninterrupted growth between 1995 and 2008, with an 
annual average growth rate of around 2%. The economy experienced a period of overheating 
in  2006-2007,  caused  by  accelerating  investment  and  private  consumption  on  the  back  of 
credit expansion and surging house prices. Labour market bottlenecks and tight labour market 
conditions in general led to high wage growth while productivity growth fell. Since the mid-
1990s,  slow  productivity  growth  and  relatively  high  wage  growth  have  contributed  to  a 
deterioration in cost competitiveness as measured by relative unit labour costs. This, in turn, is 
likely to be an important factor behind the sustained losses in export market shares over the 
last decade.  

The  Danish  economy  was  already  slowing  down  before  the  onset  of  the  financial  crisis, 
amidst a correction in the real estate market. As a result, output fell by almost 7½% between 
mid-2008  and  mid-2009  as  investment  and  exports  collapsed,  while  private  consumption 
contracted along with an increase in the unemployment rate and a sharp fall in house prices. 
House prices fell by around 20% in real terms between 2007 and 2009 and, after stabilising in 
2010, dropped by an additional 6% in 2011, reaching levels last seen in 2004.  

The  improvement  of  the  Danish  economy  in  2010  was  due  mainly  to  fiscal-stimulus 
measures, export growth on the back of a rebound of external demand and a turnaround in the 
inventory  cycle.  In  2011,  despite  solid  exports,  the  overall  performance  of  the  Danish 
economy  was  subdued  due  to  deleveraging  efforts  among  households  and  firms,  with  GDP 

6 

 
 
 
growth reaching only 1%. The sovereign debt crisis has, however, led to strong international 
demand for highly-rated mortgage bonds and government securities from Denmark, resulting 
in low interest rates, which currently underpin a still very fragile housing market. 

Following the downturn in 2012, real GDP is expected to accelerate in 2013 and 2014 on the 
back of the projected recovery of the global economy. Export growth is expected to pick up 
slowly in 2013 and to grow more substantially in 2014. Tight credit conditions are likely to 
continue  to  affect  private  investment,  while  public  investment  is  dragged  down  by 
consolidation  efforts.  Private  consumption  is  projected  to  accelerate  in  the  course  of  2013, 
driven mostly by an increase in household liquidity (due to repayment of contributions from 
the  voluntary  early  retirement  pension  scheme  as  well  as  the  tax  reform  and  lower  interest 
payments).  Nevertheless,  it  is  foreseen  that  the  stagnating  labour  market  will  continue  to 
weigh on consumer spending. Furthermore, due the housing market situation households are 
expected to keep on deleveraging and increase savings. 

2.2. 

Sustainability of external positions 

Denmark's current account surplus, which has persisted for more than a decade, experienced a 
significant widening from the start of the crisis in 2008 and peaked at 5.9% of GDP in 2010. 
This was due to the performance of both the balance of goods and services and the balance of 
primary income (Graph 1).  

The  high  and  rising  current  account  surpluses  registered  in  recent  years  contrast  somewhat 
with  the  observed  pronounced  losses  in  export  market  shares  (EMS)  over  the  last  decade. 
These losses therefore have to be qualified in several respects. First, the EMS losses that have 
occurred for goods were partly compensated by gains in EMS for services. Second, while the 
volume  of  goods  exports  did  not  develop  very  dynamically,  this  was  partly  offset  by 
favourable export prices, as Denmark was able to charge relatively high prices for its goods 
exports. Third, since 2008, the losses in EMS have been accompanied by relatively moderate 
import  growth,  reflecting  a  sharp  rise  in  private  sector  savings,  which  more  than  offset  the 
deterioration in the general government balance. 

Under  the  impact  of  the  high  current  account  surpluses  since  2008,  the  net  international 
investment position (NIIP) has seen a strong improvement. Measured as percentage of GDP, 
the NIIP increased from -5.1% in 2008 to +27.8% in 2011. The improvement in the NIIP has 
primarily occurred through a rise in net direct investments and changes in reserves (Graph 2).  
The changes in the NIIP mainly reflect valuation changes and, to a lesser extent, changes in 
net interests and dividends (investment income effect) and net transactions (Graph 3).  

Overall,  the  improvement  in  the  current  account  balance  over  the  last  few  years  reflects 
increased savings in the private sector, which more than offset the deterioration in the general 
government balance (Graph 4), rather than a stronger competitive performance. This suggests 
that,  as  domestic  demand  recovers  and  the  private  sector's  propensity  to  spend  increases, 
import growth will accelerate, leading to lower current account surpluses. 

7 

 
 
 
 
 
 
 
Graph 1: Decomposition of the current 
account balance 

Graph 2: Components of the net 
international investment position (NIIP) 

Source: Commission services 

Source: Commission services 

Note: * indicates estimated figure using quarterly data. 

Note: * indicates estimated figure using quarterly data. 

Graph 3:  Net international investment 
position (NIIP) changes  

Graph 4: Net lending/borrowing by sector 

Source: Commission services 

Source: Commission services  

8 

 
 
 
 
 
2.3. 

Competitiveness and trade performance 

According to the MIP scoreboard, the loss in EMS over the five -year period 2007-11 was of 
the same order of magnitude as over 2006-10, thus remaining well above the threshold of 6 
percentage  points.  However,  although  still  declining,  the  pace  of  the  contraction  slowed 
substantially between 2010 and 2011, with the annual rate of change improving from -10.6% 
in 2010 to -4.0% in 2011 (Graph 5). Both goods and services contributed to this improvement 
(Graph  6).  The  relatively  good  performance  of  merchandise  exports  was  due  partly  to  the 
large share of non-cyclical goods such as pharmaceuticals, food and food-related products in 
Denmark's overall merchandise exports.  

As  identified  in  the  In-Depth  Review  of  May  2012,  Denmark's  problem  of  competitiveness 
and weak performance in exports of goods during the last decade are linked to the pronounced 
rise in unit labour costs (ULC). Between the end of the 1990's and 2009, the rise in ULC in 
Denmark  exceeded  that  of  its  main  competitor  countries1.  Recently,  however,  Danish  cost 
competitiveness  has  been  improving.  Nominal  ULC  decreased  in  2010  and  increased  only 
slightly in 2011 and the indicator in the MIP scoreboard, i.e. the percentage change over the 
past three years, fell from 11.0% in 2010 to 4.7% in 2011, which is well below the indicative 
scoreboard threshold (Graph 7).  

To understand the drivers affecting competitiveness of Denmark, non-cost factors need to be 
examined  in  addition  to  cost  components.  A  more  comprehensive  view  of  the  evolution  of 
export  market  shares  can  be  provided  by  analysing  the  product  market  composition  and  the 
geographic destination of Danish exports, as presented in section 3. 

Graph 5: Decomposition of rate of 
change of EMS for goods (in value terms) 

Graph 6: Breakdown of the rate of change 
of EMS by goods and services (in value 
terms) 

Source: Commission services 

Source: Commission services 

Graph 7: Evolution of nominal unit 
labour costs and its components compared 
1 In this review, Germany, the Netherlands, Sweden and Finland are chosen as the main competitor countries of Denmark. 
to IC35 

9 

 
 
 
                                                            
Source: Commission services 

2.4. 

Private sector indebtedness 

As  a  result  of  the  strong  rise  in  house  prices  and  the  accompanying  upsurge  in  residential 
investment,  the  debt  level  of  Denmark's  households  increased  markedly,  by  52%,  between 
2001 and 2009. The debt level of non-financial corporations also rose over the same period, 
but at a more moderate pace of 29%. On the whole, gross private sector debt2 increased by 
42% between 2001 and 2009, compared with an average rise of 31% for the EU as a whole. 

Although gross private sector debt diminished in both 2010 and 2011, reaching 238% of GDP 
in 2011 (from 251% of GDP in 2009), this still exceeds significantly the indicative threshold 
of the MIP scoreboard. Moreover, the drop was mainly due to the decline in the indebtedness 
of non-financial corporations, which fell from 104.3% of GDP in 2009 to 96.1% of GDP in 
2011 (Graph 8). Similar trend may be observed for the household debt ratio, which started to 
decrease slowly from a peak in 2009.  

As mentioned in the previous In-Depth Review, high household debt is to a significant extent 
a  structural  feature  of  the  Danish  economy,  with  household  assets  exceeding  liabilities. 
Although the net financial asset position of households remains comfortable, real estate and 
pension savings are highly illiquid assets while further corrections in the housing market pose 
downside  risks  for  household  balance  sheets  (Graph  9).  In  addition,  the  composition  of 
mortgage loans has changed since the beginning of the 2000s, with deferred-instalment and 
adjustable-rate loans gaining in popularity, thus leaving households more exposed to interest 
rate hikes and fluctuations in property prices.  

2 Private sector's debt is defined as the sum of loans and securities other than shares, non-consolidated. The private sector includes non-
financial corporations (private and public corporations), households, and non-profit institutions serving households. 

10 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
 
The recent report 'Gældsudgifter i husholdninger med realkreditlån' by the Danish Ministry of 
Business  and  Growth  on  household  indebtedness  in  Denmark  finds  that  the  total  mortgage 
debt  of  Danish  households  represents  about  1,364  billion  Danish  Kroner,  which  equals 
approximately  78%  of  Danish  GDP.  The  report  notes  that  mortgage  debt  is  primarily 
concentrated among households with the highest incomes. Loans with adjustable interest rates 
are  also  more  likely  to  be  chosen  by  households  with  the  highest  incomes  but  also  by 
households with the lowest incomes. However, only approximately 1% of the total mortgage 
debt has been issued to the 10% of households with the lowest income. In addition to that, the 
share of lower income households who report having to draw on their savings or having to run 
into  debt  to  keep  up  current  expenditures  fell  over  the  year  to  spring  2012.3  The  report 
concludes that the distribution of mortgage loans mitigates the risks of non-repayment. 

The  2012  In-Depth  Review  concluded  that  the  household  debt  level  in  the  aftermath  of  the 
house  price  correction  represented  an  imbalance  posing  increased  economic  risks,  in 
particular  through  potential  effects  operating  via  the  financial  sector  (potential  increases  in 
non-performing loans) and private consumption (e.g. the need for deleveraging due to erosion 
of asset values or a high debt-service burden). Section 3 of this review investigates whether 
this  imbalance  is  unwinding  by  examining  the  results  of  recent  research  that  allows  for  a 
better assessment of the related potential risks. 

3 For more information on the financial stress indicator see chapter "Key features of the current European employment and social 
situation" in the Commission report Employment and Social Developments in Europe 2012. 

11 

 
 
                                                            
 
Graph 8: Sectorial decomposition of total 
gross debt (Private sector EA17) 

Graph 9: Net financial assets of 
households 

Source: Commission services 

Source: Commission services, Eurostat 

Note: Decomposition of financial liabilities in % of GDP (non-
consolidated data), as defined in Eurostat (dataset nasa_f_bs). 
Figures for each sector are the sum of loans and securities other 
than shares. 

Note: The structure of assets and liabilities is informative for the 
potential risks associated with different instruments. Both gross and 
net figures need to be looked at. Useful to compare the structure 
and magnitude with the euro area or EU. In percentage of GDP 

2.5. 

Asset market developments 

Due  to  easy  credit  conditions,  house  prices  in  Denmark  experienced  a  sustained  increase  in 
the ten years up to 2007, with a considerable acceleration between 2003 and 2007, when the 
increase  in  real  house  prices  amounted  to  54%.  The  property  tax  freeze  since  2002  and  the 
introduction of deferred-instalment mortgages in 2003 are among the factors that contributed 
to this development4. 

The housing market in Denmark turned around in 2007, already before the onset of the global 
financial and economic crisis, and, since then, real house prices have declined by more than 
27%. Following a sharp fall in 2008, house prices stabilised between 2009 and 2010, before 
continuing their descent in 2011 (-0.1%) and 2012 (-4.9%) (Graph 10). As a consequence, the 
ratio of affordability (price-to-income) is currently close to its long-term average (Graph 11). 
On the other hand, measured against past experience, a further downward adjustment cannot 
be excluded (see Graph 12).  

Following  the  bursting  of  the  housing  bubble,  household  indebtedness  became  a  prime  risk 
for  the  financial  sector  and  the  near-to-medium-term  outlook  for  private  consumption.  In 
Section  3,  private  indebtedness  is  analysed  within  the  scope  of  developments  in  mortgage 
foreclosures,  real  estate  revaluation  and  wealth,  taking  into  account  recent  information  on 
possible household insolvency and the stability of the household debt. 

4 Danmarks Nationalbank (2011). 

12 

 
 
 
                                                            
Graph 10: Evolution of House Price 
Index and MFI Loans for House 
Purchase 

Graph 11: Price-to-disposable income 
EU27 

Source: ECB, Commission services 

Source: AMECO, OECD, STAT, ECB, BIS. 

Note:  Data  for  DE  up  to  1990  refers  to  West  Germany.  Sample 
max and min values are depicted by the blue bars. 

13 

 
 
 
 
 
Graph 12: Real house price cycle, upswing and correction against different 
benchmarks 

Trough/peak: BE 97Q1/10Q4, DE 08Q3/09Q4, IE 97Q1/07Q3, EL 00Q1/09Q1, ES 97Q1/07Q3, FR 97Q1/07Q3, IT 97Q4/09Q1,  LU 95Q1/10Q1, MT 00Q1/08Q3, NL 
90Q4/08Q3, AT 05Q1/09Q1, PT 96Q4/01Q3, SI 03Q1/08Q1, FI 93Q2/11Q3, BG 02Q2/08Q3, CZ 04Q1/08Q4, DK 93Q2/07Q3, EE 03Q3/07Q2, LV 00Q1/07Q3, LT 
00Q3/07Q3, HU 01Q4/04Q4, PL 05Q1/07Q3, RO 05Q1/07Q3, SE 96Q1/07Q4, UK 96Q2/07Q3. 

Source: ESTAT, ECB, OECD, BIS 

Note: This graph refers to a scatterplot of inflation-adjusted house price developments in EU Member States. Past peaks are identified and 
troughs and plot the total growth from latest trough to latest peak against the growth from latest peak to the current level. The House price 
series  are  staff  calculations  obtained  by  backward  linking  ESTAT  data  with  data  from  other  sources  (ECB,  OECD,  BIS).  The  curve 
representing the previous trough is not intended to be interpreted as a benchmark. Rather it helps visualise that the reference points used 
for the calculation of the two growth rates are different: trough-to-peak increases are calculated taking the trough as base year while peak-
to-latest data considers the peak as base year. Moreover, in order to take into account the different cycle durations the latest trough and 
peak information for each country is reported under the chart. 

14 

 
 
 
 
 
 
 
3. 

3.1. 

IN-DEPTH ANALYSIS OF SELECTED TOPICS 

Competitiveness and export performance 

Denmark's  current  account  has  recorded  significant  and  rising  surpluses  over  several  years 
and  it  is  likely  that  the  surplus  will  be  sustained  in  the  next  few  years,  though  at  more 
moderate  levels.  Nevertheless,  when  looking  at  Denmark's  export  performance  the  loss  in 
EMS remains well above the threshold for the corresponding indicator in the MIP scoreboard. 
The  sustained  decline  in  EMS  in  spite  of  recent  improvements  in  cost  competitiveness 
suggests that non-cost factors may be playing a role. 

The 2012 In-Depth Review concluded that the product composition of Danish goods exports 
is rather favourable, while their geographical specialisation acts as a drag on export growth. A 
more refined analysis that breaks down Denmark's export performance, defined as a country's 
export  growth  minus  global  export  growth,  into  geographical  destinations  and  product 
categories  before  and  after  2008  shows  that  Denmark's  geographical  specialisation  was  a 
positive factor before the crisis while it became a negative factor in its aftermath (Graph 13). 
The strong orientation of Danish exports towards the slow-growing European market is likely 
to  be  a  main  explanation  for  this.  However,  holding  export  destinations  constant  Danish 
export  performance  also  deteriorated  both  before  and  after  the  crisis,  although  this 
deterioration was less pronounced during the later period.  

The  contribution  of  Denmark's  initial  product  specialisation  to  export  growth,  which  was 
close to neutral before the crisis, became mildly positive afterwards. This seems to be due to 
the  share  of  cyclically  less  sensitive  goods  such  as  pharmaceuticals,  food  and  food  related 
products  in  Denmark's  overall  exports.  In  other  words,  Denmark's  product  specialisation 
becomes a positive factor during downturns or periods of slow growth, like 2008-2012. This 
may again reverse once the recovery becomes more entrenched. Furthermore, the analysis of 
market  share  developments  within  individual  product  categories  suggests  again  a  strong 
deterioration in competitiveness as shown by the negative contribution before the crisis which 
even worsened later.  

Denmark's exports of services seem to perform better than those of goods, with their share in 
total  world  exports  having  remained  rather  stable  since  2000  (Graph  14).  The  positive 
contribution of services to the evolution of market shares reflects, to a significant extent, the 
large representation of sea transport in Danish services exports.  

The  following  analysis  elaborates  the  developments  in  the  potential  explanatory  factors 
behind Denmark's losses in export market shares, focusing on both cost and non-cost related 
aspects (ULC, product composition and geographical destination). 

15 

 
 
 
 
 
 
 
 
 
Graph 13: Growth in nominal exports 
relative to global growth in exports 
(Shift-share analysis) 

Graph 14:  Share of Danish exports of 
services in total world exports 

Source: Commission services 

Source: Commission services 

Decomposition of total (worldwide) nominal export growth (net of 
the  global  trade  growth)  into  four  components:  i)  growth  due  to 
the growth of destination markets, ii) growth due to the growth in 
product  markets,  iii)  export  growth  to  destination  markets  above 
their  growth,  iv)  export  growth  in  product  markets  above  their 
growth.  The  decomposition  tells  whether  a  country  was  initially 
(in  the  beginning  of  a  period)  specialised  in  geographical 
destinations  and/or  sectors  with  dynamic  or  sluggish  demand  as 
well as whether  a  country has increased or decreased its share in 
these  geographical  or  product  markets.  The  pre-crisis  period  is 
defined  as  2000-2007,  the  post-crisis  period  is  defined  as  2007-
2010 

3.1.1.  Cost competitiveness and changes in unit labour cost 

The problem of Danish competitiveness and the weak performance of export of goods can be 
partly attributed to a rise in relative unit labour cost (ULC) resulting from high nominal wage 
growth  coupled  with  weak  productivity  growth.  A  negative  relationship  between  EMS  and 
wage competitiveness was revealed in the In-Depth Review of 2012. While a relatively high 
share of up-market products to some extent allowed Danish exporters to pass on rising costs 
to prices, high ULC contributed to the decrease in export market shares in volume terms. 

External  cost  competitiveness  is  also  related  to  fluctuations  in  nominal  exchange  rates. 
Denmark is part of the Exchange Rate Mechanism II and the exchange rate is set at a fixed 
value  plus  or  minus  2.25%  vis-à-vis  the  euro.  As  a  consequence,  since  1998,  the  nominal 
krone-euro  exchange  rate  has  remained  almost  unchanged.  However,  in  effective  terms,  i.e. 
taking into account the fluctuation of the euro vis-à-vis the currencies of Denmark's trading 

16 

 
 
 
 
 
partners,  the  Danish  krone  appreciated  between  2000  and  2009  and  depreciated  afterwards 
(Graph 15).  

This  trend  of  deteriorating  competitiveness  in  the  earlier  period  and  an  improvement  in  the 
latter  has  been  reinforced  by  developments  in  Denmark's  relative  unit  labour  costs.  In 
particular, productivity growth has been low as compared with main competitors over the past 
decade.  On  the  other  hand,  productivity  growth has  picked  up  over  the  last  three  years,  but 
there is uncertainty about whether this reflects a structural shift or a cyclical acceleration at 
the start of a recovery when employment growth tends to lag output growth.  

Economic  analyses  have  been  focussing  on  the  issue  of  low  productivity  growth  for  some 
time and a number of possible sources have been identified such as insufficient competition in 
some  sectors  (construction,  retail  trade,  health  care,  and  public  sector  services)  and 
inefficiencies  in  the  education  system.  In  order  to  address  this  issue  in  a  comprehensive 
manner the Danish authorities have set up the Productivity Commission which is mandated to 
come up with policy recommendations by the end of 2013.  

Despite sluggish productivity growth, wage growth in Denmark has developed broadly in step 
with that of its main competitors Sweden, Finland and the Netherlands while exceeding by far 
that  of  Germany.  Wage  growth  accelerated  particularly  in  the  period  before  the  crisis  when 
the  economy  showed  signs  of  overheating,  but  started  to  slow  down  from  2009  on  and  fell 
below that of main competitor countries between 2010 and 2012 (Graph 16).  

As  a  result  of  these  developments,  the  rise  in  ULC  exceeded  that  of  the  country's  main 
competitors for most of the 2000s (Graph 17). The resulting cost competiveness gap started to 
reverse  only  from  2009  onwards  when  wage  growth  started  to  slow  down  and  productivity 
growth to pick up. However, despite these recent improvements, the cost competitiveness gap 
remains large and a further sustained improvement is necessary to correct for the losses that 
accumulated during the past decade. On current projections, the gap should narrow further in 
coming years as a result of continued moderate wage developments and productivity growth 
returning to its longer-term average. 

17 

 
 
 
  
Graph 15: Rate of change of nominal 
and real effective exchange rates (HICP- 
and ULC-based) vis-à-vis IC35 

Graph 16:  Developments in labour wage 
index 

Source: Commission services 

Source: Commission services 

Graph 17: Rate of change of nominal 
ULC  

Source:OECD, Commission services 

18 

 
 
 
 
 
 
3.1.2.  Export market shares and geographical specialisation of exports 

Denmark  is  a  small  and  open  economy  in  which  trade  in  goods  and  services  constitute  a 
significant  share  of  GDP.  Danish  export  growth  in  both  volume  and  value  terms  was 
characterised  by  steady  growth  over  the  last  decade,  with  the  exception  of  2009,  when  the 
global  crisis  triggered  a  contraction.  In  relative  terms,  however,  Denmark's  export 
performance  was  moderate.  Indeed,  over  the  period  2005-2011  Denmark  had  the  second 
lowest  rate  of  growth  in  exports  for  both  goods  and  services  when  compared  with  its 
competitors (Graph 18 and Graph 19).  

Developments in the global economic environment, in particular the growing participation of 
high-growth  emerging  economies  in  international  trade,  pose  new  challenges  for  Danish 
exporters.  Last  year's  In-Depth  Review  found  that  the  mix  of  geographic  destinations  of 
Danish exports did not contribute to growth of export market shares between 2000 and 2005 
and  that,  as  a  consequence,  Denmark  would  benefit  from  greater  representation  in  high-
growth emerging markets.  

Graph 18: Goods: Rate of change of 
exports to the rest of the world  
(in value terms), selected countries 

Graph 19: Services: Rate of change of 
exports to the rest of the world  
(in value terms), selected countries 

Source: Commission services 

Source: Commission services 

In geographical terms, Denmark's exports reveal a strong dependency5 on the EU: compared 
with its competitors, Denmark is the second most dependent on the EU for goods exports and 
the third for services exports. However, Denmark's export shares to the EU have been falling 
since 2005, implying that its exports have become less dependent on EU demand. While this 

5 Export dependency on the rest of the EU is understood as a relation of EU-directed exports to the total exports of a country. 

19 

 
 
 
                                                            
reflects  a  more  general  development  across  EU  countries,  the  trend  has  been  slightly  more 
pronounced than for its main competitors (Graph 20 and Graph 21). 

But  the  future  performance  of  Denmark's  exports  will  hinge  to  a  considerable  extent  on  its 
capacity  to  penetrate  high-growth  emerging  markets,  such  as  the  BRICS  (Brazil,  Russia, 
India,  China  and  South  Africa).  In  this  respect,  Denmark  is  lagging  behind  its  main 
competitors, with its share of goods exported to these countries being the second lowest after 
the Netherlands. Since 2005, a positive trend has been apparent which however has not been 
more pronounced than for its main competitors (Graph 22).  

Graph 20: Export dependency on the EU 
- goods (in value terms) 

Graph 21: Export dependency on the EU  
- services (in value terms) 

Source: Commission services 

Source: Commission services 

Graph 22: Exports of goods to the BRICS as percentage of total goods exports  
(in values) 

Source: Commission services 

20 

 
 
 
 
Denmark's  limited  presence  in  the  BRICS  could  be  due  to  its  large  share  of  small  and 
medium-sized  firms  in  value-added,  as  these  firms  typically  face  greater  difficulties  in 
venturing  into  new  markets.  Furthermore,  according  to  a  study  by  Danmark  Nationalbank6, 
firms in small countries display a greater tendency to export to their neighbouring countries, 
especially if these are large, leaving a smaller export share to distant markets in comparison to 
larger  countries.  However,  this  does  not  explain  why  Sweden  and  Finland  perform 
significantly better than Denmark in this regard.  

One  reason  for  Denmark's  low  presence  in  these  markets  could  also  be  the  product 
composition  of  its  exports,  which  is  concentrated  in  relatively  expensive  high-quality 
consumer  products.  While  the  demand  for  such  products  is  currently  relatively  low  in 
emerging economies, the high income elasticity of demand for such products and the rapidly-
growing  incomes  in  these  countries  may  impact  positively  on  Denmark's  exports  to  these 
markets in the future. 

3.1.3.  Product market composition and developments in exports of goods 

Denmark  continued  to  lose  EMS  in  the  past  few  years  despite  improvements  in  cost 
competitiveness  and  the  fact  that  the  product  composition  of  exports  has  been  relatively 
favourable to export growth. To better understand the relationship between the market share 
losses  and  developments  in  exports  of  goods,  it  is  helpful  to  look  in  greater  detail  at  the 
product composition of Danish exports.  

Denmark  is  relatively  specialised  in  low-tech  products.  Although  low  tech  products  as 
percentage of overall exports have declined considerably over past decades7 they still account 
for  the  largest  share  of  Denmark's  manufacturing  exports  in  terms  of  values  (Graph  23  and 
Graph 24). However, Danish low-tech exports have a relatively high value density which has 
further increased between 2005 and 2011. 

6 Danmarks Nationalbank (2012b). 
7 Danmarks Nationalbank (2012b). 

21 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
Graph 23: Composition of goods 
exported, 2005 and 2011 (values) 

Graph 24:  Share of high- and low-tech 
products in manufacturing exports  
(values and volumes) 

Source: Commission services 

Source: Commission services 

Interestingly, when compared with its main competitors, between 2005 and 2011 Danish low-
tech products performed better in volume terms than in value terms (Graph 25 and Graph 26). 
This points to an improvement in cost competiveness and/or a compression of profit margins 
in recent years which allowed Danish exporters in this product segment to maintain relatively 
high sales in volume terms. 

Denmark's exports are relatively less concentrated in high-tech products. High-tech products 
are assumed to have the highest export growth potential, as they represent the cutting edge of 

22 

 
 
 
 
 
 
 
new  products  that  are  manufactured  with  the  use  of  the  highest  and  newest  technology 
available.  The  high  level  of  knowledge  gained  by  the  specialisation  in  high-tech  products 
could  potentially  benefit  Denmark  and  would  allow  a  significant  improvement  in 
productivity.  As  is  to  be  expected,  for  high-tech  products  the  volume  component  plays  a 
subordinate role. In terms of values, the composition of Danish exports has seen a favourable 
development between 2005 and 2011, with the share of high-tech products in overall exports 
of manufactures having increased noticeable. 

Graph 25: Rate of change of low-tech 
exports to the rest of the world  
(in value terms) 

Graph 26: Rate of change of low-tech 
exports to the rest of to the world  
(in volume terms) 

Source: Commission services 

Source: Commission services 

Compared to its competitors, however, the relative performance of Danish high-tech exports 
appears less favourable. Between 2005 and 2011, only Finish exports reveal lower growth for 
this type of products (Graph 27). On the positive side, extra-EU exports of high-tech products 
did  relatively  well  (Graph  28).  Given  that  extra-EU  markets  are  expected  to  grow  faster  in 
coming years this bodes overall well. 

23 

 
 
 
 
 
Graph 27: Rate of change of high-tech 
exports to the rest of the world  
(in value terms) 

Graph 28: Rate of change of high-tech 
exports to extra- EU countries  
(in value terms) 

Source: Commission services 

Source: Commission services 

The above analysis broadly confirms the conclusion of the previous In-Depth Review. While 
Denmark seems to be relatively specialised in low-tech products, within this product category 
its  exports  are  concentrated  in  the  higher-value  segment  and  there  has  been  a  further 
accentuation  of  this  trend  in  recent  years.  High-tech  products  are  still  somewhat 
underrepresented in overall exports but changes over past years go in the right direction even 
though this development is somewhat less pronounced than for its main competitors. Overall, 
it  can  be  concluded  that  product  market  composition  does  not  seem  to  be  a  risk  factor  to 
Denmark's export performance. 

3.2. 

Household debt 

3.2.1.  Risks to financial stability 

In  terms  of  financial  stability,  the  consequences  of  the  rise  in  household  debt  have  been 
contained so far. This is visible, for instance, in the number of foreclosures which, although 
having  risen  in  the  aftermath  of  the  crisis,  has  remained  at  a  moderate  level  in  a  historical 
perspective  (Graph  29).  Admittedly,  the  consequences  of  the  larger  share  of  adjustable-rate 
mortgage loans among households have so far been mitigated by the drop in interest rates on 
Danish mortgage bonds, leading to a fall in the interest rate burden of households from 2010 
to  2011  (Graph  30).  As  the  increase  in  the  share  of  adjustable-rate  loans  leaves  households 
more exposed to interest rate hikes in the future, it is pertinent to investigate the vulnerability 
of Denmark in this respect.  

24 

 
 
 
 
 
 
 
 
Graph 29: Foreclosures 

Graph 30: Interest burden of households 
and non-financial corporations 

Source: Association of Danish Mortgage Banks 

Source: Commission services 

Recent research on the distribution of household debt provides some comfort in this regard. In 
particular,  a  study  by  the  Ministry  of  Business  and  Growth8  on  the  loan  distribution  among 
households shows that, in general, mortgage debt is concentrated among households with high 
incomes.  Almost  90%  of  the  mortgage  debt  is  held  by  households  in  the  upper  half  of  the 
income distribution and one third of all mortgage debt is held by households in the 10th decile 
of the income distribution. Similarly, a study by Danmarks Nationalbank (DNB)9 shows that 
the largest part of household gross debt is concentrated in the hands of those with the highest 
incomes.  Specifically,  more  than  one  half  of  total  family  gross  debt  is  held  by  the  20%  of 
families with the highest after-tax incomes. Conversely, families that belong to the lower half 
of  the  income  distribution  accounted  for  a  mere  14%  of  total  gross  debt.  The  conclusion 
emerging from these studies is that most of the debt is held by households, who are likely to 
find it easier to service their loans also in a situation of rising interest rates. 

Nevertheless,  variable-interest  and  deferred-instalment  loans  do  pose  some  risks  to  the 
financial  system.  According  to  the  latest  Danmarks  Nationalbank  report10,  the  share  of 
variable-rate  loans  out  of  total  lending  by  mortgage  banks  rose  from  46%  to  68%  from  the 
beginning  of  2005  until  the  third  quarter  of  2012.  Over  the  same  period,  share  of  deferred-
amortisation loans rose from 20% to 56% of total mortgage lending. Variable rate loans are 
particularly  prevalent  among  families  in  the  top  10%  and  the  bottom  10%  of  the  income 
distribution. For the latter income class, which is considered to be  the most vulnerable one, 
loans  with  variable  rates  represent  almost  70%  of  the  total.  Also,  deferred-instalment  loans 
with  variable  rates  are  more  widespread  among  households  in  the  lower  part  of  the  income 
distribution.  This  also  reflects  the  fact  that  such  households  used  the  possibilities  in  the 

8 Ministry of Business and Growth (2013). 
9 Danmarks Nationalbank (2012b). 
10 Danmarks Nationalbank (2012d). 

25 

 
 
 
 
                                                            
mortgage credit system to move to these types of mortgage loans, when their incomes fell as a 
result of the crisis, possibly to avoid foreclosure.  

Ultimately, what counts is the capacity of households to service their debt. According to the 
study by the Ministry of Business and Growth, the large majority of households (95%) spend 
less than half of their disposable income on servicing their total debt. The study shows that a 
one-percentage-point increase in interest rates would raise the share of households that spend 
more than half of their income on debt service from 5% to 6%. In a 'stress test' scenario with 
interest rates rising by 5 percentage points, the corresponding share would rise to 13%. The 
amount  of  debt  held  by  this  group  would  then  correspond  to  DKK  280bn  or  21%  of  all 
mortgage  loans.  However,  as  some  households  will  be  able  to  react  before  such  an  interest 
rate hike occurs – e.g. by changing to other loan types (for instance, to fixed rate loans if the 
rates on these loans do not increase correspondingly) or by selling their house or other assets 
–  the  calculated  share  of  households  with  a  debt  service  burden  above  50%  should  be 
considered  an  upper  limit.  Furthermore,  part  of  these  households  would  still  be  able  to 
continue servicing their debt even if their debt service burden rose above 50% and, in case of 
default their loans, would be backed by guarantees in property. The potential DKK 280bn (37 
bn  EUR)  of  debt  held  by  households,  which  would  have  to  spend  more  than  50%  of  their 
disposable  income  on  debt  service,  would  thus  not  fully  burden  the  financial  sector  and  is 
therefore unlikely to pose a serious threat to Denmark's financial stability.  

Overall, the financial sector's losses on household exposures have been modest so far in the 
face  of  rising  gross  debt.  Against  this  background  and  given  recent  research  on  the 
distribution of household debt, it appears that the debt-to-income ratio does not constitute a 
threat to the economy's financial stability at the current juncture. Nevertheless, in the current 
fragile  financial  and  macro-economic  environment,  the  high  level  and  the  composition  of 
mortgage debt have increased the exposure of the financial system to adverse developments. 
Under the tail risk of a simultaneous materialisation of factors such as rising interest rates, a 
further  fall  in  house  prices  and  continued  low  growth  and  rising  unemployment,  pressure 
points in the Danish mortgage system may show up.  

3.2.2.  Risks to economic stability 

Some  consolidation  efforts  among  households  have  been  observed  in  recent  years,  with  the 
debt-to-gross disposable income ratio being reduced from an historical high of 302% in 2009 
to 286% in 2011 (Graph 31). A similar downward adjustment is also apparent when debt is 
measured  in  terms  of  debt-to-GDP  or  debt-to-assets.  Nevertheless,  indicators  of  over-
indebtedness of households show a level of the debt-to-GDP ratio in Denmark that is one of 
the highest in the EU (Graph 32). However, as the high debt level and the changes to it also 
reflect  structural  factors  such  as  lower  structural  unemployment,  this  does  not  necessarily 
imply  that  risks  in  terms  of  deleveraging  are  high  or  have  increased.  Accordingly,  it  is 
necessary to look at the deleveraging pressures from a broader perspective in order to have a 
better appreciation of the gravity of the situation. 

26 

 
 
Graph 31: Household debt ratios  

Graph 32: Indicators of over-indebtedness, 
selected countries   

Source: Commission services 

Source: Commission services 

To this end, a stress map of credit supply and demand conditions has been constructed which 
puts  Denmark's  situation  into  the  EU  context  (Graph  33).  Such  a  relative  analysis, 
complemented  by  an  assessment  of  the  overall  trend  for  individual  indicators  (see  below), 
provides  a  useful  first  approximation  of  deleveraging  pressures  faced  by  an  individual 
Member  State.  For  Denmark,  it  appears  that  neither  demand-side  nor  supply-side  lending 
pressures seem to be of particular concern11. Synthesising the information on individual items 
indicating  credit  demand  and  supply  pressures  (see  Tables  1  and  2),  Graph  34  shows  that 
Denmark  belongs  to  EU  Member  States  with  relatively  low  demand  pressures,  particularly 
due  to  low  unemployment  and  high  consumer  confidence,  and  with  relatively  low  supply 
pressures, mainly because of its performance in terms of bank profitability and low sovereign 
CDS spreads. 

11  Indeed,  all  indicators  of  lending  supply  and  demand  pressures  for  Denmark  are  close  to  or  below  the  EU  average.  In  addition,  these 
indicators,  respectively,  were  constructed  from  the  individual  indicators  above  in  order  to  gauge  the  likely  effect  on  the  short-term 
deleveraging  dynamics.  The  overall  indicator  is  based  on  the  average  rank  of  a  Member  State  on  each  variable.  Specifically,  for  each 
Member State the rank (percentile) along all variables is calculated. The average rank is then calculated separately for supply and demand 
variables  and  scaled  to  be  between  0  and  10  Tables  1  and  2  present  the  individual  variables  and  the  overall  pressure  indicator  for  all 
Member States. 

27 

 
 
 
 
 
 
 
                                                            
Graph 33: Stress map of credit demand 
and supply conditions 

Graph 34: Lending demand and supply 
pressures 

Source: Commission services 

Source: Commission services 

Note: The overall supply and demand pressures indicators are based 
on  the  average  rank  of  a  Member  State  (MS)  on  each  supply  or 
demand  variable  (see  the  stress  map  explanation  for  details). 
Specifically,  for  each  MS  we  calculate  its  rank  (percentile)  in  all 
supply/demand  variables.  We  then  calculate,  separately  for  supply 
and  demand  variables,  the  average  rank  of  a  MS  and  we  scale  it 
between 0 and 10. 

Note:  The  charts  present  stress  maps  of  credit  supply  (up)  and 
demand (down) conditions. For each variable the range of the graph 
is  given  by  the  maximum  and  minimum  observation  among  all 
Member States (MS) with available data. A weighted average of all 
available  EU27  Member  States  is  provided  as  a  visual  reference. 
Variables  are  plotted  on  a  regular  or  inverted  scale  ensuring  that  a 
larger  map  corresponds  to  more  adverse  conditions.  Credit  supply-
related indicators include the change in overall non-performing loans 
relative  to  2007,  the  banks'  Tier  1  capital  ratio,  banks'  return  on 
equity,  banks' exposure to high risk foreign claims as % of GDP, the 
sovereign  CDS  spread,  the  Bank  Lending  Survey  (BLS)  tightening 
of credit standards for (i) loans to enterprises and (ii) house purchase 
loans  (trailing  4-quarter  average),  and  the  Survey  on  the  access  to 
finance  of  SMEs  (SAFE)  loan  request  failure  rate  (percentage  of 
requests  that  did  not  receive  all  or  most  of  the  amount  requested). 
Credit  demand-related  data  include  the  EC  Consumer  Confidence 
Indicator,  the  Economic  Sentiment  Indicator,  the  unemployment 
rate, the house price evolution relative to 2007Q4, the BLS changes 
in demand for (i) enterprises and (ii) house purchase loans, and the 
SAFE  variable  on  External  financing  needs.  Most  recent  available 
data are presented (2012 Q2, Q3 or Q4). 

28 

 
 
 
 
 
 
 
Table 1: Credit demand conditions, selected countries and EU average 

Unemployment rate

Consumer 
confidence

Economic 
sentiment

House price change 
(vs. 2007Q4)

Last
12.5
16.2
5.3
25.5
7.8
7.4
7.5
10.3
7.7
7.8

Prev. year
8.1
12.7
4.4
22.0
8.3
7.3
7.6
9.7
7.3
7.7

Last
-2.3
-2.2
-1.9
-1.8
-0.8
-1.6
-0.1
-0.9
-0.7
-1.4

Prev. year
-1.0
-2.2
-2.0
-0.6
-1.5
-1.0
-0.6
-0.6
-0.3
-1.7

Last
77.8
79.2
86.3
88.2
97.6
90.4
93.9
85.4
95.1
92.8

Prev. year
85.0
79.0
90.5
93.0
94.0
94.6
92.3
92.0
97.1
94.0

Last
-19.7
-5.3
-15.6
-30.2
-2.5
11.3
-17.2
-13.4
15.5
14.2

Prev. year
-15.1
2.6
-7.5
-17.7
-4.3
9.4
-16.2
-4.8
14.5
11.9

Corporate 
loan 
Last v. 
-25.0
-15.0
-35.7
-22.5

CY
PT
NL
ES
UK
BE
DK
PL
SE
FI

Average

10.5

9.7

-1.5

-1.3

90.6

93.6

-4.2

-2.3

-27.0

Source: ECB, BIS, IMF, Datastream, ESTAT, European Commission, staff calculations 

10.9
-4.3
5.6

2.0

0.5

6.5

SME loan demand 
(SME survey)
Last

Prev. year

House-purchase 
loan demand (bank 
Prev. year
-50.0
-100.0
-33.3
-38.9

Last
-65.0
-85.0
-66.7
-16.7

Overall demand 
pressures

8.2
6.9
7.1
7.0
3.7
4.7
4.1
6.1
2.6
4.6

5.9
-4.1
5.7

-1.0

-3.1

5.6

-25.0

-16.0

Table 2: Credit supply conditions, selected countries and EU average 

NPL increase
(vs. 2007)

Tier 1 ratio

Bank profitability 
(ROE)

Last Prev. year
10.1
5.3
1.3
5.1
0.9
1.9
2.9
0.6
0.2

8.6
4.1
1.1
4.4
1.0
1.4
2.2
0.6
0.2

Last Prev. year
11.9
8.5
11.8
9.8
11.1
16.3
15.1
10.9
13.9

7.0
8.6
11.8
10.6
10.7
15.1
14.9
10.9
13.7

Last
-40.4
0.9
5.7
-5.2
3.6
3.2
2.8
11.8
9.5

Prev. year
-86.0
-4.1
6.2
0.1
4.2
1.4
0.6
10.7
8.1

CY
PT
NL
ES
UK
BE
DK
SE
FI

Banks' high-risk 
foreign claims 
(% GDP)

Last Prev. year

16.7
16.2
8.5
12.7
12.0

1.4
0.9

17.6
16.5
8.4
13.3
13.4

1.3
1.0

Sovereign CDS

Mortgage lending 
tightness 
(bank survey)

Corporate 
lending  tightness
(bank survey)

SME lending  
tightness
(SME survey)

Overall 
supply 
pressures

Last
1007
342.8
53.1
231
45
42
21.0
12
30

Prev. year
1187
1026.4
96.2
275
70
145
105.8
42
64

Last Prev. year
50.0
25.0
29.2
8.3

30.0
90.0
28.0
13.9

Last Prev. year
60.0
15.0
17.9
2.5

35.0
95.0
-3.6
2.5

Last Prev. year

56.1
70.1
46.6

47.0
48.1
37.5

24.7

16.8

9.1

6.6

8.9
7.9
6.2
5.9
5.0
3.8
3.5
2.5
1.7

Average

1.8

1.7

11.4

11.4

3.2

1.7

12.2

12.9

184

184

15.0

17.0

11.8

14.3

32.1

28.9

Source: ECB, BIS, IMF, Datastream, ESTAT, European Commission, staff calculations 

Finally,  deleveraging  needs  may  be assessed by a comparison of the actual debt level to an 
equilibrium/sustainable  debt  level.  Differences  related  to  institutional  characteristics  and 
structural  supply-side  factors  play  a  key  role  in  determining  the  stability  of  financial 
conditions. Hence, the sustainability of a debt level should be assessed against the equilibrium 
level  of  household  debt  as  a  benchmark.  For  instance,  the  fall  in  structural  unemployment 
prior to the crisis, financial developments and changes to the pension system may have led to 
a rise in the equilibrium level of debt in Denmark by easing credit rationing without incurring 
increased  risk.  Therefore,  one  should  assess  the  extent  to  which  an  increase  in  the  debt  to 
income ratio of households constitutes a movement towards a new equilibrium or is related to 
a riskier financial position to the sector.  

Graph 35 shows the household debt-to-GDP ratio together with its estimated sustainable path. 
A build-up of pressures can be identified between 2003 and 2007, when the gap between the 
actual  debt  and  its  sustainable  path  increased  rapidly.  During  this  period,  the  cumulated 
difference  rose  by  35.5  pps  in  Denmark,  which  is  very  high  in  a  comparative  perspective. 
After a downward correction in 2008, the increase in the annual differences continued, but at 
a  more  moderate  pace,  in  2009  and  2010.  According  to  the  latest  data,  in  2011  further 
moderate  rebalancing  took  place.    The  closure  of  the  gap  between  the  actual  and  the 
sustainable  debt  ratios  has  to  take  place  through  a  rebalancing  of  household  sector  balance 
sheets. The pace of this adjustment depends, on the one hand, on how much the actual ratio of 

29 

 
 
 
 
 
debt  to  GDP  diminishes  (deleveraging  efforts  by  households,  thus  reducing  their  liabilities) 
and,  on  the  other  hand,  on  how  much  the  benchmark  rises  (through  corrections  or  negative 
valuation effects in asset prices which would allow for an increase in the sustainable level of 
debt). The adjustment towards a more sustainable level of indebtedness will depend crucially 
on the interaction of these two forces.  

As households in Denmark are in the process of reducing their debt ratios, while the housing 
market  is  simultaneously  stabilising,  the  household  debt  imbalance  is  in  the  process  of 
unwinding.  In  general,  bringing  the  debt  down  to  a  sustainable  level  before  potential  debt 
distress  occurs  is  highly  desirable,  but  it  can  also  be  costly  in  terms  of  growth  and 
employment. In the case of Denmark, however, the process is happening at a relatively slow 
pace. This may be appropriate since the risk of debt distress is rather low, especially the risks 
to  financial  stability.  In  conclusion,  the  impact  of  the  deleveraging  process  on  the  economy 
appears to be relatively moderate and is unlikely to be a significant cause for concern in the 
coming years.  

Although  the  risks  from  deleveraging  needs  to  economic  stability  are  low,  the  level  of 
household debt and its links to real estate make the economic position of Danish households 
sensitive to changes in interest rates and fluctuations in house prices. Denmark recorded some 
of the largest swings in private consumption among a range of countries over the period 1995-
2010  (Graph  36).  Such  large  fluctuations  can  have  an  impact  on  the  speed  with  which  the 
economy  can  recover.  Hence,  in  order  to  avoid  such  harmful  fluctuations  in  the  future,  it 
would  be  prudent  to  address  potential  pro-cyclicalities  in  the  housing  market  and,  thus,  the 
build-up  of  unsustainable  debt  levels.  Lowering  incentives  to  take  up  debt  would  also 
contribute in this respect. 

Graph 35: Deleveraging forces in the 
Danish household sector, actual debt and 
sustainable debt 

Graph 36: Household debt ratio and 
volatility in private consumption 

Source: Commission services 

Source: Statistics Denmark 

Note:  This  graph  refers  to  the  annual  deviation  of  the  debt  to  GDP 
ratio  from  the  sustainable  path  as  well  as  the  cumulated  changes 
since the beginning of the sample. Debt is presented in terms of GDP 
to facilitate the interpretation of the numbers. 

30 

 
 
 
 
 
 
 
3.2.3.  Measures taken to reduce risks in the coming years 

The Danish authorities and the mortgage credit institutes have taken a number of measures to 
improve  the  robustness  of  the  mortgage  credit  system  and  to  limit  the  incentives  to  take  up 
debt. In particular, until now all the refinancing auctions have been taking place once a year, 
in December. This posed a particular challenge related to the larger share of adjustable-rate 
loans, in particular regarding interest rate hikes. Consequently, adverse developments in the 
market  could  lead  to  an  increased  risk  at  the  time  of  refinancing  of  adjustable-rate  loans, 
which  would  have  undesirable  effects  on  house  owners  and  mortgage  institutes.  To  counter 
this  possibility,  the  mortgage  institutes  have  taken  measures  to  spread  auctions  to  refinance 
adjustable-rate  loans  over  the  year  so  as  to  reduce  the  refinancing  risk.  Danmarks 
Nationalbank  and  the  industry  agreed  on  this  already  in  2009.  From  2010  to  2017,  the 
refinancing auctions are taking place three times per year, in December, April and October. In 
2012,  almost  half  of  the  loans  were  refinanced  in  April  and  October.  From  2018  onwards, 
they will take place also in July. As a result, refinancing auctions will be spread over the year 
and therefore the above mentioned potential risks will be limited.  

The EU's capital requirement directive, which was implemented in Danish law in July 2007, 
also poses a potential challenge for the Danish mortgage institutes since it requires that loan-
to-value  (LTV)  ratios  of  80%  are  respected  for  the  entire  life-span  of  the  so-called  'Særligt 
dækkede  obligationer'  (SDOs).  These  new  bond  types,  which  were  introduced  in  2007 
alongside  the  traditional  mortgage  bonds  ('Realkreditobligationer'  –  ROs),  now  constitute 
more  than  60%  of  all  covered  bonds.  In  the  current  environment  of  low  inflation  and  very 
moderate  house  price  increases  the  automatic  downward  pressure  on  the  LTV  ratio,  as 
observed prior to the crisis, is no longer as strong and it is therefore relevant to investigate the 
mortgage institutes' need for additional collateral in case of a negative shock to house prices.  

The  mortgage  credit  institutes  themselves  have  been  undertaking  measures  to  ensure  the 
provision of additional collateral. For instance, Nykredit, the biggest Danish mortgage credit 
institute, introduced a so-called two-layer system in 2012, whereby the LTV ratio of deferred-
instalment  and/or  adjustable-rate  loans  is  limited  to  60%.  The  remaining  20%  has  to  be 
covered  by  loans  with  instalments,  which  are  either  fixed-rate  loans  or  variable  rate  loans12 
with  an  interest  rate  fixed  for  a  minimum  period  of  five  years.  Furthermore,  another  big 
mortgage  credit  institute,  Realkredit  Danmark,  has  increased  the  contribution  rates/fees 
('bidragssats') for the variable rate and deferred-instalment loans significantly, making fixed 
rate  loans  and  loans  with  instalments  relatively  more  attractive.  Such  measures  will 
effectively limit the share of deferred-instalment and adjustable-rate loans. Developments in 
the shares of variable rate loans and deferred-instalment loans have indeed shown signs of a 
stabilisation in recent years. 

The  government  has  announced  new  rules  to  discourage  mortgage  lenders  from  providing 
variable rate and deferred-instalment mortgages to financially weak borrowers. All borrowers 
have to be eligible for a loan with a fixed rate with instalment in order to receive a variable-
rate  and/or  deferred-instalment  loan.  While  mortgage  institutes  already  apply  such  rules  in 
practice  the  measures  will  provide  a  common  formal  framework.  Furthermore,  to  give 
borrowers  better  information  about  the  riskiness  of  their  loans,  the  government  is  about  to 
implement a risk-labelling scheme (a so-called traffic light system as individual loans will be 
labelled using the three colours of a traffic light) for housing mortgage loans. The traffic light 
is meant to be a supplement to the usual guidance to borrowers from the credit institutions. 

12 Note that these loans are called variable-rate loans although the interest rate is fixed for 5 years before it is necessary to refinance. 

31 

 
 
                                                            
On the other hand, although cadastral values continue to be updated every two years to reflect 
market values, the property value tax has been fixed in nominal terms since 2002. Despite the 
fact  that  the  property  tax  freeze  is  judged  to  be  one  of  the  factors  that  contributed  to  the 
emergence of the housing bubble, the government has not signalled any intention to review 
the property value tax system. 

Finally, as a result of the 2009 tax reform, interest rate deductibility is being lowered over the 
coming years. This is expected to attenuate the incentives to hold debt and thereby gradually 
bring  down  the  household  debt  level,  at  least  compared  with  what  it  would  have  been 
otherwise. Indeed, as pension saving schemes are expected to continue to be expanded over 
the  coming  years,  this  should  create  an  upward  pressure  on  the  gross  debt  level  without 
necessarily  affecting  the  net  financial  assets  of  households.  Such  a  build-up  of  gross 
household debt should be sustainable and not harmful to the economy. 

32 

 
 
4. 

POLICY CHALLENGES  

The analysis in the previous sections has shown that, whereas there are no severe imbalances 
in  Denmark,  some  unbalanced  macroeconomic  developments  can  be  detected  in  relation  to 
Denmark's competitiveness and household debt.  

responses  were 

It should be recalled that these challenges were identified under the MIP in the first IDR and 
relevant  policy 
the  country-specific 
reflected  and 
recommendations  issued  for  Denmark  in  July.  The  assessment  of  progress  in  the 
implementation of those recommendations will take place in the context of the assessment of 
the  Danish  National  Reform  Programme  and  Convergence  programme  under  the  European 
Semester.  Against  this  background,  this  section  discusses  remedial  actions  that  could  be 
followed to address the challenges discussed in this In-Depth Review. 

integrated 

in 

Concerning  the  challenge  of  improving  external  competitiveness  a  number  of  different 
avenues can be considered: 

Price-cost  competitiveness  and  wages/labour  costs:  The  analysis  in  this  IDR  has 
highlighted the importance of price competitiveness for Denmark's export performance. The 
problem of competitiveness and weak performance of exports of goods in Denmark is linked 
to a rise in relative unit labour costs as a result of relatively high nominal wage growth and 
poor  productivity  growth  over  the  last  decade.  The  key  aspect  of  a  strategy  to  regain  price 
competitiveness  in  the  short  term  is  to  ensure  that  wage  developments  evolve  along  a 
moderate  path.  In  the  medium  to  longer  term  implementing  measures  to  boost  productivity 
growth  such  as  removing  obstacles  to  competition,  in  particular  in  the  services  sector,  and 
removing barriers for firms’ use of knowledge and education will be essential. 

Recently,  wages  and  productivity  have  been  developing  in  the  right  direction.  Looking 
forward,  nominal  ULC  are  forecast  to  grow  at  a  moderate  pace,  while  real  ULC  are  set  to 
decline  further,  as  productivity  growth  is  expected  to  catch  up  to  the  pre-crisis  trend. 
Nevertheless, the accumulated competitiveness gap will take time to correct and this process 
will require relatively low wage growth and/or higher productivity growth for some time to 
come. 

Non-price cost competitiveness: the analysis also revealed the importance of non-price cost 
competitiveness  in  explaining  the  performance  of  exports.  With  regard  to  geographical 
specialisation,  Danish  goods  exports  are  still  mainly  oriented  towards  the  slow-growing 
European  market.  A  reorientation  towards  more  dynamic  regions  would  therefore  allow  a 
faster  growth  in  the  volume  of  goods  exported  and  a  more  diversified  export  portfolio. 
Conditions  in  emerging  markets  are  often  more  challenging  for  doing  business.  Hence, 
Danish companies may need customised support from public authorities to facilitate entry into 
new  markets.  In  light  of  the  dynamically  changing  global  trade  environment  and  related 
challenges, it is important that Danish exporters show flexibility and adaptability in order to 
be able to adjust to future global demand developments. 

The external competitiveness of Denmark is expected to improve with the measures taken by 
Danish  government  to  improve  the  educational  outcome  and  by  removing  obstacles  to 
competition. The current government has appointed a Productivity Commission to get to the 
heart  of  the  problem  and  come  up  with  proposals  for  productivity-promoting  measures. 
Continued focus on wage moderation and productivity growth, resulting in continued further 

33 

 
 
improvements  in  cost  competitiveness,  should  limit  and  eventually  reverse  the  trend  of 
declining export market shares of goods. 

Concerning the challenge linked to the high level of household debt and the implications 
for the real economy, there is a number of issues that can be considered:  

High  level  of  household  debt:  the  analysis  above  revealed  that  the  risks  posed  by  high 
household  debt  for  financial  stability  are  low  and  that  the  consequences  of  the  rise  in 
household  debt  have  been  contained  so  far.  It  should  be  recalled  that  a  country-specific 
recommendation from 2012 called for considering further preventive measures to strengthen 
the stability of the housing market and the financial system in the medium term, including by 
taking  into  account  the  results  of  the  study  by  the  Ministry  of  Business  and  Growth  on  the 
distribution  of  assets  and  liabilities  across  households.  According  to  this  study,  the  total 
mortgage  debt  is  concentrated  amongst  households  with  the  highest  incomes  which  are 
expected to be better equipped to resist any likely increase in interest rates.  

Moreover,  the  Danish  authorities  and  the  mortgage  credit  institutes  have  taken  a  number  of 
measures to improve the robustness of the mortgage credit system and to limit the incentives 
to take up debt, as described above. In addition, regarding financial stability, the framework 
for financial supervision has been generally strengthened, in particular by the introduction of 
tools for enhanced monitoring of individual banks,13 the creation of a bank resolution regime 
and the establishment of new institutions responsible for macro-prudential oversight14 of the 
financial sector and the economy. 

Economic  risks  related  to  the  build-up  of  household  debt  levels:  these  risks  have  been 
addressed  in  conjunction  with  the  housing  boom.  More  specifically,  changes  to  interest 
deductibility rules over the coming years are expected to reduce the incentives to hold debt, 
thereby  gradually  reducing  the  household  debt  level,  at  least  compared  with  what  it  would 
have been otherwise. However, to reduce the risk of an unsustainable build-up of household 
debt and prevent future house price bubbles further measures in the areas of taxation could be 
useful.  First,  the  pro-cyclical  effects  of  and  the  debt  bias  in  housing  taxation  could  be 
corrected  by  realigning  the  property  value  tax  to  actual  market  values  or,  as  a  second  best 
option, by further phasing out the tax deductibility of interest payments. This would not only 
restore neutrality among investment alternatives, but would also free up fiscal space to reduce 
taxes  that  are  more  harmful  to  growth,  such  as  labour  income  taxes  and  corporate  taxes.  In 
addition,  removing  the  ceiling  on the  annual  increase  of  the  municipal  land  value  tax  could 
prevent future pro-cyclical effects of lagged tax increases.  

The timing and composition of any measures in the housing sector could be considered so as 
to  avoid  unnecessary  pro-cyclical  effects  by  depressing  house  prices  and  household 
consumption  in  a  context  of  slow  growth  and  a  fragile  housing  market.  Given  the  current 
situation in the housing market, a gradual approach could be warranted. 

13 The so called "supervisory diamond" phased in in the period 2010-2012. 
14 The Systemic Risk Council and the interagency committee to develop prudential arrangements for 
systemically-important financial institutions (SIFIs). 

34 

 
 
 
 
 
 
                                                            
REFERENCES: 

Danish Economic Council, "Danish Economy", Autumn 2009.  

Danish Economic Council, "Danish Economy", Autumn 2010.  

Danish Economic Council, "Danish Economy", Autumn 2011.  

Danish Economic Council, "Danish Economy", Spring 2008.  

Danish Ministry for Economic Affairs and the Interior, "Economic Survey", December 2012.  

Danish Ministry of Finance, "Budget Outlook 3", December 2012.  

Danmarks Nationalbank, "Financial Stability Review", 2011.  

Danmarks Nationalbank, "Financial Stability Review", 2012.  

Danmarks Nationalbank, "Monetary Review 1st Quarter" Part 1 and 2, 2012a. 

Danmarks Nationalbank, "Monetary Review 2nd Quarter" Part 1 and 2, 2012b. 

Danmarks Nationalbank, "Monetary Review 3rd Quarter" Part 1 and 2, 2012c. 

Danmarks Nationalbank, "Monetary Review 4th Quarter" Part 1 and 2, 2012d. 

Danske Bank, "Nordic Outlook; Economic and Financial Trends", December 2012.  

Economic  and  Financial  Affairs,  "European  Economy;  Macroeconomic  Imbalances- 
Denmark", European Commission, 2012. 

Economic  and  Financial  Affairs,  "European  Economy;  Scoreboard  of  the  surveillance  of 
macroeconomic imbalances", European Commission, February 2012. 

European  Commission,  "Assessment  of 
convergence programme for Denmark", Commission Staff Working Paper, 2011. 

the  2011  national  reform  programme  and 

European Commission, "Alert Mechanism Report – 2013",  European Commission, 2012. 

European  Parliament  and  Council,  "Regulation  (EU)  No  1176/2011  of  the  European 
Parliament  and  of  the  Council  on  the  prevention  and  correction  of  macroeconomic 
imbalances", Official Journal of the European Union, 2011. 

International Monetary Fund, "Euro Area Policies; 2012 Article IV Consultation", 2012.  

Ministry of Business and Growth, "Gældsudgifter i husholdninger med realkreditlån", 2013. 

Realkreditradet  Association  of  Danish  Mortgage  Banks,  "Prognose  for  spredning  af 
refinansieringsauktioner", August 2012. 

35