jens thomsen : report on the danish economy statement by mr jens thomsen, governor of the national bank of denmark, at the meeting of the danish economic council, copenhagen, 26 october 2010. * * * thank you for an interesting report. the report is based on the revised national accounts for the 1st half of the year, so the forecast deviates from forecasts published by danmarks nationalbank in september and of the ministry of finance in august. in addition, a choice has been made to the effect that the higher - than - planned public consumption in 2010 must be counterbalanced in 2011. this will result in weak developments in 2011. it is, of course, debatable whether the decline of 1. 0 per cent in public consumption in 2011 is realistic. the housing price model seems to be very simplified – based on the trend in real cash prices. this can provide an indication, but there seems to be a need for further development of the housing price model. the surpluses in 2005 – 2008 – of around 4 – 5 per cent of gdp for public finances – have been replaced by a deficit of the same magnitude in 2010, and the report concludes that consolidation should take place from 2011. danmarks nationalbank supports this view. a tightening will limit the accumulation of debt. one element of such consolidation is that growth in public consumption must not be higher than planned. it is therefore important to ensure that local authorities have sufficient incentive to observe the agreements. bank taxes as proposed for regulation must be of considerable size to have any impact. it should be noted that “ uncertain financing ” can be difficult to define. european solutions may be hard to find due to national differences in bank funding. for quite a while, wage increases have been higher in denmark than in the euro area. at the same time, productivity growth has been weak in denmark. the report provides an analysis of productivity developments. denmark ’ s performance is particularly poor when it comes to tfp ( total factor productivity ). among other things, the report points to a relatively large proportion of people with high educations being employed in the public sector. furthermore, denmark has a low proportion of people with science degrees, who are more oriented towards the private sector. this is still somewhat of a puzzle, but the report presents new insights which may help to solve the puzzle. this is my last meeting in the economic council. while i have been a member, there have been 45 meetings, most of which i have attended. the

they did so because the market was able to price the risk. people voted with their feet. so there was a high degree of market discipline. * * * * * * * * * what can we learn from these two historical examples? firstly, i note that the people involved also took on the risk – they all had something at stake. it was their own money – or their close business partners'money – that was lent. that gave them an incentive for sound risk management. they were focused on behaving in such a way that their good names and reputations and their wealth were not jeopardised. that is no longer the case. today's banks are so large that no individual or small group of people can own and operate a big bank. this means that there is no longer a close link between those bearing the risk, the owners, and the day - to - day management. when shares are as widely dispersed as they are in most danish banks, everyone is responsible, which ultimately means that no - one takes on the responsibility. being owned by everyone is the same as being owned by no - one. secondly, i note that the market plays an important role. it is good if clients vote with their feet. you might ask whether things had been different today if we had learnt more from history. page 3 of 8 * * * * * * * * * now i will turn my attention to something more recent – the financial crisis. it is already more than 10 years since the financial crisis erupted. the financial crisis made it very clear that we had created a system in which the banks reaped the gains in good times, while society and the taxpayers had to foot the bill when things went wrong. distressed western banks were saved by means of government funds. that was also the case in denmark. there was simply no other option. it was necessary to intervene to support financial stability. that was important in order to be able to continue the functions within the financial system that are critical to the real economy. households, firms and authorities all depend on services provided by the institutions. default within the financial system would interrupt these critical functions, which would have considerable negative consequences for the financial system and the real economy. * * * * * * * * * after the crisis, crisis management regimes were introduced for banks worldwide. in the usa, dodd - frank was passed. and at the eu level the bank recovery and resolution directive, brrd, was adopted to prevent