jens thomsen : brief overview of the danish economy statement by mr jens thomsen, member of the board of governors of the national bank of denmark, at the meeting of the danish economic council, copenhagen, 27 may 2004. * * * it now seems probable that the danish economy reached a trough in the autumn of 2003 and that an upswing has set in ; an upswing which has not been acknowledged until now, near the middle of 2004. the upswing has primarily been reflected in private consumption, but in addition unemployment has been falling slightly since the turn of the year. naturally, the final impact on unemployment is difficult to predict since unemployment typically reacts with a considerable and varying lag. unlike most other western european countries, denmark has a relatively low unemployment rate, and a strong upswing could lead to overheating. the greatest risk would be if a substantial economic upswing materialised in our neighbouring countries, but there are no indications of this. germany, in particular, is having difficulties boosting its economy. a positive aspect is that growth in the 10 new eu member states is above four per cent, although they account for only four per cent of denmark ’ s exports. in the short term it would seem that only a domestically driven consumption boom with a substantial increase in the consumption ratio could lead to overheating. the consumption ratio is currently low, and the wealth ratio is high. consequently, a marked consumption effect cannot be ruled out. the reversal of the danish economy emphasises how difficult it is to finetune the economy by means of fiscal policy. our knowledge is incomplete. it takes time to prepare fiscal - policy measures, and it takes time before they have an impact on unemployment. such measures can easily have a disruptive effect on the economy when the underlying cyclical factors are uncer - tain and changing. “ in practice there is a genuine risk that attempts to conduct active stabilisation policy will in themselves lead to cyclical fluctuations ”, cf. the former economic advisor torben andersen in udviklingslinier i økonomisk teori - trends in economic theory - ( 2000, ed. chr. hjorth - andersen ). if fiscal policy is eased, it must also be tightened at a later stage ; otherwise it will not be possible to maintain the long - term targets for the development in public finances. the reflections on the sustainability of public finances in the consultation paper emphasise this need for subsequent fiscal - policy adjustment. in

chooses to merge into one bank with branches in the various countries. in that case, the authorities in its home country – presumably sweden – would have the principal responsibility for activities in denmark, just as the danish authorities currently supervise e. g. danske bank's activities in its swedish branch. that is how the eu legislation is designed. this legislation is suitable if a bank has a relatively small branch in another country. however, the swedish authorities cannot hold responsibility for nordea's impact on financial stability in denmark. it is still denmark's responsibility that our financial system functions – even if we do not have insight into almost one quarter of the danish banking market. consequently, danmarks nationalbank is of the opinion that where large branches are involved that may affect financial stability in another member state, we need more binding cooperation between the authorities of the home country and the host country than eu legislation provides for. both the supervisory authorities and the central banks in the nordic countries have concluded collaboration agreements relating to cross - border financial enterprises. we have a long - standing tradition for nordic cooperation, and presumably we will be able to negotiate the necessary insight into large danish branches of banks domiciled in other nordic countries, and vice versa. however, the system should also be designed to handle business integration between north and south within the eu. in this respect, the tradition for cooperation is less well - established than among the nordic countries. it may therefore be necessary to rethink the eu legislation so that the individual member states are still empowered to safeguard financial stability – even with the presence of large foreign branches whose operations may have an impact on the financial system. the eu needs a legal handle to ensure that the authorities of the host country gain the necessary insight into a large branch of a foreign bank. the problem is naturally not acute, but amendments to eu legislation take their time, and we do not know when the need may arise. this is an issue that we will pursue in cooperation with other danish authorities. chart 1. lending growth and losses and provisions per cent 3. 0 per cent 2. 5 2. 0 1. 5 1. 0 0. 5 0. 0 - 5 - 0. 5 - 10 - 1. 0 annual lending growth 14 - 12 - 2006 losses and provisions ( right - hand axis ) danmarks nationalbank chart 2. credit risk and average lending growth, 2000 - 05 credit - risk measure, per cent 2. 0 1. 8 1. 6 1. 4 1