nils bernstein : denmark ’ s thoughts on the euro – a central banker ’ s view statement by mr nils bernstein, governor of the national bank of denmark, in connection with the euro consultation of the european affairs committee of the folketing ( danish parliament ), copenhagen, 22 january 2009. the spoken version is the final version. * * * danish participation in the euro can be expected to lead to slightly lower interest rates, a small increase in foreign trade and lower transaction costs. in normal, calm periods, interest rates will be only marginally lower than under the current fixed - exchange - rate regime. in turbulent periods such as the present one, the spread widens, often at a rather inopportune time, since the widening may go hand in hand with other negative factors affecting the real economy. over a longer horizon, adopting the euro will have a certain positive overall effect on growth in denmark. but it is difficult to quantify this effect, which is hardly likely to be felt in the short term. since the introduction of the euro in 1999, denmark has performed well outside the euro area. this is due to our stability - oriented economic policy with focus on medium - term objectives and reforms to improve the structure of our society, not least the labour market. it is important that denmark continues along this path – even if we eventually join the euro. the main reason for establishing the euro was to create a foundation for sustainable economic growth by way of stable prices and an area with irrevocably fixed exchange rates. with its fixed - exchange - rate policy vis - a - vis the euro, denmark has benefitted from this foundation. in the current situation with a financial crisis and a global economic slowdown, the economic and monetary union demonstrates its strength. the single currency and single monetary policy are stabilising factors that prevent the individual member states from seeking their own – often mutually competitive – monetary solutions to the crisis. this would only make it escalate further, as we saw in the 1970s. it is and has been the general view of danmarks nationalbank that denmark's adoption of the euro is a natural extension of our fixed - exchange - rate policy and would not involve major economic upheavals. for danmarks nationalbank, danish participation in the euro would mean joining the eurosystem, which comprises the central banks of the euro area member states. the chairman of the board of governors of danmarks nationalbank would be given a seat on the governing

a value for investors. less liquid issuances of local governments or state agencies have to a higher degree suffered from private sector issuers with a government guarantee. in 2010, the government bond market may see increasing competition from other sectors, including covered bonds and corporate bonds, if the financial market continues to improve and investors gain risk appetite. this would be a positive sign of health in the financial system but also raise a concern about the government bond market in view of the record issuance requirements. secondary markets the secondary market has been more permanently hit by the crisis than primary markets. after the shock in september 2008, liquidity in the secondary market dried up, resulting in a significant widening of bid - ask spreads and a dramatic reduction of volumes, cf. chart 3. the situation has improved in 2009 with a narrowing of bid - ask spreads, but the secondary markets have still not normalised. it is important to restore transparency and confidence in the government bond market. some countries are successfully bringing more competition in the secondary market by implementing market making obligations based on relative performance among primary dealers instead of fixed maximum spreads and minimum volumes. future challenges over the summer, the financial markets have been characterised by stronger confidence in real economic developments, and the extensive political measures have contributed to increasing the risk appetite of investors. spreads in the money market have come down from a high of several hundred basis points to a level below pre - lehman. similarly, the spreads between european issuers have narrowed considerably. these factors indicate a significant improvement in financial conditions since the historical low in october 2008. the panic mood has ceased, but the enhanced market stability is to a high degree the result of continued public support measures. market conditions have still not normalised and the estimated government issuance need for 2010 is record high in many countries due to high redemptions and large budget deficits, cf. chart 4. compared to one year ago, debt managers and banks are however less nervous. the financial markets have improved and in light of the expectations of the future government funding requirements turnover in the primary and secondary market should increase. both debt managers and bankers have a mutual interest in restoring confidence in the market.