nils bernstein : the european debt crisis – from a danish perspective speech by mr nils bernstein, governor of the national bank of denmark, at the seminar “ europe in the times of crisis – are we looking for solutions or parachutes? ”, at danske bank, copenhagen, 14 december 2011. the slides can be found on the website of the national bank of denmark. * * * thank you for inviting me to speak here today. i will touch upon the european debt crisis from a danish perspective. the world economy has lost momentum since last spring and short - term outlook has worsened. the european economies, especially in the euro area, have seen the strongest slowdown. but there are considerable differences from country to country. germany and france continued to enjoy solid growth in the 3rd quarter, whereas growth in the most indebted countries, the five giips countries i. e. greece, italy, ireland, portugal and spain, has been close to zero or even negative ( slide 2 – real gdp ). there is a clear division among the eu member states : countries, with relatively sound public finances and external balances before the crisis, are performing better than countries with internal and external imbalances ( slide 3 – general government balance ). but over the past couple of months even euro area member states with sound economies have been affected by rising interest rates. there is considerable volatility, and three groups in the euro area seem to have been formed. the first group with the narrowest spreads to germany includes finland, the netherlands, austria and france. the second group consists, among others, of belgium, spain and italy and the third group is ireland, portugal and greece. denmark stands out by having a negative yield spread of 15 – 20 basis points to germany. in the five giips countries, a substantial share of government debt is held by foreign investors, and the short - term public debt issuance requirement is high. in combination with high current account deficits, resulting from lack of competitiveness, this leaves these countries especially vulnerable to changes of sentiment in the international capital markets ( slide 4 – current account ). despite marked differences between the economies with high debt ratios in the euro area, they all saw a significant reduction in the risk premium – and thus the level of interest rates – following the introduction of the single currency in 1999 ( slide 5 – yield spreads ). this immediately eased the financing burden on their very substantial government debt. but this advantage was not used to consolidate

the widening of the fluctuation band. we also tried to obtain support from page 4 of 7 the bundesbank to get back to a narrow band between the danish krone and the d - mark. markets eventually calmed down and the krone exchange rate against the d - mark was brought back to its level from before the turmoil. the erm crisis is the last time that a crisis has caused a noticeable deviation of the exchange rate from its central parity. during the global financial crisis in 2008, new lessons were learned. first of all, we were reminded of the need for large buffers. this applies to our foreign exchange reserve. but also, in the financial sector. we also saw how excessively accommodative economic policies in the years leading up to the crisis contributed to the economic setback in denmark. heightened global uncertainty prompted investors to seek safe havens. several small currencies came under pressure – including the danish krone. to stabilise the krone, we intervened heavily. to quote my predecessor, former governor nils bernstein on the matter ; “ we could literally see our reserves pouring out of our coffers. i felt like driving a car without brakes. ” as a result, we increased interest rates on several occasions, thereby widening the spread between our policy rate and that of the ecb. a clear example that defending a fixed exchange rate regime is costly at times. but we never doubted that it was worth it. and as a result of our efforts, the exchange rate remained stable throughout the crisis. in the aftermath, we decided to increase our foreign exchange reserves significantly. as governor bernstein put it ; “ we had to recognise the truth in the simple saying ; money is hardest to come by when you need it most. ” in the first 30 years of the fixed exchange rate policy, currency crises were typically associated with downward pressure on the krone. that changed with the sovereign debt crisis in 2011 - 12. assets in danish kroner were suddenly considered a safe haven by investors who worried about the risk of a potential break - up of the euro area. as a result, we intervened heavily by purchasing currency. we also became acquainted with negative interest rates. it was the first time in our 200 - year history that we had negative rates – in fact, it was the first page 5 of 7 time for any central bank to reduce its key policy rate into negative territory. the introduction of negative rates brought us some spotlight in the central