development has been alarmingly poor, and its state is close to depression. moreover, japan also experiences deflation, i. e. falling prices. japan's economic problems appear very hard to solve by applying the traditional economic - policy instruments. in europe, the german economic development in particular has given grounds for concern. although remaining europe's economic locomotive for many decades, since the mid - 1990s germany has experienced moderate growth and high unemployment. the international economic slowdown has further amplified these problems. at the same time, germany faces a situation where a large budget deficit impedes an active fiscal policy to counter this development. even the automatic budget reaction in the face of a further dampening will create problems for germany's compliance with the budgetary requirements. what about denmark? do we have recession, depression or deflation? in fact we have none of them. denmark did not reach very high growth rates at the end of the 1990s. we experienced moderate economic growth, but our employment situation was extremely favourable ; in fact the labour market was under pressure. this situation has not changed significantly. the figures so far available indicate that denmark's economic situation is robust, with some economic growth. the growth has been sufficient to stabilise unemployment at a level that is very low by european standards. thus, so far the international economic slowdown has not presented noticeable problems for denmark. the economic slowdown has generated debate within the eu with regard to the stability and growth pact. it is criticised for inflexibility in view of the maximum permitted budget deficit of 3 per cent of gdp. however, this limit is just one element of the pact. in order to stay on the right side of 3 per cent, the member states are committed to respect the medium - term budgetary objective of positions close to balance or in surplus. in the years of favourable cyclical development, there must be a sound budget surplus. this lends flexibility, i. e. “ leeway ”, when the business cycle weakens, and the automatic stabilisers come into play. however, if the deficit in the good years is already high, there is no margin to draw on when the economy weakens. in this situation, the limit of 3 per cent is reached quickly. the fundamental idea behind the pact is therefore in the good years to create room for manoeuvre via a strong budgetary situation. in this case too, denmark is actually a good example. for a number of years,

balance of payments surplus and improved financial regulation make it possible to test the capacity limit a little more than previously. this time around, economic growth has been more balanced than in many previous periods. that is how it should continue to be. there is no need to jam on the fiscal or financial brakes in order to dampen demand yet. but nor is there any need for more accommodative economic policy. can overheating be countered by structural reforms? overheating occurs when society's demand for consumption and investment and demand from abroad substantially exceed the capacity of the economy. so it is relevant to ask whether overheating can be avoided – by curbing a rise in demand, and by introducing extraordinary expansions of the economic capacity – including whether the latter might even replace the former. basically, the answer to the last questions is no, or rather : this is very unlikely. it requires the implementation of supply reforms where the capacity increase materialises as rapidly, as strongly and with as much certainty as measures to curb demand do. there is one historical example to show that this is to some extent possible. the second half of the 1990s saw a protracted upswing in which the threat of economic overheating was countered several years in a row by introducing fast - acting measures to increase the supply of labour and lower structural unemployment. but the situation has changed since then and the instruments applied cannot be re - used. at that time, structural unemployment was 8 - 10 per cent. today it is 3 - 4 per cent and mainly comprises short unemployment spells between jobs. at that time, schemes such as leave of absence and transitional allowance, which had been introduced a few years earlier, could be abolished at short notice. they cannot be abolished once more. and even in the 1990s, capacity expansion was not a standalone solution. in 1998 a tax reform was introduced that not only brought long - term structural improvements, but also dampened demand in the short term ( the " whitsun package " ). this was one of the reasons why the subsequent cyclical downturn was mild and brief. in theory, a similar measure is available today, i. e. immediately to increase the early retirement and retirement ages. but they are already being increased gradually, and there seems to be broad political consensus that retirement ages should be increased at longer notice. that is a political priority. suggestions for other potential measures are more speculative, but they have one thing in common : it is far more uncertain