nils bernstein : the danish economy in an international perspective speech by mr nils bernstein, governor of the national bank of denmark, at the annual general meeting of the association of dlr kredit, copenhagen, 25 april 2007. * * * thank you for the invitation to speak here today. my subject today is the danish economy in an international perspective. i will first present some views on globalisation, and then turn to the internationalisation of the financial markets. finally, i will consider some of the financial products that have come to us from abroad and today are offered to private danish investors. the danish economy has traditionally been internationally oriented, with considerable external trade. agriculture became globalised more than 100 years ago. much of our prosperity is a consequence of the international division of labour. the current development has made this international perspective even more relevant. globally, there is an ever - increasing international exchange of goods and services, investments, information, people, culinary habits, culture, etc. the economic changes have been extensive and help to explain why globalisation is currently a major topic of debate. * * * globalisation has developed in waves of shorter or longer duration over the last few centuries. especially in the golden eras, there was major technological progress within transport and communication. these eras were also characterised by an international political environment that stimulated free trade and the unrestricted mobility of capital and people. in current years, globalisation seems to have even more wind in its sails. populous nations such as china and india have become part of the global market economy. technological progress in e. g. the it area has fundamentally changed how companies organise their production set - ups. the free movement of capital has probably never enjoyed better conditions than those prevailing today. these changes have increased the benefits from the international division of labour. lowtechnological production has moved to the countries whose labour - intensive production gives them a comparative advantage. production in more developed countries has become further concentrated around high - tech products. at the same time, the outsourcing of services, rather than just the production of goods, has been increasing rapidly. today, cross - border trade in services accounts for 20 per cent of world trade. one indicator of the growing economic integration between different countries is that world trade is expanding faster than global output measured by gdp ( slide 2 ). this has been the case without any interruption since the second world war. compared to other industrial countries, the danish economy has enjoyed double globalisation gains. denmark's export

uncertainty on the introduction of the euro has contributed further to the increasing financial integration of the euro area member states. in recent years, new joint framework conditions for the european securities markets have also been drawn up. the globalisation of the financial markets provides for more efficient use of capital, with potential substantial gains for the global economy. for investors, the greater integration of the financial markets augments opportunities for investment. capital can seek out new markets yielding higher returns, and a larger financial market increases opportunities to spread risk. in addition, borrowers gain access to raise capital from a wider and deeper pool of investors. the overall effect is the more efficient use of capital, such that the capital is utilised where it has the greatest effect. but financial integration has also brought new risks. substantial financial imbalances across countries can be financed for as long as the financial markets have confidence in developments, but once this confidence has gone, things can change very quickly. since 2002, and without interruption, the usa has been able to finance a current - account deficit of around 4 - 7 per cent of gdp ( slide 6 ). during this period the usa's consumption and investment demand has persistently and significantly exceeded its income. considerable capital inflows from abroad have made this possible. but what will happen if these capital inflows suddenly cease? this will push up us interest rates and weaken the dollar significantly. in this scenario there is a risk that the necessary adjustment will be very cost - intensive for large parts of the global economy. the prices of a number of financial assets will adjust rapidly, leading to economic adjustments. fortunately, it is widely believed that the risk of an abrupt adjustment is diminishing, but it still exists. denmark has also been part of the global financial integration. danish companies frequently acquire companies abroad, and foreign companies buy danish companies. even in international terms, the sale of tdc to an international capital fund in 2006 was one of the largest ever transactions of its kind. the development in the danish securities markets reflects increasing financial integration, especially with the euro area. statistical analyses show that yield changes in danish 10 - year government bonds closely follow equivalent german yield changes ( slide 7 ). there is also relatively close covariation between danish, german, british and japanese interest - rate changes and interest - rate changes in the world's most important bond market – the market for us government bonds ( slide 8 ). the convergence has increased significantly in recent years. investors apparently increasingly consider