The Folly of Denmark's Currency Peg

A blog about business and economics.
Oct. 16 2012 4:43 PM

The Folly of Denmark's Currency Peg

151745371
Danish Prime Minister Helle Thorning-Schmidt attends an interactive session on the European crisis at the World Economic Forum in Tianjin on Sept. 11, 2012

Photograph by Goh Chai Hin/AFP/GettyImages

Richard Milne writes about economic problems in Denmark and the ensuing political problems for the country's center-left coalition:

Denmark was the hardest hit of the Nordic countries by the financial crisis, aside from Iceland, as highly indebted households caused big credit losses for banks with several smaller lenders going bust. But the Danish krone has proved to be popular in foreign exchange markets as the country’s peg to the euro means that it is a potentially lucrative trade if the single currency breaks up.
The Danish central bank has responded by pushing interest rates to historic lows, and even taking the deposit rates that it pays banks into negative territory. That means Danish short-term mortgage rates, highly popular with the public, are at record lows and getting ever nearer to zero.
That has done little to help Ms Thorning-Schmidt, however, as second-quarter GDP figures showed a decline.
Advertisement

I think the necessary context for this has to be Denmark's misguided policy of pegging its currency to the euro. Sweden, which like Denmark isn't on the euro but unlike Denmark lets its currency float, depreciated substantially during the crisis and then its currency bounced back during the recovery and is now higher relative to the euro than it was before the crisis. Denmark, by contrast, has stuck with the flat peg and continues to see a sluggish job market.

The fact that Danish interest rates are incredibly low right now is just another example of how misleading it can be to rely on interest rates as your way of understanding the stance of monetary policy (recall that rates were high in the inflationary seventies). For small countries in particular, exchange rate dynamics are incredibly important. Denmark's commitment to the euro peg means that when the eurozone's nominal growth path started slowing sharply, Denmarks was brought down with it.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

War Stories

The Right Target

Why Obama’s airstrikes against ISIS may be more effective than people expect.

Why Is This Mother in Prison for Helping Her Daughter Get an Abortion?

The XX Factor
Sept. 23 2014 11:13 AM Why Is This Mother in Prison for Helping Her Daughter Get an Abortion?

Divestment Is Fine but Mostly Symbolic. There’s a Better Way for Universities to Fight Climate Change.

I Stand With Emma Watson on Women’s Rights

Even though I know I’m going to get flak for it.

It Is Very Stupid to Compare Hope Solo to Ray Rice

Building a Better Workplace

In Defense of HR

Startups and small businesses shouldn’t skip over a human resources department.

It’s Legal for Obama to Bomb Syria Because He Says It Is

How Ted Cruz and Scott Brown Misunderstand What It Means to Be an American Citizen

  News & Politics
War Stories
Sept. 23 2014 4:04 PM The Right Target Why Obama’s airstrikes against ISIS may be more effective than people expect.
  Business
Moneybox
Sept. 23 2014 2:08 PM Home Depot’s Former Lead Security Engineer Had a Legacy of Sabotage
  Life
Outward
Sept. 23 2014 1:57 PM Would a Second Sarkozy Presidency End Marriage Equality in France?
  Double X
The XX Factor
Sept. 23 2014 2:32 PM Politico Asks: Why Is Gabby Giffords So “Ruthless” on Gun Control?
  Slate Plus
Political Gabfest
Sept. 23 2014 3:04 PM Chicago Gabfest How to get your tickets before anyone else.
  Arts
Brow Beat
Sept. 23 2014 4:33 PM Stop Throwing Your Vegetable Trimmings Away
  Technology
Future Tense
Sept. 23 2014 1:50 PM Oh, the Futility! Frogs Try to Catch Worms off of an iPhone Video.
  Health & Science
Science
Sept. 23 2014 4:33 PM Who Deserves Those 4 Inches of Airplane Seat Space? An investigation into the economics of reclining.
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.