The Folly of Denmark's Currency Peg

Moneybox
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

Justice Ginsburg’s Crucial Dissent in the Texas Voter ID Case

The Jarring Experience of Watching White Americans Speak Frankly About Race

How Facebook’s New Feature Could Come in Handy During a Disaster

The Most Ingenious Teaching Device Ever Invented

Sprawl, Decadence, and Environmental Ruin in Nevada

View From Chicago

You Should Be Able to Sell Your Kidney

Or at least trade it for something.

Space: The Next Generation

An All-Female Mission to Mars

As a NASA guinea pig, I verified that women would be cheaper to launch than men.

Terrorism, Immigration, and Ebola Are Combining Into a Supercluster of Anxiety

The Legal Loophole That Allows Microsoft to Seize Assets and Shut Down Companies

  News & Politics
Jurisprudence
Oct. 19 2014 1:05 PM Dawn Patrol Justice Ruth Bader Ginsburg’s critically important 5 a.m. wake-up call on voting rights.
  Business
Business Insider
Oct. 19 2014 11:40 AM Pot-Infused Halloween Candy Is a Worry in Colorado
  Life
Outward
Oct. 17 2014 5:26 PM Judge Begrudgingly Strikes Down Wyoming’s Gay Marriage Ban
  Double X
The XX Factor
Oct. 17 2014 4:23 PM A Former FBI Agent On Why It’s So Hard to Prosecute Gamergate Trolls
  Slate Plus
Slate Picks
Oct. 17 2014 1:33 PM What Happened at Slate This Week?  Senior editor David Haglund shares what intrigued him at the magazine. 
  Arts
Behold
Oct. 19 2014 4:33 PM Building Family Relationships in and out of Juvenile Detention Centers
  Technology
Future Tense
Oct. 17 2014 6:05 PM There Is No Better Use For Drones Than Star Wars Reenactments
  Health & Science
Space: The Next Generation
Oct. 19 2014 11:45 PM An All-Female Mission to Mars As a NASA guinea pig, I verified that women would be cheaper to launch than men.
  Sports
Sports Nut
Oct. 16 2014 2:03 PM Oh What a Relief It Is How the rise of the bullpen has changed baseball.