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DENMARK

Key Economic Indicators

(Millions of Danish Kroner (DKK) Unless otherwise stated)

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1/ Percentage by Gross Factor Income Distribution. 27 Until end-1990 ml. As of 1991 the Mi (and m2) money supply figure is no longer available. The figure shown for 1991, which comes closest to the Ml definition, is made up of the nonbank sector holdings of coins and notes plus actual demand deposits in Danish banks (by contrast the Ml definition includes as demand deposits, deposits available upon one month's or less notice). 37 Savings as a Percent of Personal Disposable (after tax) Income.

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47 Excluding EC Agricultural Export Subsidies (rebates), valued at close to three percent of total commodity exports. 5/ End of Period. 6/ Including advance payments on the principal.

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An industrialized market economy dependent on imported raw materials, coal and petroleum coke, Denmark has pursued a liberal trade policy to maintain supply security. The standard of living is one of the ten highest in the world. There has been substantial progress in correcting some of the fundamental structural imbalances which plagued the economy throughout the 1980s. The recurrent and large balance of payments (BOP) deficits shifted into surplus in 1990, a situation expected to continue. This has allowed Denmark to begin to reduce gradually its foreign debt. The public sector deficit in 1991, although larger than expected, has been reduced to about 1.5 percent of Gross Domestic Product (GDP), compared to 5.5 percent of GDP in 1982, when the first of a series of non-socialist coalition governments took office. The annual inflation rate over the same period has been reduced from 10 percent to 2.5 percent. The major remaining problems are the high level of unemployment, and the second highest tax burden among OECD countries. Although self-sufficient in oil and gas, Denmark is not richly endowed with natural resources, and most of the Danish GDP results from value added in industry and in the production of services. More than one-quarter of the labor force is employed in the public sector, most of them providing services under the highly developed Danish social security system. Denmark has been a member of the European Communities (EC) since 1973 and is therefore subject to EC legislation in a variety of fields. The EC common customs tariff is fully applied. Denmark has implemented the largest number of EC directives of any member state leading up to the single market by the end of 1992.

Following several years of near economic stagnation, the Danish economy is now showing improvement. The GDP in 1990 increased 2.1 percent, led mostly by strong export sector performance. Prospects for 1991 are that GDP will increase by close to two percent. The improved growth rate is the result of a revival in private consumption and continued strong exports (due in part to the German reunification). The result has been a sharp improvement in the balance of payments (BOP), which in 1990 saw a surplus (almost 10 billion kroner) for the first time since 1963. The surplus for 1991 is projected to drop slightly to nine billion kroner, due to increased development assistance payments and contributions to the EC.

Since the center-right coalition governments headed by Prime Minister Schlueter first took office in 1982, their goal of reducing public spending and the central government budget deficit has been generally accomplished. The budget drifted back into deficits after surpluses were achieved in 1986 and 1987, but at more manageable levels (i.e., ranging between two and three percent of GDP, compared to 10 percent in 1982). For 1991, the deficit is projected to be 36 billion kroner, or

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4.3 percent of GDP, due to continued growth in unemployment expenditures and stagnant tax revenues. The central government's deficit in 1991 will be financed entirely by domestic sales of government bonds and drawing on the Central Bank. Foreign debt will be reduced by advance payments on the principal. At the end of 1991 the central government's total debt is projected to stand at 523 billion kroner, of which 17 percent will have been borrowed abroad, compared to 25 percent at the end of 1990. The debt will also largely be held in currencies tied together in the European Monetary System, rather than in dollars.

The public sector as a whole, including local governments which have their own taxing authority, has generally had a budget surplus as local governments' budget surpluses have more than offset the central government's deficit. However, local governments are now also facing a tight financial situation, and it is projected that public sector budgets as a whole will show a deficit of about 1.5 percent of GDP in 1991.

Monetary policy is the responsibility of the Central Bank, which in principle is an independent institution. The primary tools used to regulate money supply are sales and purchases of bonds, and adjustments of conditions for commercial bank deposits with and borrowing from the Central Bank. For a long period the Danish interest rate has been kept well above that of its neighboring countries, especially Germany, in order to finance the recurrent BOP deficit. However, as a result of the Danish BOP surplus and the low inflation rate, the interest differential between Denmark and Germany in the second half of 1990 narrowed to about one percent. For the first time since the Deutsche mark was created in 1948, the Danish six-months money-market rate in October 1991 dropped below the German rate.

These developments have placed Denmark among the economic "hard core" EC countries and have triggered a significant change in the previous "reluctant" Danish attitude towards the EC Monetary and Economic Union (EMU). Denmark is now one of the EC member states that most strongly advocates the creation of the EMU with its attendant common currency and European Central Bank. Denmark supports a Central Bank unit with the primary objective of ensuring price stability, while supporting the EC's general economic policy.

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Denmark is a member of the European Monetary System (EMS), which has helped the Government maintain its stable krone policy. Since 1982, the Government has successfully opposed attempts to solve Denmark's economic problems through exchange rate adjustments, i.e., a devaluation of the krone. In August 1991 the trade-weighted krone rate was three percent lower than in August 1990, due almost entirely to increases in the values of the dollar and the yen. Following erratic developments in the size of foreign exchange reserves in 1988 and 1989, reserves have since been stable ranging between 55 and 65 billion kroner. The value of the krone against the U.S. dollar in September 1991 was about nine percent lower than in September 1990. This may have some negative impact on DENMARK

U.S. exports to Denmark in the second half of 1991.

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Despite the Government's success in partially resolving Denmark's structural imbalances, a number of problems remain in connection with the implementation of the EC Single Market on January 1, 1993.

In the rigid and heavily unionized Danish labor market, changes are needed to improve the geographic and sectoral mobility of labor in spite of present high unemployment. The Government is proposing extensive labor market reform, including a tightening of the present generous conditions for receiving unemployment benefits and transferring two-thirds of the financing of the unemployment insurance system to employers and employees. At present the central government pays about two-thirds of the costs. It is not clear that the Government will be able to gain sufficient support in the Parliament to pass these changes. However, the Government projects that 100,000 new jobs will be created before 1996, particularly in the services sector, leading to a one-third reduction in unemployment.

Danes generally concede that the tax system must be overhauled to stimulate private savings and investment, and to reduce the black economy, which has grown to between 5 and 10 percent of GDP. However, the Government has been unable to pass proposals to bring the high Danish marginal income tax rates closer to those of the other EC countries. In addition, the structure of the Danish income tax system is significantly different from those of the other EC countries, as Danish employers pay practically no social security taxes. (By contrast German industrial employers pay about 20 percent of total wage costs to social security.)

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Another major concern is the level of Danish Value-Added-Tax (VAT), which, at 25 percent, is the highest in the EC. However, as VAT revenues constitute some 25 percent of the Central Government's total revenues, a reduction would have severe budgetary consequences. The Government therefore has no present plans for a VAT reduction, hoping that the EC VAT rates, particularly the German, will gradually approach the Danish rate.

In order to prevent excessive border trade, Denmark currently has a waiver from the general EC principle of free border trade, which will last for five years after the 1993 beginning of the "Single Market". The Government has reduced a number of excise taxes on border trade items, which has resulted in a drastic reduction in the Danish/German border trade.

If significant tax reductions are to take place, the number of public sector employees must be reduced and the scope of activities taken on by the public sector cut back. The central government aims at reducing the number it employs by 10,000 annually during the 1990's. To that end, the Government is "privatizing" some of its business activities, including the State Life Insurance Company, Copenhagen

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Airport, and the telecommunication entities. It will retain majority ownership of most of the "privatized" companies, however.

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Denmark's foreign debt stood at 279 billion kroner at the end of 1990, or some 34 percent of GDP. Interest payments amounted to 34 billion kroner, or almost 12 percent of gross export earnings. The debt is the result of more than a quarter-century of BOP deficits. This debt makes the Danish economy sensitive to fluctuations in international interest rates, as a one percentage point increase costs the country almost 3 billion kroner on an annual basis.

The volatility of the dollar since the mid-1980s triggered a Danish government decision in early 1988 to reduce gradually the dollar's share of the central government foreign debt. In 1984 more than 50 percent of this debt was denominated in dollars; in 1990 this ratio had dropped to less than 15 percent. The dollar debt is being shifted into debt denominated in German marks, Swiss francs, and European Currency Units (ECU).

Following a total restructuring in 1989 of Danish development assistance policy, Denmark has ceased to give soft loans to developing countries. All assistance is now given in the form of grants, and the least developed countries are gradually being released from existing loans. In support of the democratization process in Eastern Europe, Denmark in the two-year period 1990/91 granted bilateral assistance in the form of grants and investment support worth 500 million kroner and multilateral assistance of more than one billion kroner, mostly in the form of loan guarantees. The Government plans to increase the total assistance to Eastern Europe to about two billion kroner in 1992.

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Heavily dependent on foreign trade, Denmark maintains only a small number of restrictions on imports of goods and services. For industrial goods, import restraints do not pose significant barriers to U.S. exports. Agricultural goods must compete with domestic production, protected under the umbrella of the EC's Common Agricultural Policy, as well as stringent sanitary requirements. None of the measures are directed against the United States alone. Danish restrictions on foreign direct investment are limited to arms production, hydrocarbon production, aircraft ownership, and the financial and legal services sectors.

A ban on foreign participation in Danish arms production was liberalized effective October 1990, allowing for 40 percent equity participation, but limiting voting rights to 20 percent.

Government participation in hydrocarbon exploration and exploitation is mandatory. This participation must be free of costs in the exploration phase. The Government pays its full

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