Krugman Weighs In On Danish Take On Euro

06 Dec 2011

Leading economist sees advantages to Denmark’s ambiguous relationship to single currency

The Nobel prize-winning American economist and New York Times columnist Paul Krugman noted on Thursday that “there is something not rotten in the state of Denmark”.

Krugman was referring to the fact that Denmark has maintained its own currency, the Danish krone, while nevertheless pegging it to the troubled euro. Popular support among Danish voters for fully adopting the euro hovered near the 50 percent mark until the current debt crisis tipped the scales decidedly against it.

In the heated, everlasting debate over whether to be or not to be in the Eurozone, the critics of Denmark’s current half in-half out status have liked to note that Denmark has the worst of both worlds by pegging the krone to the euro, without gaining a voice in euro negotiations.

But Krugman appeared to see the situation in a different light.

In a comparison of Danish and Finnish bond rates, he noted that Finland was being penalised in the form of higher borrowing rates due to its membership in the Eurozone, while Denmark was chugging along fine with low bond rates – even though the krone is pegged to the euro.

“Denmark is being treated as a ‘haven’ country, while Finland – which is very close in terms of both its deficit and its debt performance – is being priced as a risky debtor,” Krugman wrote on his New York Times blog.

He concluded that the reason Denmark had thus far escaped the euro-taint – despite the krone’s tight connection to the euro – was that lenders might presume that Denmark could cut the cord, let the krone float free, and print money (guaranteed, of course, by the central bank, Nationalbanken) should the euro hit the fan.