Denmark and the euro

Status

The Maastricht Treaty of 1992 required that members of the European Union join the euro once certain economic criteria had been met. However, the treaty gave Denmark the right to opt-out from participation, which they subsequently did. Denmark meets all five criteria and could join the euro if it chooses.

The krone has been part of the ERM II mechanism since 1 January 1999, when it replaced the original ERM. This implies it is required to trade within 2.25% either side of a specified rate of 1 euro equal to 7.46038 kroner (making the lower rate 7.29252 and the upper rate 7.62824). This band, 2.25%, is narrower than the 15% band used for most ERM II members. However, the exchange rate has kept within 0.5% of the defined rate, even less than the set limits. The independence of the Danish central bank is therefore limited in practice. Its aim is to keep the krone within this exchange rate band. This policy marks a continuation of the situation that existed from 1982–1999 with regard to the Deutsche Mark, which provided a similar anchor currency for the krone. The ECB is also obliged to help protect the Danish currency in the case of speculative attacks.

Early monetary unions in Denmark (1873–1914)

On 5 May 1873 Denmark with Sweden fixed their currencies against gold and formed the Scandinavian Monetary Union. Prior to this date Denmark used the Danish rigsdaler divided into 96 rigsbank skilling. In 1875, Norway joined this union. A rate of 2.48 kroner per gram of gold, or roughly 0.403 grams per krone was established. An equal valued krone of the monetary union replaced the three legacy currencies at the rate of 1 krone = ½ Danish rigsdaler = ¼ Norwegian speciedaler = 1 Swedish riksdaler. The new currency became a legal tender and was accepted in all three countries. This monetary union lasted until 1914 when World War I brought an end to it. But the name of the currencies in each country remained unchanged.

European Monetary System and pre-euro monetary co-operation

The Danish krone was fixed to a basket of European currencies during the 1980s. This was formalised in the European Monetary System (EMS). Prior to that Denmark had participated in the "European currency snake" in the years after the collapse of the Bretton Woods system.

Pre-eurozone documents (1992–1999)

The Maastricht Treaty of 1992 required that EU member states join the euro. However, the treaty gave Denmark the right to opt-out from participation, which they subsequently did following a referendum on 2 June 1992 in which Danes rejected the treaty. Later that year Denmark negotiated the Edinburgh Agreement, under which Denmark was granted further opt-outs, which led to the Maastricht Treaty being accepted in a referendum on 18 May 1993. As the result, Denmark is not required to join the eurozone. Denmark did however participate in Stage 2 of EMU, which was considered the preparatory phase for the introduction of the euro. As a part of this process, the National Bank of Denmark participated in various aspects of the planning of the euro as it was still considered to be very important for future Danish economic policy. According to a history published by the central bank, "Firstly, it was important to create a solid framework for price stability in the euro area, making it an appropriate anchor for the Danish fixed-exchange-rate policy. Secondly, Denmark had an interest in developing an expedient framework for exchange rate cooperation between the euro area and the non-euro area member states. Thirdly, Denmark had a general interest in the formulation of the ground rules for Stage 3 of EMU to ensure that Denmark would be able to adopt the single currency at a later stage on the same terms as those applying to the initial euro area member states."

Euro referendum (2000)

A referendum held on 28 September 2000 rejected membership of the eurozone. 87.6% of eligible voters turned out, with 46.8% voting yes and 53.2% voting no. Most political parties, media organisations and economic actors in Denmark campaigned in favour of adopting the euro. However, a couple of major parties campaigned against. Had the vote been favourable, Denmark would have joined the eurozone on 1 January 2002, and introduced the banknotes and coins in 2004. The immediate run-up to the referendum saw a significant weakening of the euro vs. the US dollar. Some analysts believe that this resulted in a general weakening of confidence in the new currency, directly contributing to its rejection. The bank believes that the debate was "coloured by the view that, on account of its fixed-exchange-rate policy, Denmark had already reaped some of the benefits of joining the euro area."

Possible second euro referendum

On 22 November 2007, the newly re-elected Danish government declared its intention to hold a new referendum on the abolition of the four exemptions, including exemption from the euro, by 2011. It was unclear if people would vote on each exemption separately, or if people would vote on all of them together. However, the uncertainty, both in terms of the stability of the euro and the establishment of new political structures at the EU level, resulting first from eruption of the Financial Crisis and then subsequently from the related European government-debt crisis, led the government to postpone the referendum to a date after the end of its legislative term. When a new government came to power in September 2011, they outlined in their government manifest, that a euro referendum would not be held during its four-year term, due to a continued prevalence of this uncertainty. As part of the European elections in 2014, it was argued collectively by the group of pro-European Danish parties (Venstre, Konservative, Social Democrats and Radikale Venstre), that an upcoming euro referendum would not be in sight until the "development dust had settled" from creation of multiple European debt crisis response initiatives (including the establishment of Banking Union, and the Commission's - still in pipeline - proposal package for creating a strengthened genuine EMU). When a new Venstre-led government came to power in June 2015, their government manifest did not include any plans for holding a euro referendum within their four-year legislative term.

There has been some speculation that the result of a Danish referendum would affect the Swedish debate on the euro.

Usage today

The euro can be used in some locations in Denmark, usually in places catering to tourists, such as museums, airports and shops with large numbers of international visitors. However, change is usually given in kroner. Double krone-euro prices are used on all ferries going between Denmark and Germany.

Consequences of a euro adoption

If Denmark were to adopt the euro, the monetary policy would be transferred from the Danmarks Nationalbank to the ESCB. In theory this would limit the ability of Denmark to conduct an independent monetary policy. However, a study of the history of the Danish monetary policy shows that, "while Denmark does not share a single currency, its central bank has always tracked changes made by the ESCB".

However, whilst outside the euro, Denmark does not have any representation in the ESCB direction. This motivated the support for an adoption of the euro by former Prime Minister Anders Fogh Rasmussen: "De facto, Denmark participates in the euro zone but without having a seat at the table where decisions are made, and that's a political problem". Furthermore, the ESCB does not defend the Danish krone exchange rate. This is done by Danmarks Nationalbank, and the Danish government. In a crisis it can be tough for a small country to defend its exchange rate.

The expected practical advantages of euro adoption are a decrease of transaction costs with the eurozone, a better transparency of foreign markets for Danish consumers, and more importantly a decrease of the interest rates which has a positive effect on growth. However, when joining the euro, Denmark would abandon the possibility to adopt a different monetary policy from the ECB. If ever an economic crisis were to strike specifically the country it would have to rely only on fiscal policy and labour market reforms.

In the wake of the 2010 European sovereign debt crisis European leaders established the European Financial Stability Facility (EFSF) which is a special purpose vehicle aimed at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. It has two parts. The first part expands a €60 billion stabilisation fund (European Financial Stabilisation Mechanism). All EU countries contribute to this fund on a pro-rata basis, whether they are eurozone countries or not. The second part, worth €440 billion consists of government-backed loans to improve market confidence. All eurozone economies will participate in funding this mechanism, while other EU members can choose whether to participate. Unlike Sweden and Poland, Denmark has refused to help fund this portion of the EFSF. If Denmark joined the eurozone it would then be obliged to help fund the second portion.

Public opinion

There have been numerous polls on whether Denmark should abolish the krone and join the euro. The actual wording of the questions have varied. In 2008 and 2009 they generally, but not always, showed support among Danes for adopting the euro. Since 2011, polls have consistently shown majority opposition to joining the Eurozone.

Greens Analyseinstitut, a public opinion research company, has generally asked "How would you vote at a possible new referendum about participation of Denmark in the common currency?" ("Hvad ville du stemme ved en evt. ny folkeafstemning om Danmarks deltagelse i den fælles valuta?").

Danish dominions

The Faroe Islands currently use the Faroese króna, a localised version of the Danish krone but legally the same currency. Such notes are normally not accepted by shops in Denmark proper, or foreign exchange bureaus, but exchanged 1:1 in Danish banks. Greenland currently uses ordinary Danish kroner but has considered introducing its own currency, the Greenlandic krone in a system similar to that of the Faroese one. Both continue to use Danish coins.

It remains unclear if Greenland and the Faroe Islands would adopt the euro should Denmark choose to do so. Both are parts of the Kingdom of Denmark, but remain outside of the EU. For this reason, they do not take part in EU referenda.

Possible euro coin design

Before Denmark's 2000 referendum on the issue, Danmarks Nationalbank and the Royal Mint were asked by the Ministry of Economics to propose possible designs for the future Danish euro coins. The suggested design was based on the designs of the Danish 10- and 20-krone coins, with Queen Margrethe II on the front, and the 25- and 50-øre coins, switching their back motif (a crown) to the front of the euro coins.