The issue of whether Denmark should adopt the euro or not has been one of great debate in Denmark for a number of years.
Despite being a fully-fledged member of the European Union, Denmark is one of a minority of EU countries that have chosen not to adopt the euro as their currency. Denmark is indeed, now that the UK has left the EU, the only EU country that is officially exempt from joining the eurozone and will not do so without a referendum being held in Denmark to approve of it.
Instead of using the euro, Denmark uses the Danish krone (DKK). The Danish krone is pegged at a stable value against the euro under the current European Exchange Rate Mechanism.
Denmark is exempt from adopting the euro following the outcome of two national referendums.
The first referendum, held in 1992, resulted in Denmark negotiating (amongst other things) an exemption from the usual requirement to adopt the euro as part of EU membership. A second referendum, held in the year 2000, specifically into whether Denmark should adopt the euro also resulted in the rejection of the euro. This has led to Denmark’s continued use of the Danish krone.
The first Danish referendum, as previously mentioned, resulted in the Danish public rejecting the terms of the Maastricht Treaty.
The Maastricht treaty of 1992, which was put together by the then twelve members of the European Communities, was the foundation treaty for the European Union. To advance integration between those countries that were members of the European Communities, the treaty set out a range of measures that would be introduced. These measures set out to promote, amongst other things, shared European citizenship, common foreign policies, a greater level of freedom of movement, and the introduction of a single currency.
As part of the Danish constitution, it is necessary for Denmark to hold a referendum on any change that would result in a transfer of Danish sovereignty. This is unless there is a 5/6 parliamentary majority in favour of the proposed change. At the time there was no such parliamentary majority and so a public referendum was held in Denmark into whether or not Denmark should accept the terms of the Maastricht Treaty.
By a very thin margin, the result was a no vote, with 50.7% of the population voting against its acceptance and 49.3% voting in favour of it.
The upshot of this referendum, after a period of intense debate both within Denmark and between Denmark and the EU and after another referendum, was held, was that Denmark joined the EU but only under various conditions. These conditions related to Denmark being given opt-outs from elements of the Maastricht Treaty related to union citizenship, common security and defense, justice and home affairs, and the monetary union.
Importantly, the European Union accepted Denmark without requiring them to adopt the euro.
In 2000 another referendum was held in Denmark, specifically into whether or not Denmark should adopt the euro as the national currency.
The result of the referendum was a rejection of the euro, again by a thin margin, with 53.2% voting against the adoption of the euro and 46.8% voting in favour.
This second referendum has led to an ongoing continuation of the prior situation with Denmark being a member of the European Union but being exempt from the usual requirement to adopt the euro.
Despite not adopting the euro, Denmark does participate in the European Exchange Rate Mechanism II (ERM II)
The ERM II system is a European system whereby measures are introduced to ensure that the exchange rates of different EU countries are held at a consistent level of value against each other. Amongst other things, having consistent rates of exchange promotes economic stability and trade between participating countries. The ERM II system was introduced in 1999 to replace the previous ERM I system that was in operation before.
Under the ERM II system, the Danish krone exchange rate against the euro is held within 2.25% of 1 EUR to 7.46 DKK.
This use of the ERM II system in Denmark, rather than being a new initiative, represents a continuation of the normal system with Denmark having participated in the previous European Exchange Rate Mechanism that was in place well before the Maastricht Treaty and has participated in other fixed exchange rate systems before that.
It is generally accepted that the two best options for Denmark are to either continue participating in the ERM II system or adopt the euro.
Put simply, some argue that participation in the ERM II system allows Denmark to benefit from the euro in a similar way to countries that actually use the euro, while still maintaining an important level of monetary policy independence. Others argue that this independence does not really exist in the ERM II system and that Denmark would benefit more by fully adopting the euro.
One of the chief arguments in favour of adopting the euro is that Denmark would benefit economically more substantially from the euro by adopting it as its currency, rather than by simply pegging itself against it under the ERM II system.
Importantly, the main advantages that many expect Denmark would experience by adopting the euro are a decrease in transaction costs with eurozone countries, better transparency for eurozone consumers in the Danish market and Danish consumers in the eurozone market, and a decrease in interest rates.
The other substantial argument in favour of adopting the euro is that Denmark would be able to contribute to policies related to the control of the euro if they adopted the euro as the national currency.
An important argument is that under the ERM II system, the Danish central bank is forced to follow strict policies to maintain the exchange rate of the Danish krone to the euro. Importantly, the monetary policies that Denmark follows are largely dictated by the eurozone. In order to maintain the ERM II system, eurozone monetary policies effectively determine the monetary policies that Denmark follows.
Many argue that, while it is possible for Denmark to determine their own monetary policies if they keep the Danish krone, this is only a theoretical possibility because Denmark has always stuck to the ERM II system or an alternative system before that and is officially bound by their commitment under ERM II to maintain the exchange rate.
The chief argument here is that the ERM II system essentially ties Denmark to euro policy without giving it any control over what that is. Also, the opposing argument, that being outside of the eurozone does actually allow Denmark to determine its own monetary policy, is only theoretical.
The arguments in favour of keeping the ERM II system in place and of not joining the eurozone are, for the most part, that Denmark would not benefit substantially by joining the euro and that the independence that the country maintains by keeping the Danish krone is actually of serious importance.
One point is that simply by maintaining a fixed exchange rate against the euro under the ERM II system, Denmark is able to benefit substantially from the economic stability offered by the euro. Some argue that the ERM II system allows Denmark to act as if it were a eurozone country without actually adopting the euro.
The other argument against adopting the euro, which is also of significance, is that by not adopting the euro Denmark keeps what many argue is a very important level of autonomy from the eurozone. The central argument here is that in times of localised economic strife, Denmark has the option of temporarily abandoning the ERM II system and adopting independent monetary policies that will help it to overcome the economic trouble that it is facing.
Importantly, if Denmark adopted the euro, at these times they would be forced to follow the policies of the eurozone. In many cases, these policies would not be in Denmark’s favour which would prevent the country from overcoming the economic strife as effectively as it would be able to if it could dictate its own monetary policy.
It is argued that, while Denmark has a strong history of following fixed exchange rate systems that have dictated its monetary policy, it is important to keep the option of monetary policy independence for times of economic hardship.
Many point to the example of Sweden in the last major global economic crash. Sweden is another EU country that has not adopted the euro and has a free-floating currency, but which normally follows much eurozone monetary policy. In the 2008 financial crisis, Sweden followed the independent monetary policy that enabled the country to overcome the situation much more efficiently than it would have been able to if it had adopted the euro.
Another argument that is raised against the claim that Denmark would benefit from involvement in the policy management of the euro is that their influence would be minimal, given the size of the eurozone. It is also argued that they are currently able to influence eurozone policy anyway through channels other than the official eurozone policy system.
Public opinion has historically been very mixed, changing from being in favour of adopting the euro to being against its adoption at various times.
Following the referendum of 2000, in which the euro was rejected, support for the euro seemed to move marginally in favour of its adoption for a number of years. However, following the onset of the eurozone debt crisis in 2010, this support has (according to various polls) been lost with there being a consistent and marked lack of support for adopting the euro.