Denmark: Economy

Denmark's industrialized market economy depends on imported raw materials and foreign trade. Within the European Union, Denmark advocates a liberal trade policy. Its standard of living is among the highest in the world, with a GDP per capita of $58,500 making Denmark the 18th richest country in the world in 2010. In 2010, Denmark devoted 0.91% of gross national income (GNI) to foreign aid to less developed countries, including for peace and stability purposes, refugee pre-asylum costs, and environmental purposes in central and eastern Europe and developing countries, making Denmark one of the few countries that are contributing more than the UN goal of 0.7% of GNI to aid. In 2011, Denmark is expected to devote a similar percentage. The new government has said it wants to raise official development assistance to 1% of GNI.

Denmark is a net exporter of food and energy. Its principal exports are machinery, instruments, and food products. The United States is Denmark's largest non-European trading partner, accounting for 5.0% of total Danish goods trade in 2010. Aircraft, computers, machinery, and instruments are the major U.S. exports to Denmark. Among major Danish exports to the United States are industrial machinery, chemical products, furniture, pharmaceuticals, canned ham and pork, windmills, and plastic toy blocks (Lego). In addition, Denmark has a significant services trade with the U.S., a major share of it stemming from Danish-controlled ships engaged in container traffic to and from the United States (notably by Maersk-Line). There were 436 U.S.-owned companies operating in Denmark in 2008, not including financial service companies.

Like the rest of the world, Denmark was affected by the 2008-2009 global economic crisis. Most local observers agree that Denmark is on the path to a slow recovery, with economic growth from the third quarter of 2009 onward. Gross unemployment averaged 6.0% in 2010, up from 2.7% in 2008, and is expected to average 6.2% in 2011; the average length of the unemployment period has increased. Unemployment is not anticipated to decrease before the end of 2012. Private consumption has contracted significantly and is still below pre-crisis levels. The same goes for industrial production, which was pushed to the lowest level in over a decade. Exports fell dramatically--about 20%--also due to the devaluation of trading partners’ currencies, especially those of Sweden, Norway, and the U.K. In 2010 exports regained some of the loss with 10% growth; they exceeded pre-crisis levels in the spring of 2011. Export growth has led much of the recent GDP growth but has slowed in the second half of 2011 due to a slowdown in global economic activity. The government estimates GDP growth of 1.3% in 2011 and 1.8% in 2012. The budget surplus of 2008 became a deficit of $8.5 billion in 2009 (2.7% of GDP) and is forecast to be $12.6 billion in 2011 (3.8% of GDP), exceeding the 3% limit set by the Economic and Monetary Union of the EU (EMU). The 2012 estimate shows a growing deficit of $15.7 billion (4.6% of GDP), while the 2011 deficit will likely be worse than estimated. The government has proposed plans for fiscal consolidation to bring the deficit below 3% of GDP by 2013; as of January 2011, the EU Commission said that Denmark’s responses to remedy the budget deficit had been adequate. Following the renewed financial turmoil in the second half of 2011, the fiscal plan may no longer be sufficient. Public debt reached 43.7% of GDP in 2010 but remains well within the 60% limit set by the EMU. It is estimated to increase to 44.4% in 2011.

In addition to the global crisis, Denmark has underlying growth challenges and is projected to have one of the lowest productivity growth rates among Organization for Economic Cooperation and Development (OECD) countries in the decade to come; it dropped from sixth to twelfth place among the richest OECD nations from 1997 to 2007. Denmark is facing demographic challenges that could lead to labor supply shortages by 2015 according to some estimates. Denmark has maintained a stable currency policy since the early 1980s. The krone, formerly linked to the Deutschmark, has been pegged to the Euro since January 1, 1999. The Greek financial crisis has affected Denmark to some extent--as the Euro falls in value, the krone also falls, making Danish exports more competitive. Denmark’s contribution to the EU financial support package to Greece was 1.2 billion Euro (approx. $1.6 billion). It is expected that as of 2011, Denmark will not meet the economic convergence criteria for participating in the EMU due to its public deficit rising above the allowed 3% of GDP, but the Danish Government remains committed to meeting the criteria. Prior to the Greek financial crisis, opinion polls showed a majority in favor of the EMU, but with the continued turmoil in the Euro zone, polling at the end of the third quarter of 2011 showed record high support for a "no" vote in the event of a referendum on joining the Euro zone (57% against versus 36% in favor). No referendum on the EMU/Euro is expected during the life of the current parliament, which could run until 2015, and not until polling shows a significant majority supporting Denmark's entry into the common currency.

Danes are generally proud of their welfare safety net, which ensures that all Danes receive basic health care and need not fear real poverty. However, there is a growing political debate about how government policy should be reformed in order to preserve and strengthen the system. The portion of working-age Danes (16 to 66-year-olds) living mostly on government transfer payments amounts to 24% (2010). The heavy load of government transfer payments burdens other parts of the system. Health care, other than for acute needs, and care for the elderly and children have suffered, while taxes remain among the highest in the world. About one-third of the labor force is employed in the public sector.

Greenland
On June 21, 2009, Greenland assumed increased autonomy under a Self Rule Act, deepening the “home rule” that had been in effect since 1979. Under self rule, the Greenlandic government (Naalakkersuisut) and the Danish Government are recognized as equal partners and Kalaallisut, the Inuit dialect, becomes the official language of Greenland. The Greenland Government intends to take responsibility for additional government functions gradually, such as prisons, criminal justice, courts of law, family law, passports, and mineral resources. The Danish Government freezes its annual block grant at the 2007 level of 3.2 billion kroner ($570 million, 2010 exchange rate). That grant will be adjusted for Danish inflation, though not the often higher Greenlandic inflation, meaning the value in real terms is expected to shrink in coming years. However, Greenland gains rights to its mineral, oil, and natural gas resources: the first 75 million kroner ($13.3 million) from mineral/oil/gas revenues would go to Greenland, with further revenues split equally between the two governments, and with Denmark’s share being subtracted from the annual block grant. Once the block grant is eliminated, any additional revenue would be subject to renegotiation between the Danish and Greenlandic governments.

The public sector in Greenland, including publicly-owned enterprises and the municipalities, plays the dominant role in the economy and employs roughly 50% of the workforce. A large part of government revenues still comes from the Danish Government block grant--46% in 2009. The block grant remains an important supplement to GDP. About one-third of government revenue came from taxes in 2009.

Greenland's economy has been relatively unharmed by the global economic crisis. The main sources of income for Greenland are transfers from abroad, the value of fish production, and the direct and indirect effects of mineral exploration. Transfers from abroad are contained in agreements and will not be influenced by international trends, while the value of fisheries and mineral resource exploration is influenced by international economic developments. According to the Greenlandic Economic Council, real GDP is estimated (the most recent national account statistics are from 2007) to have contracted by 1.0% in 2009, followed by a recovery of 2.0% growth in 2010 and 3.0% growth in 2011. The outlook for 2012 is for zero GDP growth. The recovery was primarily driven by hydrocarbon and mineral exploration and exploitation investments, as well as high levels of construction activity in the capital Nuuk in 2010-2011 and the 2010-2011 increase in the price of fish and shrimp, Greenland’s main export. The 2012 outlook is highly uncertain depending on continued exploration activities. A commercial find of hydrocarbons or minerals could add significantly to activities, while disappointments could lead to contraction. Unemployment rose in 2008-2010 after an extended period from 2003 with lower unemployment. Unemployment now seems to have stabilized at the 2010 level. Structural reforms are still needed in order to create a broader business base and economic growth through more efficient use of existing resources in both the public and the private sectors.

Due to its continued dependence on exports of fish (mainly shrimp), which make up 85% of goods exports, Greenland’s economy remains sensitive to foreign developments. Greenland has registered a growing foreign trade deficit since the closure of the last remaining lead and zinc mine in 1989. The trade deficit reached $391 million, or 24% of GDP, in 2010. International interest in Greenland’s mineral wealth is increasing. International consortia are increasingly active in exploring for hydrocarbon resources off Greenland’s western coast; in November 2010, seven exclusive licenses for exploration and exploitation of oil and gas were awarded. There are international studies indicating the potential of oil and gas fields in northern and northeastern Greenland. The U.S. Geological Survey estimates that up to 17 billion barrels of oil and gas are present in the area between Canada and Northwest Greenland. Cairn Energy carried out three exploration drillings in Greenland in 2010, the first exploration drilling in Greenland in 10 years, and discovered gas and oil-bearing sands in one of the drillings. Drilling continued in 2011 but without significant finds. The U.S. aluminum producer Alcoa in May 2007 concluded a memorandum of understanding with the Greenland Home Rule Government to build an aluminum smelter and associated power generation facility in Greenland to take advantage of abundant hydropower potential, although progress on that project has been delayed. It is estimated that, upon completion, the Alcoa investment would be worth approximately $2.5 billion. Tourism also offers another avenue of economic growth for Greenland, with increasing numbers of cruise lines now operating in Greenland’s western and southern waters during the peak summer tourism season.

Faroe Islands
In early 2008, the Faroese economy began to show signs of an impending slowdown. The main difficulty lay with the fishing industry coming under pressure from smaller catches combined with historically high oil prices. Reduced catches, especially of cod and haddock, strained the Faroese economy in 2008-2009. GDP grew 24% (in current prices) between 2004 and 2008 but then contracted by 0.8% in 2008 and by 1.6% in 2009. According to the Governmental Bank of the Faroes (Landsbanki Foroya), the Faroese economy changed from a downturn to growth in 2010, and it is estimated that nominal GDP increased by 3.4% in 2010. The bank predicts that there are prospects for nominal economic growth in 2011 (3.1%) and 2012 (3.5%), but developments in 2011 have brought these estimates down from 5% annually. The main drivers of growth are considerably higher output levels in the fisheries sector and expectations for increased private spending. As households gradually become secure enough to increase consumption further, revenues from tax and duties may increase faster than GDP. These economic developments would reduce government deficits to some extent. This is desirable if the public deficit is to remain at a level where the Faroe Islands can sustain economic fluctuations without losing the confidence of both citizens and international creditors.

The temporary slowdown in the Faroese economy followed a strong performance since the mid-1990s, with annual growth rates averaging close to 6%, mostly as a result of increased fish landings and salmon farming and high and stable export prices. Positive economic development had helped the Faroese Home Rule Government produce increasing budget surpluses that in turn helped to reduce the large public debt, most of it to Denmark. Most of the Faroese who emigrated in the early 1990s (some 10% of the population) due to an economic recession have returned. Unemployment had been low since 2003 and practically non-existent at its lowest level of 1.2% in April 2008, but has since increased sharply, with average unemployment of 5.7% in 2010 and rising to above 7% in early 2011. Unemployment is expected to decrease slightly in 2012 as the economy improves. The currency of the Faroe Islands is the Foroyska kronan. However, it is not an independent currency. Faroese bank notes are Danish bank notes that feature Faroese motifs. There are no Faroese coins.

Initial discoveries of oil in the Faroese area give hope for eventual oil production, which could lay the basis for a more diversified economy and thus less dependence on Danish economic assistance. Aided by an annual subsidy from Denmark corresponding to about 6% of Faroese GDP, the Faroese have a standard of living comparable to that of the Danes and other Scandinavians.

Politically, the present Faroese Home Rule Government has initiated a process toward greater autonomy from Denmark, if not complete secession. In that respect, agreement on how to phase out the Danish subsidy plays a crucial role.

Sources:

CIA World Factbook (November 2011)
U.S. Dept. of State Country Background Notes ( November 2011)

Glossary