High-taxed Danes fear for their home-grown model

Sarah Helm concludes her series with a report on Denmark's view of EMU
Copenhagen - Gazing down over the Danish Parliament a tall, elegant woman stands in her office, at the top of the national Bank of Denmark, musing about the evolution of the Danish "social model". Why is it that Danes are prepared to pay such high taxes, and to let the state distribute their wealth?

Nothing symbolises the special Danish way of doing things more than the fact that the country has placed two women in charge of its money. Bodil Nyboe Andersen is governor of the Bank of Denmark, and Marianne Jelved is economics minister.

"It is true we probably have the most egalitarian society in Europe," says Mrs Nyboe Andersen. "But I can't answer why it happened this way here. It just did - it is an evolution which has lasted more than 150 years. It is a question of faith - do you think one way is better than the other. We are not saying ours should be copied."

So what would happen to the Danish model if the country joined the single currency and succumbed to economic and monetary harmonisation? Those matters, Mrs Nyboe Andersen says, are "political" - a ruse, used by many Danes in sensitive positions, to avoid answering the big question: will Denmark join economic and monetary union?

The answer, on the face of it, is clearly no. The Danes, like the British, secured an opt-out from the single currency after Maastricht. But the Danes went even further than Britain - they chose to exercise the opt- out, deciding not to enter at the 1999 launch.

As the deadline approaches, however, some believe Danish resolve to remain out of EMU is faltering. The Danish opt-out could be reversed - after a referendum - in time to join a second wave, perhaps in 2002. If EMU is a success Denmark will not be able to resist joining, say diplomats. It will be part of a second wave, probably coming in along with Britain, Ireland, Sweden, Italy, Spain and Portugal.

Denmark today provides both a model for those striving for monetary union - and a model for those who believe it is better to stay outside.

Along with Luxembourg and Ireland, Denmark is one of only three countries which meet all the Maastricht economic criteria.

The country will balance its public deficit books next year. Unemployment is at 6 per cent, according to Commission figures, and growth is between 2.5-3 per cent.

Denmark reviewed its public spending in the early 1980s, when it carried out many of the painful adjustments which other countries are undergoing today. The country then set up a "stability pact" to control public spending, which is something of a forerunner of the EMU stability pact.

While Denmark's success shows the Maastricht way works, however, it also raises questions about the necessity of any deeper economic union which could lead to a levelling of European tax and welfare systems.

Denmark has managed to maintain fiscal discipline while keeping to its own unique policies of high tax and high state provision. Income tax, along with environmental taxes and high VAT, mean everyone loses at least 60 per cent of their salary in tax. In return, all health care is provided for and public education is of the highest standard, with private schools available only for special needs.

Although Denmark is making adjustments to improve labour market flexibility, it still is able to offer every worker a six-month sabbatical and early retirement on virtually full pay.

When it comes to the crunch, however, Danes may not be so sentimental about their welfare state. "Taxes on everything" is a regular cry. Green taxes are scorned as a means for the government to raise revenue, not to clean the water.

Pro-Europeans, such as Uffe Elleman-Jensen, the former foreign minister say Danes will see sense and accept the single currency once they realise the country will lose influence over European economic policy-making by remaining outside. The country would also risk exchange rate instability. "As soon as Danes start crossing the border to go shopping with euros in Germany they will realise it makes sense," he says.

Mrs Nyboe Andersen seems less sure. "I don't think we should over-estimate the economic costs of staying out," she says. "We already accept the economic policy and would continue to follow it. Although there is a political cost to be paid if we have no influence over decision-making."

If the messages from the political elite remain so unsure, it seems unlikely that Danes will be persuaded to say "yes" to the euro in the near future.

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