Danish Peg Under Attack
But even as the Swedish central bank, the Riksbank, cut interest rates yesterday by 50 basis points, the Danish central bank, Nationalbanken, felt compelled today to raise its interest rate by 50 basis points. The reason is that the Danish krone has been under speculative attacks and that the Danish central bank feels that it needs to reinforce its direct interventions on behalf of the krone with higher interest rates.
Especially given that the macroeconomic conditions of Denmark are fairly sound, with a (until now at least, it will probably fall because of the economic downturn) large budget surplus and a somewhat smaller current account surplus, it seems unlikely that the speculators will succeed in bringing down the peg. However, this might require a further increase in the interest rate differential to the euro area, something which will make the deflationary monetary conditions in Denmark even worse, and cause a significant cyclical downturn.
That in turn will likely strengthen those in Denmark that wants it to abolish the krone and replace it with the euro. By having a peg, Denmark has anyway given up its monetary independence. The only differences that keeping the krone makes is maintaining transaction costs and reduce transparency, plus of course as these news illustrate, an added risk premium for Danish securities, a risk premium which rise during times when it is worst for the Danish economy.
That is not likely to sway the more hardcore opponents of euro entry: the leftists who are convinced that the euro is a "neo-liberal" plot to bring down the welfare state and who doesn't seem to quite grasp what I just pointed out above about monetary independence under a peg, and the supporters of the nationalist anti-immigration party, the Danish People's Party, who wants to keep the krone for sentimentalist nationalist reasons. But for the likely swing voters in a possible future referendum this could be a decisive factor for achieving a victory for the pro-euro camp.
Prime minister Anders Fogh Rasmussen, who is in favor of the euro, was going to launch a referendum, but postponed it after the European Court issued a ruling that modified the very restrictive Danish immigration laws. As these restrictive immigration laws enjoy an overwhelming popular support, Fogh Rasmussen feared that the ruling would create enough anti-EU sentiment to make a victory for euro supporters impossible. But as the Danish centre-right government made a deal with the Danish People's Party to add new restrictions to immigration laws that would compensate for those deemed illegal by the European court, this issue has to some extent faded away. And with the price of keeping the krone for sentimental reasons become increasingly obvious and steep with these developments, popular sentiment is likely to become increasingly pro-euro, something which will likely make Fogh Rasmussen more anxious to have a referendum as soon as possible.