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.
Read more about this topic: Denmark And The Euro
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