The Danes' counter-example

Additional stimulus hasn't caused bond yields to rise in Denmark. They're in the EU and have their o

Denmark's new three-party coalition government has announced that the primary aim of its economic policy is to secure a balance between revenues and spending and create growth by bringing forward public investment. The new Danish prime minister, Helle Thorning-Schmidt, who is Neil Kinnock's daughter-in-law, unveiled her coalition cabinet on Monday and indicated that her government would take a radically different approach from the austerity measures being adopted by other European countries. The new Danish government apparently intends to spend ten billion Danish kroner to upgrade roads, railways and bicycle paths. The stimulus agenda also includes plans to provide temporary tax credits for companies that invest in R&D and machineries along with new technologies. It said it also aimed to carry out a tax reform that would significantly reduce taxes on wage incomes.

This is a very interesting counter-example to George Osborne's and David Cameron's claims that austerity is crucial to keep bond yields low. This is what Cameron said in the rapidly revised part of his party conference speech yesterday, that in a draft version that was circulated told people to save -- when he really meant he wanted them to spend.

When you're in a debt crisis, some of the normal things that government can do, to deal with a normal recession, like borrowing to cut taxes or increase spending -- these things won't work because they lead to more debt, which would make the crisis worse. Why? Because it risks higher interest rates, less confidence and the threat of even higher taxes in future. The only way out of a debt crisis is to deal with your debts. That's why households are paying down their credit card and store card bills. It means banks getting their books in order. And it means governments -- all over the world -- cutting spending and living within their means.

Cameron's speech -- even the corrected final version -- gets it precisely the wrong way round. The only way out of a debt crisis -- if by debt crisis we mean, as he says, a situation where households are desperately trying to pay down debt because on an individual level this is rational -- is for the government to step in and spend more, at least temporarily. For the government to join in and try to save more too, which he argues is logical, is disastrous. A first-year undergraduate course in macro-economics should have taught him that!

What has happened in Denmark -- which, just like the UK, is not in the euro but is a member of the European Union? It is a nice test case, because if Dave is right -- which he isn't -- then bond yields should have soared in Denmark, even on talk of injecting stimulus. They haven't. Here is a selection of yields on ten-year government bonds for Denmark and the UK over the past couple of months or so.

 
  Denmark UK
05/10/2011 2.005 2.354
30/09/2011 2.069 2.427
23/09/2011 1.932 2.363
09/09/2011 1.975 2.456
02/09/2011 2.204 2.641
19/08/2011 2.362 2.606
12/08/2011 2.573 2.753

 

One argument the coalition has made is that the US has lower yields because the dollar is a reserve currency, so their data isn't relevant: currently their yield is 1.888 per cent. But that does present the government with a further problem, because bond yields in Sweden, which is also in the EU but not in the euro, are 1.695 per cent. They are 2.135 per cent in Canada, which is also not a reserve currency, and a paltry 0.879 in Switzerland, which really does look like a place of safety.

Based on the evidence from Denmark, putting additional stimulus into the economy has not caused bond yields to rise and they remain below those in the UK. The Danes are a much better comparison country than the Greeks, the Portuguese, the Italians or the Spanish that don't have their own central bank and currency as the Danes do; just as we do.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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Sir Ivan Rogers: UK may wait until mid 2020s for an EU trade deal

The former ambassador to the EU had previously warned his colleagues about Brexit negotiatiors' "muddled thinking". 

Brits may have to wait until the mid 2020s for a free trade deal with the EU, UK's former ambassador to Brussels has warned.

Sir Ivan Rogers, who quit abruptly in January after warning of "muddled thinking", gave evidence to the Brexit select committee. 

He told MPs that his Brussels counterparts estimated a free-trade agreement might be negotiated by late 2020, and then it would take two more years to ratify it.

He said: "It may take until the mid 2020s until there is a ratified deep and fully comprehensive free-trade agreement."

The negotiations could be disrupted by the "rogue" European Parliament, he cautioned, as well as individual member states.

"Canada [the EU-Canada trade deal] not only nearly fell apart on Wallonia, it nearly fell apart on Romania and Bulgaria and visas," he said. 

Member states were calculating what the loss of the UK will mean to their budgets, he added - although many were celebrating the end of Britain's much-resented budget rebate. 

He also thought it unlikely the EU member states would agree to sectoral deals, such as one for financial services, if it meant jeopardising the unity of the EU negotiating position. 

In his resignation letter, which was leaked to the press, Rogers told his staff that "contrary to the beliefs of some, free trade does not just happen when it is not thwarted by authorities"and that he hoped they would continue "to challenge ill-founded arguments and muddled thinking".

Rogers said the comment was about "a generic argument on muddled thinking", which applied to "the system". He described how the small organisation he initially headed had been swamped by new arrivals from the newly-created Department for Exiting the EU.

The new recruits were enthusiastic, he said, but "they don't know an awful lot about the other end".

The UK needed to understand "we're up against a class act with the European Commission on negotiating", he warned. 

He said that if the UK reverted to World Trade Organisation rules - the option if it cannot agree a trade deal - it would enter a "legal void".

"No other major player trades with the EU on pure WTO terms," he said. "It's not true that the Americans do, or the Australians, or the Israelis or the Swiss."

The US has struck agreements "all the time" with the EU, he explained: "A very significant proportion of EU-US trade is actually governed by technical agreements."

Once the UK leaves the EU, it will be treated as a "third country", he added. This meant that the UK would need to get on a list to be allowed to export into the EU. Then individual firms would have to be listed, and their products scrutinised.

Rogers revealed he had debated "endlessly" with colleagues about the UK's relationship with the EU. "The core of the problem is not day one," he said. "The problem is day two, or day two thousand. What have you just captured your sovereignty and autonomy for?" Simply getting access to the single market would not mean a level playing field with EU companies, he explained.

He said: "The European Union is not a common sense agreement. It's a legal order."

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.