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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“Why are you here?”: Juncker and MEPs mock Nigel Farage at the European Parliament

Returning to the scene of the crime.

In today's European Parliament session, Jean-Claude Juncker, president of the European Commission, tried his best to keep things cordial during a debate on Brexit. He asked MEPs to "respect British democracy and the way it voiced its view".

Unfortunately, Nigel Farage, UKIP leader and MEP, felt it necessary to voice his view a little more by applauding - the last straw even for Juncker, who turned and spat: "That's the last time you are applauding here." 

MEPs laughed and clapped, and he continued: "I am surprised you are here. You are fighting for the exit. The British people voted in f avour of the exit. Why are you here?"  

Watch the exchange here:

Farage responded with an impromptu speech, in which he pointed out that MEPs laughed when he first planned to campaign for Britain to leave the EU: "Well, you're not laughing now". Hee said the EU was in "denial" and that its project had "failed".

MPs booed again.

He continued:

"Because what the little people did, what the ordinary people did – what the people who’d been oppressed over the last few years who’d seen their living standards go down did – was they rejected the multinationals, they rejected the merchant banks, they rejected big politics and they said actually, we want our country back, we want our fishing waters back, we want our borders back. 

"We want to be an independent, self-governing, normal nation. That is what we have done and that is what must happen. In doing so we now offer a beacon of hope to democrats across the rest of the European continent. I’ll make one prediction this morning: the United Kingdom will not be the last member state to leave the European Union."

The Independent has a full transcript of the speech.

Now, it sounds like Farage had something prepared – so it's no wonder he turned up in Brussels for this important task today, while Brexiteers in Britain frantically try to put together a plan for leaving the EU.

But your mole has to wonder if perhaps, in the face of a falling British pound and a party whose major source of income is MEP salaries and expenses, Farage is less willing to give up his cushy European job than he might like us to think. 

I'm a mole, innit.