FINANCE MINISTER CAUTIOUSLY OPTIMISTIC ON ECONOMY

UNCLAS COPENHAGEN 000575

SIPDIS

STATE FOR EEB/IFD/OMA, EEB/TPP/ABT, EUR/NB
TREASURY FOR DAVID WRIGHT
COMMERCE FOR PAUL DACHER

E.O. 12958: N/A
TAGS: ECON EFIN PGOV DA
SUBJECT: FINANCE MINISTER CAUTIOUSLY OPTIMISTIC ON ECONOMY


1. SUMMARY: Danish Finance Minister Claus Hjort Frederiksen gave a
cautiously optimistic read-out of the Danish economy in a recent
gathering with the local diplomatic corps. Though Denmark has been
affected by the global economic crisis, Frederiksen said the impact
had been diminished by the fact that Denmark had been outperforming
its neighbors in the run-up to the crisis. He asserted that the
Danish Government's reply to the crisis had been appropriate, swift,
substantial, and temporary. Response measures have turned the 2008
budget surplus of about 2% of GDP into a projected deficit of around
5% of GDP in 2010. The Government is concerned that, besides the
impact on the budget and Denmark's debt obligations, further fiscal
stimulus could delay a necessary adjustment in wages. Because of
stimulus spending and decreased revenues, the Ministry's previous
goal of achieving structural surpluses between 2011 and 2015 has
been revised to restoring fiscal balance or surplus by 2015. END
SUMMARY.



2. Danish Minister of Finance Claus Hjort Frederiksen told
diplomatic representatives at an annual Danske Bank-sponsored event
that, though challenged by the global economic crisis, Denmark is
performing well compared to its neighbors. Denmark actually
entered its current slowdown in 2007, but that came on the heels of
a series of strong years, therefore the crisis has not been as
severe in Denmark as in neighboring countries. Though he expected
the recovery here to lag behind neighbors', Frederiksen said
increased consumer confidence, a stabilizing housing market, and the
predicted pick-up of world trade will result in Danish economic
growth in the near future.


3. Frederiksen repeated several times during his remarks that the
Danish government's reply to the crisis had been appropriate, swift,
substantial, and temporary. He predicted that the substantial
discretionary fiscal measures the Government undertook to dampen the
impact of the global downturn, combined with low interest rates,
will add to economic activity in 2010 by 4% of GDP and increase
employment by 75,000 (2.7%). However, these measures will also have
an impact upon the public budget. Automatic stabilizers (Denmark
has some of the strongest stabilizers in the OECD, primarily via
generous unemployment schemes) will further affect the budget. The
short-term developments in public finances will turn the budget
surplus of around 2% of GDP in 2008 into a deficit of around 5% of
GDP in 2010.


4. The Minister assured the audience that the government is
monitoring the situation closely and will not hesitate to act,
should further action be needed. The Government is concerned though
that, besides the impact on the budget and Denmark's debt
obligations, further fiscal stimulus could delay a necessary
adjustment in wages. Denmark has experienced considerably higher
wage increases than its primary trading partners in recent years,
which, combined with slow productivity growth and an appreciation of
the Danish Krone (plural: Kroner),has weakened the Danish
exporting businesses. Because it will exceed the EU's 3% public
deficit ceiling, the Government is also expecting to come under the
"excessive deficit procedure" with ensuing recommendations for
fiscal consolidation and a deadline for bringing the deficit below
the reference value stated in the EU Stability and Growth Pact.


5. Finally the Minister touched on the long-term developments of
public finances. Denmark faces a significant change in demographic
composition that will lead to increased expenditures for health and
elderly care. In addition, Denmark is facing less revenue from the
North Sea, as reserves of oil and gas are gradually depleted. The
Government's 2015 plan for solidifying fiscal balance has been
undercut by the economic downturn. The previous goal of achieving
structural surpluses between 2011 and 2015 has been revised to
restoring fiscal balance or surplus by 2015. The long-term
sustainability of public finances will rely on structural reforms --
some already in place -- including an adjustment of the retirement
age and eligibility for public pension schemes. Other reforms
include the fully-financed tax reform adopted in March 2009.
Frederiksen also highlighted the newly established Growth Forum,
aimed at giving the government fresh ideas for improving
productivity and GDP growth through education, research and
development, innovation and entrepreneurship reforms.

FULTON