Denmark’s euro problem

19 October, 2015 at 08:35 | Posted in Economics | 2 Comments

Denmark has combined high taxes and strong social benefits (free college, heavily subsidized child care, and more) with strong employment and high productivity. It shows that strong welfare states can work.

But it is worth noting that Denmark has had a fairly bad run since the global financial crisis, with a severe slump and a very weak recovery. In fact, real GDP per capita is about as far below pre-crisis levels as that of Portugal or Spain, although with much less suffering. What’s going on?

fotboja-handvaska-1Part of the answer may be high levels of household debt. But Sweden has high private debt, too, and (despite its monetary missteps) has done much, much better.

My interpretation is that Denmark is paying a high price for shadowing the euro — it hasn’t joined, but it runs monetary policy as if it had — and also, for the past few years, for imposing a lot of fiscal austerity despite very low borrowing costs.

None of this has much bearing on the welfare state issue: short-run macro policy is a different subject. But just in case you wanted to think of Denmark as a role model across the board, this is a useful reminder.

Paul Krugman



  1. Careful with gadget-led analysis. Has he really studied what is happening in Denmark and Sweden – the history, quantitative and qualitative. His verdict on monetary missteps in Sweden already makes me suspicious. My guess here is that he is indirectly defending his gadgets and MIT mates. Did he consider concerns about asset price bubbles – that are not in his gadgets?

  2. In the above vein, I am sure a few readers here have seen this:

    He writes,

    “Reasonable people can differ about what the future holds, but the simple calculation that first got me thinking about this (and which no doubt influenced how Maddison did the backward projections to come up with his estimates) leaves no room for doubt about what happened in the past. The rate of growth of GDP per capita has increased over time. The rate of progress in standards of living has increased even more.”

    That of course is ahistorical nonsense that eminates from neo-classical gadgets that show that growth is a linear process. Historians know we have rises and falls. Also the problems are likely to occure when we have the ‘rises’.

    He also asks:

    Why have so many countries that start from far behind the frontier failed to achieve rapid catch-up growth?

    Again you need to know the history. It is multi-faceted. For example wars play a part – sometimes this goes against the explanation for high growth, sometimes it is behind it. For example there are similarities between China and Japan, but also big differences (they were both closed economies, but there are important differences in their approach to raising funds to accumulate physical capital). You start from the ground up without a model and go through documentary primary evidence (which is mainly qualitative). Nobody suggests for example you analyse the causes of WWi with a gadget; you similarly do not do that with questions like this.

    He also says that maths helps us define variables. Rubbish. What goes on is mathematical, largely irrelevant analysis with undefined variables like utility and capital. If he did seriously want to look at this he would put the models away and do some serious ontological and epistemological enquiry, with a fair amount of genealogy. This happens elsewhere – for example it is no coincidence that some of the big figures like Derrida behind Critical Theory were linguists.

    Also the late Angus Maddison, whose historical data he uses, would not like what he does. He was a big critic of modern macro.

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