COPENHAGEN, March 30: Denmark said on Monday it expected its own real interest rates to be slightly higher than those in the 11 countries joining European Economic and Monetary Union (EMU).There was also a risk that Denmark would lose some influence in European economic policy following the launch of the new single currency, the euro, in 1999, the economy ministry said in a report.
Denmark meets the entry criteria for EMU but has opted out of membership in the first wave.
Danish economic and fiscal policy should be more ambitious than fulfilling the EMU convergence criteria, the ministry said in the report titled "Denmark outside the euro.""We can expect in the future too a certain interest rate spread over the euro area, and with similar (Danish) inflation as in the euro area also slightly higher than real interest rates in Denmark," the ministry said.
It said this would make private citizens' and companies' borrowing more expensive, but it added the markets, at the moment, seemed to be expectingonly a small interest rate premium.
Danish three-month interest rates at 3.75 per cent are some 23 basis points higher than three-month German rates. In the five-year maturity, the yield differential is 20 basis points and in the 10-year maturity it is 23 basis points.
"A tighter economic policy in Denmark than in the euro countries is a precondition for maintaining confidence in the Danish crown and for a narrower interest rate spread over the euro," the ministry said.
The fixed exchange rate policy -- a tight link between the Danish crown and core European currencies, primarily the German mark, and from 1999 the euro -- would remain a cornerstone of Danish economic policy, it noted.
The ministry repeated Denmark's stated objective of participating in the coming so-called ERM exchange rate mechanism, keeping the crown within a narrower fluctuation band against the euro than the permitted plus or minus 15 per cent.
The crown was currently trading at roughly the same level against the German mark asin 1987, it noted.
"This reflects that the Danish economy, including wage development, has adapted to low inflation and a stable economic environment," the ministry said.
Some 50 per cent of Danish foreign trade was taking place with the 11 countries expected to start the third phase of EMU, it said.
The launch of the euro would affect the Danish corporate sector both directly and indirectly. Some import and export companies were likely to start invoicing in euros and this might rub off on deals made inside Denmark as well, it said.
Due to the higher interest rates in Denmark, the corporate sector may increasingly focus on borrowing in euros on the international capital markets.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
