Government in crisis, but no change in policy likely

• A coalition partner is leaving government but the parliamentary situation remains much the same.

• A very broad majority supports the current stability-oriented policy of sustainable public finances with gradual reforms to enhance growth.

One of the three parties of Denmark’s coalition government has decided to leave. The Socialist People’s Party (SF) will no longer have any cabinet positions, leaving the Social Democrats and the Social-Liberal Party in charge. The decision comes after a protracted debate over the proposed sale of a minority stake in the state-owned energy company DONG to an investor consortium including Goldman Sachs that many in SF opposed, although there has been a crisis within the party for much longer.

Despite the decision, the government of Prime Minister Helle Thorning-Schmidt is able to continue. The government was already a minority government, relying on the far-left Red-Green Alliance for parliamentary support. It will continue to need this, as well as the continued support of SF. However, the government still retains the possibility of forming a majority with the main right-of-centre party Venstre. If it comes down to a confidence vote, Venstre will not support the government, but it can reach compromises in concrete cases. The sale of the DONG stake is one example of this, as are most of the important economic legislation packages since Helle Thorning-Schmidt became prime minister in 2011.

These include reforms that have made early retirement much less attractive, tighter rules on welfare payments and unemployment benefits, cuts to corporate and other business taxes, higher threshold for the top rate of income tax, a showdown with the teachers’ union and the creation of a productivity commission. Maybe more importantly, both the current government and Venstre agree on the necessity of maintaining sustainable public finances. With such broad support, none of these policies are likely to be reversed no matter how the political situation develops. Almost since the most recent election, polls have consistently shown that a new election would result in a Venstre-led government.

Denmark’s AAA credit rating and large current account surplus has made it something of a safe haven for investors during the euro debt crisis. Recently, there has been a tendency towards a weaker DKK against the EUR, which might eventually cause the central bank to hike its most important interest rate from its current minus 0.1% to perhaps zero. However, this is caused by higher money market rates in the euro, not by any concerns over the political situation in Denmark.