The Danish peg is indisputable

• There is no reason to expect Denmark to leave the peg vis-a-vis the euro despite the monetary changes in Switzerland yesterday.

• The peg is a key element of the economic policy in Denmark and it has conducted a fixed exchange rate policy since the 1930s.

• Danmarks Nationalbank still has ample room for manoeuvre to keep the peg fixed.

As the Swiss Central Bank yesterday shocked the financial markets, it has also led to speculations on whether Denmark could choose to, or be forced to, leave the peg to the euro. The discussion is interesting but it is important to bear in mind the very significant differences between the Swiss and the Danish currency regimes. Switzerland has an inflation target but introduced a currency ceiling in September 2011 as the currency strengthened during the European debt crisis, pushing down Swiss inflation significantly below the target. Denmark is in a very different position. As noted by Danmark’s Nationalbank’s ‘Monetary Policy in Denmark’ (2009), Denmark has a long-standing tradition for basing its monetary policy on an exchange rate target. In the latter half of the 1930s, the krone was pegged to the sterling. Later, Denmark participated in the dollarbased fixed exchange rate system established under the auspices of the International Monetary Fund in the post-war years (the Bretton Woods system). This system broke down in the early 1970s. Subsequently, the krone was linked to various European exchange rate systems, initially the ‘Snake’ and, from 1979, the Exchange Rate Mechanisms (ERM I and II). Since 1982, the peg has been governed very tightly.

The exchange rate policy is not decided by Danmarks Nationalbank on its own. It is laid down by the Danish government in consultation with Danmarks Nationalbank. There is widespread support for the peg in the political system. The current government as well as the opposition supports the peg, and the general elections later this year will not change anything. Both sides of the parliament support Denmark fully joining the euro. But as a consequence of the European debt crisis, we do not expect Denmark to join any time soon. But the peg is not up for discussion.

As a consequence of the very long period with a fixed exchange rate system, the exchange rate system is key in the overall economic policy in Denmark. The peg is also built into the labour market model and is fully supported by, for instance, the labour market parties. This is very different from Switzerland. The Danish peg survived the EMS crisis at the beginning of the 1990s, the financial crisis in 2008/09 and the European debt crisis in 2010-12. There is no reason to expect Denmark to leave the peg, despite the Swiss reaction yesterday.

In defence of the peg, the Danish Central Bank can be expected to lower Danish rates twice more during the forthcoming year. If needed, it can choose to lower rates further. It can also choose to build up additional currency reserves. Thus, the central bank still has ample room for manoeuvre.