Two renowned economists - Niels Thygesen, Chairman of the European Fiscal Board, and Lars Rohde, former Chairman of the Board of Governors of Danmarks Nationalbank - shared their views with investors and issuers at Nordea's annual Nordic AAA Seminar.
The financial health of Europe was front and centre at Nordea’s 12th annual Nordic AAA Seminar in Copenhagen in June. Niels Thygesen, Chairman of the European Fiscal Board, delivered a presentation on the fiscal challenges in the EU to an audience of around 120 investors and issuers from the Nordics and Europe.
“Both debt history and the outlook for the coming decade raise concerns,” he said.
The Nordic AAA Seminar took place amid growing market fears over a possible debt crisis in France, should the French far right win in upcoming snap elections.
In his speech, Thygesen noted that public debt and deficits are at historically high levels in many EU countries. He pointed to three distinct groups: six countries with high debt, nine in an intermediate category and 12 with low debt. He also noted that two recent crises – the Covid-19 pandemic and energy price shock – left a legacy of high public debt and a “de facto suspension” of fiscal surveillance for the past four years, until 2024.
In April, the European Council and Parliament agreed on a new economic governance framework – one of the most ambitious reforms to the EU’s fiscal rules since after the financial crisis. Governments with high or risky debt and deficits above 3% are to present 4-7 year fiscal-structural expenditure plans to the Commission, targeted at gradually reducing debt.
Both debt history and the outlook for the coming decade raise concerns.
Thygesen, who was one of the original architects of the economic and monetary union in the EU, shared his views on the reform (which he noted were not necessarily the views of the European Fiscal Board). He said the increased “national ownership” should raise the legitimacy of the new rules and increase compliance, as well as the willingness by the Council to enforce countries’ fiscal plans.
He did point to some “major omissions” in the new reforms, including leaving out any element of joint EU initiatives to supplement national efforts at stabilisation. He also highlighted that the fiscal rules face significant challenges, including the need for spending on defense as well as energy infrastructure to advance the green transition.
Dovetailing with Thygesen’s presentation, Lars Rohde, former Chairman of the Board of Governors of Danmarks Nationalbank, zoomed in on Denmark as a success story. He reflected on the Danish economy’s 40-year journey from being “at the edge of the abyss” to having solid fundamentals.
Denmark has had a current account surplus since 1990, and it went from being a net debtor nation to a creditor nation around 2008. “So how did Denmark go from Northern Europe’s Italy to Northern Europe’s Switzerland or Germany?” Rohde asked.
He highlighted a range of factors, including an increasing understanding among politicians of how small, open economies work, as well as a willingness to find compromises on tough issues, such as labour market reform and increased retirement age. He also emphasised the importance of Denmark’s fixed exchange rate policy against the euro, in place since 1982.
Fiscal policy is a local, national issue. You can have all the rules on the EU level, but if there’s no local ownership, it doesn’t make that much difference.
Asked about the biggest challenge in his many years as governor of Denmark’s Nationalbank, he shared in vivid detail the time in early 2015 when the central bank had to take unprecedented action to defend its fixed exchange rate policy. Large capital inflows to Denmark were putting significant upward pressure on the Danish krone after the Swiss National Bank chose to let the franc float freely.
“My mandate was simple: to defend the peg. So we did,” Rohde said, adding, “The Danish peg has served us so well over many years.”
Asked to reflect on the fiscal challenges in the EU, Rohde emphasised the importance of local and political ownership:
“Fiscal policy is a local, national issue. You can have all the rules on the EU level, but if there’s no local ownership, it doesn’t make that much difference.”