EUROPEAN COMMISSION Brussels, 26.2.2020 SWD(2020) 503 final COMMISSION STAFF WORKING DOCUMENT Country Report Denmark 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2020) 150 final} EN EN CONTENTS Executive summary 3 1. Economic situation and outlook 7 2. Progress with country-specific recommendations 15 3. Reform priorities 19 3.1 Public finances and taxation 19 3.2. Financial sector 22 3.3. Labour market, education and social policies 27 3.4. Competitiveness, reforms and investment 36 3.5. Environmental sustainability 45 A. Overview table 50 B. Commission debt sustainability analysis and fiscal risks 55 C. Standard tables 56 D. Investment guidance on Just Transition Fund 2021-2027 for Denmark 62 E. Progress towards the Sustainable Development Goals (SDGs) 64 References 69 LIST OF TABLES 3.2.1. Financial soundness indicators, all banks in Denmark 23 3.4.1. Selected indicators on digitisation of businesses, 2019 (% of enterprises) 42 C.1. Financial market indicators 56 C.2. Headline Social Scoreboard indicators 56 C.3. Labour market and education indicators 57 C.4. Social inclusion and health indicators 58 C.5. Product market performance and policy indicators 59 C.6. Green growth 60 LIST OF GRAPHS 1.1. GDP growth and contributions 7 1.2. Contributions to potential growth 8 1.3. Goods and services inflation 9 1.4. Contribution to export growth 10 1 1.5. Primary income (% of GDP) 11 1.6. Breakdown of unit labour cost rate of change 11 1.7. Pension yield tax revenues and 10-year DK government bond yields 12 2.1. Level of implementation today of 2011-2019 CSRs 15 3.2.1. Credit growth 22 3.2.2. Household debt 23 3.2.3. Nominal real estate prices 24 3.2.4. Mortgage loans by type of loan 25 3.3.1. Real compensation per employee (GDP deflator, National Currency) 27 3.3.2. Youth: in education and training, employment rate, unemployment rate, unemployment- to-population ratio, NEET 29 3.3.3. At-risk-of-poverty or social exclusion rate, age groups 30 3.3.4. Underachievers in reading by socio-economic status (ESCS 2018) 33 3.3.5. People holding tertiary education degree 34 3.4.1. Current account developments 36 3.4.2. Terms of trade development 37 3.4.3. Sectoral labour productivity 37 3.4.4. Job destruction per sector 38 3.4.5. Contribution of intangible capital growth to productivity growth 38 3.5.1. Greenhouse gas emissions per sector 47 3.5.2. Energy efficiency: Primary and final energy consumption 48 3.5.3. Renewable energy: Share in gross final energy consumption 48 3.5.4. Revenues from environmental taxes (% of total tax revenues) 49 LIST OF BOXES 2.1. EU funds and programmes to address structural challanges and foster growth and competitiveness in Denmark 18 3.1.1. Revenue neutral tax reform within the general personal income tax system 21 3.4.1. Investment challenges and reforms in Denmark 44 3.5.1. Transition to a low-carbon economy 46 2 EXECUTIVE SUMMARY Denmark has benefited from a prolonged The current account surplus is estimated to period of sustained and balanced economic have jumped above 8 % of GDP in 2019 due to growth, but challenges remain. Additional public strong goods export performance. Danish funding has been allocated for education, research exports have proven resilient to an economic and transport to improve productivity and bolster slowdown in several of Denmark’s trade partner long-term competitiveness. The anti-money- countries, suggesting that its export product mix is laundering framework has been strengthened, but less sensitive to cyclical developments. Successful further measures will be necessary to regain trust Danish multinational companies provide additional in the integrity and anti-money laundering defence impetus for goods exports and economic growth. capabilities of Danish financial institutions. The high external net asset position implies that Despite recent measures, the high level of Denmark receives capital income from abroad and household debt combined with high house price provides significant support to the current account levels and risky loan taking remains a potential balance. On the savings side, persistently high financial stability risk. Denmark’s ambitious target household savings contribute to a substantial for reducing greenhouse gas emissions will require current account surplus. significant investments and reforms across the economy(1). Real GDP growth is forecast to slow down to around 1.5 %, slightly below its potential level. Economic growth has been solid, averaging Consumer spending is projected to remain the 2.4 % since 2015, well above the euro area main factor driving growth. Labour demand is average. Consumption and investment have been expected to increase at a slower pace, but the main drivers of growth in this period. companies may still face some difficulties with Households have experienced robust income hiring skilled workers. Considering this, wages are growth, which they have used for both consumer expected to grow faster than productivity, spending and debt reduction. Labour market weighing on competitiveness. Investment is set to reforms and an influx of mainly EU workers remain flat amidst slowing global economy and a contributed to a marked increase in the labour cooling housing market. force. This supported Denmark’s prolonged economic expansion, while avoiding an The government budget surplus in 2019 is overheating of the labour market. In 2018, the estimated to have reached 2.2% of GDP, largely employment rate reached 77.5 %, markedly due to a significant hike in pension yield tax surpassing the long-term average, while the revenue. The budget is forecast to remain in unemployment rate declined to 5.1 %. Consumer surplus in 2020 and to be close to balance in 2021, price inflation remained subdued, reaching 0.7 % as the unexpectedly high pension yield tax revenue in 2019. levels off and public expenditure, notably on education, research and healthcare, is set to Investment has risen strongly since 2012. increase. In addition, the repayment in 2020-2022 Business investment has been particularly strong, of unduly collected housing tax revenue and, since 2015, housing construction further (amounting to 0.8% of GDP) will also contribute added to the growth in investment, supported by to reducing the government surplus. rising housing prices. Investment amounted to 22.0 % of GDP in 2018, well above the euro area Denmark faces significant investment needs. average. Public investment amounted to some Although it has an investment-friendly business 3.5 % of GDP, a little down from its peak in 2014. environment, some factors are holding back investment. Investment in research and innovation (1) This report assesses Denmark’s economy in light of the is concentrated in a small number of large European Commission’s Annual Sustainable Growth companies. Broadening this investment to a wider Strategy, published on 17 December 2019. In this document, the Commission sets out a new strategy on how range of companies would promote innovation to address not only the short-term economic challenges but diffusion. The growing productivity gaps between also the economy's longer-term challenges. This new large and small companies suggest weaknesses in economic agenda of competitive sustainability rests on four dimensions: environmental sustainability, productivity this diffusion of technological advances. gains, fairness and macroeconomic stability. Channelling investments to vocational education and adult and lifelong learning is also key to 3 Executive summary preventing skills mismatches and labour market education, there has been a slight increase in the tensions. Road congestion is projected to increase overall proportion of low achievers, with the around the larger cities, and there is a need to proportion of foreign-born students who are low decarbonise the transport sector. To deliver on the achievers in reading being nearly three times as climate and energy objectives and shape a new high as the proportion of low achievers among growth model, Denmark needs to identify non-migrant students. investment needs in green technologies and sustainable solutions, and secure adequate funding Denmark has made good progress towards its for these projects. targets under the Europe 2020 strategy, notably in employment, research and development, Denmark has made some(2) progress in greenhouse gas emissions, renewable energy and addressing the 2019 country-specific tertiary education. However, Denmark is not likely recommendation on investment. to achieve its target of reducing the number of people at risk of poverty or social exclusion. There has been some progress in the following areas: On the United Nations Sustainable Development Goals, Denmark has made strong progress on Denmark has taken measures to focus climate action (SDG13), where it is an investment-related economic policy on international leader. On the other hand, Denmark’s education and skills. The 2020 budget allocates results on quality education (SDG4) are sliding, more funds to research in energy and climate although the levels remain satisfactory (3). technology, but without specific measures to broaden the innovation base. The government The key structural issues, which have been has presented a specific transport plan to tackle analysed in this report, point to particular road congestion in key areas (Section 3.4). challenges for Denmark’s economy, are the following: Denmark took several significant legislative steps, improved the supervision and Denmark’s ambitious target for reducing enforcement of its anti-money laundering greenhouse gas emissions by 70 % by 2030 framework and increased the financial and (relative to 1990 level) will require human resources dedicated to anti-money significant investments and reforms across laundering, but several issues remain (Section the economy, in line with the European 3.2).