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Danmarks Nationalbank Monetary Review 4Th Quarter Danmarks Nationalbank 2010 Danmarks Monetary Review Nationalbank Monetary Review 4th Quarter 10 4 Danmarks Nationalbank Havnegade 5 DK-1093 Copenhagen K D A N M A R K S Telephone +45 33 63 63 63 Fax +45 33 63 71 25 N A T I O N A L www.nationalbanken.dk E-mail: [email protected] B A N K 2 0 1 0 4 KKvo_mon_10.inddvo_mon_10.indd 1 008-02-20108-02-2010 114:31:394:31:39 Monetary Review - 4th Quarter 2010 MONETARY REVIEW 4th QUARTER 2010 The small picture on the front cover shows the "Banker's" clock, which was designed by Arne Jacobsen for the Danmarks Nationalbank building. Text may be copied from this publication provided that Danmarks Nationalbank is specifi- cally stated as the source. Changes to or misrepresentation of the content are not permit- ted. The Monetary Review is available on Danmarks Nationalbank's website: www.nationalbanken.dk under publications. Managing Editor: Jens Thomsen Editor: Peter Birch Sørensen This edition closed for contributions on 3 December 2010. The Monetary Review can be ordered from: Danmarks Nationalbank, Communications, Havnegade 5, DK-1093 Copenhagen K. Telephone +45 33 63 70 00 (direct) or +45 33 63 63 63. Inquiries: Monday-Friday 9.00 a.m.-4 p.m. E-mail: [email protected] Rosendahls - Schultz Grafisk A/S ISSN 0011-6149 (Online) ISSN 1398-3865 Monetary Review - 4th Quarter 2010 Contents Recent Economic and Monetary Trends ............................................ 1 THE DANISH AND INTERNATIONAL ECONOMY Economic Developments in Denmark and Sweden in Recent Years . 37 Niels Blomquist, Anders Møller Christensen and Erik Haller Pedersen, Economics Sweden experienced stronger growth than Denmark before the crisis and appar- ently continues to do so after the crisis. The OECD assesses potential growth as higher in Sweden than in Denmark. Principal reasons are that fiscal policy has been more disciplined in Sweden than in Denmark and that wage inflation has been lower in spite of considerably stronger productivity growth. The different exchange-rate policies pursued have not been decisive to economic develop- ments. Economic Imbalances in the Euro Area ............................................. 49 Niels Blomquist and Jakob Ekholdt Christensen, Economics Since 1999, the euro area has generally enjoyed low and stable inflation and increased intra-euro area trade and investment, but this development masks large imbalances between the euro area member states. This article looks into the drivers of the euro area imbalances, and explores what can be done to reduce them. The analysis shows that the capital inflows from surplus member states did not sufficiently boost productivity in the euro area member states with deficits, and that their fiscal policies were too expansionary. Ultimately, the imbalances of the deficit member states became unsustainable. These member states now need to introduce extensive economic austerity measures and structural reforms of e.g. the labour market. In the short term, the surplus member states cannot solve the problems of the deficit member states, as trade with the deficit member states is limited. Structural reform in the surplus member states may in the long term contribute to raising the domestic investment potential and thus to reducing the imbalances. The framework for economic-policy cooperation in the EU must be strengthened to prevent further unsustainable imbalances and risks. Monetary Review - 4th Quarter 2010 Strengthened Economic Governance in the EU ................................ 63 Thomas Pihl Gade and Jesper Ulriksen Thuesen, Economics Developments in the government deficits and government debt of the EU member states have had a major impact on the way the economic and financial crisis has evolved in the EU. It has become evident that the current framework for economic governance has not been sufficient. This article describes the contents of the Commission's and the Van Rompuy Task Force's extensive proposals to strengthen economic governance in the EU. The impact will be greatest in the euro area member states, but also non-euro area member states such as Denmark will be affected. Overall, the new initiatives represent an important step in the direction of increased economic stability in the EU. FINANCIAL CONDITIONS The Crisis in European Sovereign Debt Markets ............................... 81 Søren Lejsgaard Autrup, Jacob Wellendorph Ejsing and Uffe Mikkelsen, Financial markets The repercussions of the financial crisis have triggered a sovereign debt crisis in Europe. For the first time in the history of the euro, a euro area member state has been on the verge of default. This article describes how such a far-reaching crisis could arise in the European sovereign debt markets. Extensive rescue packages have merely bought time for the crisis-stricken member states to implement fiscal tightening and structural reform. Basel III: Macroprudential Regulation by Means of Countercyclical Capital Buffers ................................................................................... 97 Mads Peter Pilkjær Harmsen, Financial markets The future capital-adequacy rules, Basel III, will introduce macroprudential regulation by means of countercyclical capital buffers. If the new rules had been introduced earlier, the banking sector would have been better capitalised, and the buffers to absorb losses would have been higher at the onset of the crisis. This article discusses the implementation and determination of the size of the countercyclical capital buffer. The Foreign-Exchange Market 2010 ................................................. 115 Maria Sinding-Olsen, Statistics Turnover in the Danish foreign-exchange market rose by 24 per cent from 2007 to 2010. This is a moderate rate of growth compared with the period from 2004 to 2007, when turnover more than doubled. The global foreign-exchange mar- ket showed the same trend as the Danish market, rising by just over 20 per cent. Especially the growing number of players in the market has contributed to in- creasing turnover. Moreover, foreign exchange is increasingly viewed as an inde- pendent asset class for institutional investors, which has boosted activity in the market. Monetary Review - 4th Quarter 2010 DOCUMENTATION The IMF's Quota and Governance Reform 2010 ............................... 125 Helene Kronholm Bohn-Jespersen, Economics This article outlines the main results of the quota and governance reform for the International Monetary Fund, IMF, adopted by the Executive Board of the IMF on 5 November 2010. Speech by Governor Nils Bernstein at the Annual Meeting of the Danish Bankers Association on 6 December 2010 ............................. 131 Press Releases .................................................................................... 135 Tables Vol. XLIX, No. 4 Monetary Review - 4th Quarter 2010 Monetary Review - 4th Quarter 2010 1 Recent Economic and Monetary Trends This review covers the period from mid-September to early December 2010 SUMMARY The upswing in the international economy continued in the 3rd quarter, but growth was lower than in the 2nd quarter. Looking ahead, a sluggish and uneven upswing is expected. It will mainly be driven by strong growth in the Asian emerging economies, while the pace will be much slower in the advanced economies. In all the advanced economies, growth has been buoyed up by public consumption, while private demand has shown a weak trend. Un- employment has stabilised at a high level. The first steps towards fiscal consolidation mean that fiscal policy will gradually shift from supporting demand to focusing on reducing the large government budget deficits. Monetary policy, on the other hand, remains strongly expansionary. This is also the case in Denmark, despite two small interest-rate increases in October. The Danish economy continued to improve in the 3rd quarter, grow- ing by 0.7 per cent on the preceding quarter. Consumption has picked up in the year to date, but at a moderate pace, while the level of invest- ment remains very limited. 3rd quarter growth was to a large extent fuelled by exports and thus by external demand. The current-account surplus is almost kr. 80 billion, while unemployment rose a little in October after having been stable for some months. Next year's government deficit is expected to be just under 5 per cent of the gross domestic product, GDP. It is to some extent cyclically deter- mined, but there is also a considerable underlying deficit. If the upswing is to continue, private demand must take over from public consumption as the driver of growth, also in Denmark. Danmarks Nationalbank's most recent forecast operates with such a change in the growth pattern. After five quarters of sound improvement, GDP growth will be modest in the next few quarters and will then increase towards the forecast horizon in 2012. Private consumption and exports account for the largest contributions to GDP growth, while growth in public consump- tion is assumed to be zero in 2011, followed by weak growth in 2012. In Monetary Review - 4th Quarter 2010 2 the projection, unemployment rises until the 1st half of 2011 and then falls slightly towards the end of 2012. Consumer price inflation is expected to fall below 2 per cent year-on-year from the turn of the year, when the effect of increases in indirect taxes at the beginning of 2010 drops out of the calculations. THE INTERNATIONAL ECONOMY The upswing in the global economy continued in the 3rd quarter, although growth declined a little relative to the 2nd quarter,
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