Figuring Out If Something is Rotten in the State of Denmark

Denmark's Central Bank: Nationalbanken

Chapman MBAs at Denmark's Central Bank: Nationalbanken

The final day of our tour of Danish companies led Jeff and I to the halls of wealth at Danmark National Bank in Copenhagen, where we discussed the Euro Zone economic crises and what, if anything, can be done to alleviate the pain that has been inflicting countries for the past five years. This ultimately led to questions on what role Denmark’s overly large banking sector (as well as others) should play in any cure.

The fact that Greece isn’t the only European country with significant debt problems is old news to anyone who follows current events, but an answer to how to fix the problem is still as hard to answer as ever. The economies of Spain, Portugal, Italy and Ireland are only slightly better off than Greece; the average debt to GDP ratio in each is still above 75%, although not nearly to the level of Greece’s 175%. According to the latest in the Wall Street Journal, the bond yields for those countries are once again creeping higher.

Now, some countries are taking corrective action as best they can. The yearly debt which was piling upon each of the five stated above at rates of 10 to 15 percent have mostly been reversed, with the austerity measures imposed on Ireland one key example of the trade balance and spending to revenue statistics again resulting in positive cash flow. But the process has not been without pain, nor will the pain stop anytime soon if something radical is not done. European countries were exposed too much to the risks of an incomplete system in which they are bound to the monetary policy dictated by the European Central Bank and the common Euro currency, but in which they have no real measure to take drastic fiscal corrective action due to a lack of an international legislative body with real teeth to force change.

For the Euro Zone is a project that is not nearly finished. As Danmark National Bank pointed out, a successful fiscal system requires three pillars to be effective and sustainable. The first, a universal overseer of policy, is the one pillar that the Euro Zone has created. But other enforcement and unification measures have not yet been agreed upon in any capacity. And that leaves the lawmakers and the bankers in Denmark with a serious question: should Denmark adopt the Euro and work to support unified action in creating a European Bankers Union, or should they sit on their hands practicing the ‘wait and see’ approach?

So far, the answer has been the latter. But as Danish banks control twice the assets of the entire economy of their host country, they cannot sit on the sidelines forever. A sustainable solution for Denmark and the Euro Zone are needed now, not later. One way or another, hard choices must be made.