Letter from Copenhagen

Denmark’s social democracy is remarkably impressive, but there are major challenges ahead

Mick Moran
Mick Moran

It is now nearly thirty years since the publication of Peter Katzenstein’s pioneering comparative study of the political economy of small corporatist states.  Small States in World Markets (1985) argued that a collection of small countries – Sweden, Norway, Denmark, Netherlands, Belgium, Austria and Switzerland – had built corporatist institutions almost uniquely able to compete effectively in world markets.

My spell as a visitor at Copenhagen Business School gives me an opportunity to reflect on how one of Katzenstein’s cases has fared in the age of financial crisis, austerity and recession.

A first glance suggests that this poster child of small country corporatism remains a striking success.  Denmark is still a high tax, low inequality economy and society.  Welfare provision is highly regulated, but is strikingly generous: the most visible sign on the leafy street of the suburb where I have my office is the large, wonderfully endowed nursery where parents drop their babies off for state-provided care.

Everywhere in Copenhagen you can see the visible signs of a social democratic commitment to public provision: from the astonishing achievement of the famous Öresund Bridge which links Copenhagen to southern Sweden, to the brand new Metro which operates with dizzying frequency for 24 hours a day, seven days a week.  The bridge, in its short life, has reshaped the political economy of labour markets in Denmark and southern Sweden: 18,000 people a day now commute from Malmo in Sweden into Copenhagen on the rapid train link across the Bridge.

These everyday impressions are reinforced by more systematic observations.  Some of the most serious Danish problems of economic management are problems of success.  Denmark declined to join the Eurozone.  In the age of Eurocrisis the Danish currency (the Kronor) is a safe haven.  Central bank policy is to peg to the Euro in the interests of trade competitiveness.  Policy-makers are so terrified of a Norwegian-style appreciation from an influx of hot money that interest rates for foreign depositors are negative: you have to pay to deposit your money in Kronor.

The overall fiscal position remains, in comparative terms, pretty healthy: public debt is only about 45 per cent of Gross Domestic Product.  In key high tech sectors like pharmaceuticals and green energy Denmark is a world leader.

But Denmark’s economy is tightly integrated with that of the Eurozone, and it has not escaped the wider problems of Europe and North America.  The economy suffered severely in the 2007-8 financial crisis, and the damage was not just collateral: a domestic property bubble burst in 2008, and a dozen institutional lenders went under.   Property prices continue to fall.

Economic growth has proved as elusive as elsewhere in the Eurozone: last year the economy shrank by 0.8 per cent.  An active labour market policy has controlled gross unemployment, which at 5.8 per cent is about two thirds of the EU average.  But while youth unemployment is at a level that countries like Spain and Greece could only dream of, it is nevertheless hardly negligible: for the 15-24 age group it’s 11.2 per cent, and that in a society which, in typical corporatist fashion, parks large numbers of young people in full-time education to keep them out of the labour market.

At the back of all this lies a powerful contradiction in the Danish political economy.  In precisely the way Katzenstein’s study would lead us to expect, Denmark is a leader in pressures for market liberalisation, exploiting the flexibility built on its corporatist institutions to compete aggressively in international trade in a wide range of high tech sectors. But this support for economic liberalism does not extend to labour market liberalism.

For a visitor like me, from a big British city, one of the most striking immediate visual impressions in Copenhagen is what a white city it seems.  That immediate impression is borne out by policy.  Denmark has one of the most restrictive immigration regimes in the European Union, and even under the free movement of labour rules of the Single Market there are numerous semi-concealed administrative barriers to inward migration.

The proportion of foreign born in the population is below the EU average, below that of the UK and Sweden, and almost half that of Spain.  In turn, that is storing up long-term labour market problems.  Despite all that generous child-care provision Danes are declining to reproduce: the birth rate is well below replacement level, and significantly behind the UK.   Denmark is a world leader in the production of hearing aids, and that is entirely appropriate, for its population is ageing, and suffering the usual associated ailments, like deafness.

In a country where everyone is bi-lingual in English and Danish, the sense of distinct Danish identity remains strikingly strong.  Denmark shows us two faces of small country corporatism: the flexibility and trade liberalism which lay at the heart of Katzenstein’s analysis; but a sense of national exclusiveness on which corporatist institutions have to rest, even in a social democratic paradise.