It is actually quite surprising, as no particular policy measures have been taken. Despite a right-wing government since 2001, the cut-backs in the well-fare state have been limited, the high tax level is roughly unchanged, no industrial policies have been implemented, no Thatcherite revolution – so what might the reason be? Some point to the Danish flexicurity model: it is easy to hire and fire employees, but yet they are reasonably secured by unemployment benefits and job training programmes. That should have created unique conditions for growth and employment.
But stop dreaming. Even if few have noticed, the explanation is much more prosaic: oil and gas. Denmark is an oil and gas exporting country, so as for Iran, Venezuela and Russia, oil and gas has fuelled the economy.
Denmark has been producing oil and gas since the 70ties, but it was not until 1997 that the country became self-sufficient in oil and gas, and since the beginning of the new century the net export has been considerable due to a combination of a larger production and higher prices. Taxes and income sharing has also given a solid contribution to the Danish public finances.
Some numbers:
But now, the party is about to end. The Danish oil and gas resources have never been very big, and a decade of boom is over. Oil and gas production has been declining since 2004-5, and unless big new deposits are found, it will continue declining over the coming decade. In a decade Denmark may again become net importer of oil of gas.
The last couple of years the declining production has been off-set by increasing prices, but as prices have declined since mid-2008 and production continues to fall, the effect is beginning to felt in the Danish economy. Much depends on the future oil and gas prices. In a low oil price scenario (30 USD per barrel), the contribution to the public finances will be negligible, but even at 60 USD per barrel, the contribution will be waning the coming years. Only if the oil price returns to 120 USD, happy days will be back again - at least for half a decade. The declining production will eventually make itself felt, however, and when Denmark again becomes a net-importer in a decade or so, there is nothing funny any more with high oil prices.
As the impact of the financial crisis is compounded with the falling oil- and gas revenues, the economic fundamentals for Denmark are changing. As in many other countries the financial crisis put an end to a decade long real estate bubble, and the bursting of the bubble has all but paralysed the construction. The public sector will experience an increasing deficit the coming years, probably reaching around 3% of GDP, unemployment will increase to 150-200,000, and the current account surplus will all but evaporate. So in the longer term, the party actually is over.
But in the short term, Denmark must be betting on OPEC and Chávez to keep prices up so the party can continue a bit longer.
As the oil and gas resources are being depleted, the question is of course if Denmark has made good use of this non renewable resource, while it lasted. Or if perhaps some of it should have been spared for a future of scarcity.
