The current international slowdown entails new risks for the Danish economy, which so far had been recovering only slowly and unevenly from the unwinding of a massive domestic property boom and the global crisis that erupted in 2007-08. The main challenge is to secure the necessary space for policies to cope with potential further adverse shocks by sticking to the current plans and to bring about strong, sustainable and greener growth. The economy displays a number of strengths. The fiscal position is relatively sound. The flexicurity system helps adjust to shocks while limiting the social cost of unemployment and the risk that it becomes entrenched. The welfare system ensures low poverty and inequality. However, competitiveness has deteriorated in the past decade and productivity growth has been weak, eroding potential growth. Moreover, vulnerabilities remain in the financial sector. Denmark’s green growth ambitions might translate into new sources of growth, but energy and climate change policies need to be reviewed to achieve better results at low cost.

The Danish economy has only partly recovered from the global crisis that erupted in 2007-08 and from the unwinding of a massive domestic property boom, and now faces weakening global activity and confidence amidst acute uncertainty surrounding the euro area crisis. The new government has to make sure it has sufficient leeway to cope with a potential further deterioration in global economic conditions while in a longer-run perspective promoting strong, sustainable and green growth. Denmark’s fiscal, labour market and well-being indicators compare favourably with those in many other OECD countries, but productivity growth has long been anaemic and weaknesses remain in the financial sector. Implementing policies to achieve the new government’s ambitious goal to raise labour supply is also a key part of the solution.

Denmark stands out as a country with sound public finances. Public debt and the deficit are relatively low. So is the foreseeable impact of ageing on public finances compared with many other OECD countries. Nevertheless, the very high level of public expenditures and hence, of taxes, as well as difficulties in controlling these expenditures, have negative effects on the economy and could threaten public finances in the longer run. Consolidating public finances would require addressing the core of the problem, which partly lies in the fiscal relations between levels of government. There is also room to increase the efficiency of public spending in some areas such as health and education.

Denmark’s green growth strategy focuses on moving the energy system away from fossil fuels and investing in green technologies, while limiting greenhouse gas (GHG) emissions. On the whole, current policies should allow Denmark to reach near-term climate change targets, but may not be sufficient to achieve its most ambitious targets. The challenge is to achieve objectives in a cost-effective manner and to ensure that these ambitions contribute as much as possible to global GHG emissions mitigation and to stronger and greener growth in Denmark. Better exploiting interactions with EU and international policies, finding the appropriate way to support green technologies and reducing GHG emissions in sectors not covered by the EU emission trading scheme are key issues which need to be addressed to meet this challenge.