The beef the Danes are having with the ECB at the moment is that the negative interest rates set in Frankfurt, with the Danish Central Bank having to follow the interest rate movements made by the ECB, are fuelling dangerous asset price bubbles, especially in real estate. This, of course, is sheer idiocy. I will not deny that low interest rates have an effect on asset prices, both directly by increasing its fundamental value as well as indirectly as cheaper credit can increase the demand for housing. However, housing prices in Copenhagen and elsewhere are still determined by economic conditions and regional fundamentals. It is beyond preposterous to assert that the ECB is responsible for the Danish housing price bubble. So here some cheap advice for the Danes if they are so unhappy. If you don't want to abandon the pegged exchange rate regime, how about deregulating the housing market and increasing the supply of housing in the regions where prices and demand are high (especially the metropolitan area of Copenhagen). Furthermore, adopting tighter credit restrictions in the mortgage market might also curb demand and thus cushion the "housing bubble". So take matters into your own hands and stop making the ECB responsible for your own policy failures.
Via Bloomberg I found out that a minister of the Danish government is now criticizing the ECB for its expansionary policies. Well, first of all, the ECB is and should be totally independent from political forces. I have mentioned in this blog before how it was completely inappropriate for members of the German government to criticize the ECB, trying to exert influence over monetary policy. The ECB is responsible for the Eurozone as a whole and must set its benchmark interest rate accordingly. So why the criticizm from Copenhagen now? The Danish don't even have the Euro. However, the Danish crown is pegged to the Euro, which means that monetary policy for Denmark is effectively made in Frankfurt instead of Copenhagen. The Danish Central Bank basically has to follow the ECB in all its interest rate decisions. This, however, is a choice. If the Danes are so unhappy with the current monetary policy framework, they are free to abandon the peg and adopt a flexible exchange rate like the neighboring country Sweden, which would also give them back the monetary autonomy they apparently seem to crave.
The beef the Danes are having with the ECB at the moment is that the negative interest rates set in Frankfurt, with the Danish Central Bank having to follow the interest rate movements made by the ECB, are fuelling dangerous asset price bubbles, especially in real estate. This, of course, is sheer idiocy. I will not deny that low interest rates have an effect on asset prices, both directly by increasing its fundamental value as well as indirectly as cheaper credit can increase the demand for housing. However, housing prices in Copenhagen and elsewhere are still determined by economic conditions and regional fundamentals. It is beyond preposterous to assert that the ECB is responsible for the Danish housing price bubble. So here some cheap advice for the Danes if they are so unhappy. If you don't want to abandon the pegged exchange rate regime, how about deregulating the housing market and increasing the supply of housing in the regions where prices and demand are high (especially the metropolitan area of Copenhagen). Furthermore, adopting tighter credit restrictions in the mortgage market might also curb demand and thus cushion the "housing bubble". So take matters into your own hands and stop making the ECB responsible for your own policy failures.
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AuthorMy name is Julius Probst. Archives
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