Asker Voldsgaard Ruge — Master’s Thesis: Money and the Fiscal Space of Monetarily Sovereign Governments: The Case of Denmark

by
Mike Norman
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Abstract

Since the global financial crisis ten years ago, a mature research programme has developed on the austerity policies imposed, especially in European states, to counter perceived threats from excessive public debt and deficits. While many scholars have criticised austerity for digging the hole deeper, fewer have provided clear alternatives. Yet, the economic school of Modern Money Theory encourages analysis into the operational realities of monetary systems to examine mechanisms, which allow countries with their own currency to spend unhindered. In this paper, the Danish monetary system is analysed to answer to what extent the Danish government is financially constrained and how economic policymaking in Denmark is aligned with the operational realities of the monetary system?

First, the two main theories of money, metallism and chartalism, are reviewed to ground the analysis in a monetary ontology in coherence with historical and social scientific proof. The metallist theory conceives money as a market phenomenon, which emerged spontaneously from a money-less barter economy, while states later intervened and compromised the natural monetary system. However, empirical evidence favours chartalism, which takes money as inherently a political phenomenon devised by central authorities to access real resources by levying taxes to be paid in its own unit of account. However, the advent of independent central banking appears to have subjected governments to ‘market discipline’.

This puzzle is investigated through a case analysis of the Danish monetary system. Six hypotheses derived from Modern Money Theory guides the analysis into the cooperation between Nationalbanken, the Ministry of Finance and the private banks who hold accounts with Nationalbanken. The monetary system is shown to be quite a closed arrangement, tightly controlled by Nationalbanken in its management of the liquidity in the system. Crucially it is argued that the state’s and Nationalbanken’s balance sheets ought to be viewed in consolidation as one, whereby money is a liability of the Danish government, not an asset to be obtained before spending is possible. The government’s fiscal space is determined by what is for sale in its own currency and not its tax revenues. This consolidated view is substantiated by Nationalbanken’s ongoing activity to establish a benevolent financial environment when the government sells bonds. Yet, Denmark may eventually face domestic constraints due to the self-imposed fixed exchange rate policy, if persistent balance of payment deficits return.

Finally, a constructivist case analysis of the ‘Restoration Package’ of 2010 is conducted to highlight how misrepresentation of the government as a currency user, rather than issuer, facilitated the imposition of austerity and fortified a sound finance paradigm. The paradigm was shared by the oppositional coalition and prevented them from later achieving their goal of a strong, equitable recovery.