Key Challenges

Social trust boosts
reform capacity
Having a small and open economy, Denmark has a long tradition of meeting the challenges posed by international integration and globalization, and has shown a capacity to enact needed reforms to reconcile an extensive welfare state with a well-functioning economy. Comparatively, Denmark is favorably positioned with regard to adaptability and the enactment of political reforms to address challenges, despite sometimes delaying and deferring such reforms. A tradition of open dialog, cooperation and broad-based reform goals contribute to the country’s adaptability. Trust between different actors and societal groups, often referred to as “social capital,” has also been an important factor. However, to remain among the leading industrialized nations, Denmark must continue to monitor its policies and institutions. Additional changes and reforms will be necessary.
The following briefly lists areas of crucial importance to Denmark and outlines where policy initiatives are needed:
Labor market must
reflect changing needs
First, the government must address possible bottlenecks in the labor market, and address the challenges presented by technological changes (e.g., automatization) and globalization. This has revitalized the debate on whether the education system is sufficiently equipped to supply the type and quality of education needed by the private sector.
Second, due to low productivity growth in the private sector, the economy’s growth potential is an issue. In addition, given the relative size of the public sector, improving government efficiency and productivity will be an important task.
Inequality, integration pose risks
Third, although comparatively inequality is low and social cohesion is high, Danish society is trending toward more disparity and inequality. A particular challenge involves the integration of immigrants and other marginalized groups into the labor market, which is often difficult due to insufficient job qualifications.
Reconciling social
demands an
ongoing task
Fourth, while the long-term financial viability of the welfare state despite an aging population has largely been ensured by a recent series of reforms, fiscal challenges remain due to increasing demands on welfare services in general and health care in particular. In the design of welfare policies, it is important to balance concerns for equality and social insurance with incentives for education and work. The hallmark of Danish society has been its balance between low inequality and an extensive public sector, and a well-functioning economy with high-income levels. Reconciling these objectives remains an ongoing challenge.
EU policy remains fragmented
Fifth, Denmark, with its small yet open society, has a long tradition of being an active participant and partner in international political cooperation. At the same time, there is a strong desire within society to establish “arm’s length distance” over certain issues, both to underline Denmark’s independence and prevent the country’s marginalization in international forums. As a result, the Danish debate on the European Union has always been somewhat fragmented and not always comprehensible to foreign observers. A case in point are the four Danish opt-outs included in the Maastricht Treaty. European Monetary Union membership remains a very delicate subject since the referendum in 2000. Denmark is not a member, but pursues a tight, fixed exchange rate policy to the euro. This peg has been very credible, as reflected in a very small (and in some periods negative) interest rate spread. Denmark is, in this sense, a shadow member of the euro zone, although it is not directly represented in the supranational executive bodies. The recent referendum on justice and home affairs cooperation confirmed Denmark’s “sideline” participation in EU cooperation.
Overall, both the previous and current governments have set ambitious strategic targets. Various policy plans signal a political awareness of the country’s structural problems. Dealing with these challenges is a work in progress.
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