Last fall, when the first wave of speculative attacks on the euro system was under way, I noted the peculiar safe-haven status of Denmark, which was able to borrow at much lower rates than seemingly comparable euro countries like Finland, even though Denmark's currency is pegged to the euro.
I argued that this reflected the extra flexibility Denmark gains from having its own currency. Even though it has no intention of printing money to finance the government, the fact that it could do that in the face of a liquidity squeeze is apparently worth a lot.
The first wave of attacks subsided after the European Central Bank began lending large sums to banks with sovereign debt as collateral, an indirect way of buying the debt itself. This bought the euro around seven months, which European leaders squandered. And now we're back in crisis — and Denmark's safe haven status is even more extreme. How extreme? Nominal interest rates are now negative! The central bank charges private banks 0.2 percent to hold deposits, and the interest rate on two-year government debt is -0.23 percent.
The first question to ask here is why everyone doesn't just hold stacks of currency instead, to achieve at least a zero yield? I guess the answer must be storage costs — the cost of renting a vault to hold all that paper, plus I guess there's the risk of mice eating the stuff or something. Those costs can't be very large, but I guess they're enough to make a small negative yield possible.
The other question is why Danish yields are even lower than German yields. I'm not sure that anyone really thinks Germany could face a liquidity squeeze — any situation in which that might happen is also probably a situation in which the euro is gone and Germany has its own currency again.
But maybe not; also, maybe there's some concern about Germany's having to cough up a lot of money to save the euro.
Anyway, what's happening in Denmark is an indication of just how severe the euro crisis is — so severe that people are willing to pay to have their money stored somewhere else.
Earlier this month, 160 German economists, organized by Hans-Werner Sinn — call them Sinners — signed a manifesto opposing a European banking union.
On July 9, VoxEU, the online portal run by the Center for Economic Policy Research, put up a counter-manifesto, signed by more than 100 economists in the German-speaking world, arguing in effect that the euro cannot survive without such a banking union.
"In the course of the crisis, fiscal budgets are being tapped to refinance systemically relevant financial institutions," the manifesto reads. "At the same time, financial institutions continue to play a central role in financing national governments, lending money to them and holding their debt. An unavoidable consequence is that bank failures have led to sovereign debt crises and sovereign debt crises have led to banking crises, leading to growing mistrust of both national banking systems and government finance. The situation is aggravated by the fact that international investors, driven by fear of total collapse, have withdrawn funding to struggling countries, both for governments and for banks."
It continues: "Only by breaking the link between the refinancing of banks and the solvency of national governments will it be possible to stabilize the supply of credit in crisis countries."
They're right, of course. But the Sinners clearly have the upper hand in German public opinion.
I'm finding it ever harder to spin out plausible scenarios in which the euro survives.