Denmark offers road map for dealing with looming debt-ceiling crisis

With another high-stakes standoff over the debt limit in the works, American politicians could look to the Danes for suggestions on how to handle a statutory borrowing cap.

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Denmark is the only other democratic nation to set a statutory limit on the amount of debt it can issue, but its approach to the borrowing cap — free of drama and political posturing — could not be further from the American approach.

“This was never a debt ceiling that was intended to have any political meaning,” said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics. “There was never an intent to use it politically.”

In the U.S., both parties have made political hay out of the debt limit. 

Traditionally, the burden of hiking the nation’s borrowing capacity has fallen to the party in power, allowing the minority to take potshots about the sad state of the nation’s finances while taking fruitless votes in opposition.

Debt limit proponents argue that requiring regular hikes to the debt limit allows fiscal matters to return to the forefront of the political debate. Votes to raise the debt limit also allow for considerable leverage to extract concessions, since a failure to do so would mean the U.S. would default, wrecking its financial reputation and standing across the globe.

But for the Danes, the debt limit is more a constitutional quirk than anything, and both sides work to ensure it is handled in the least dramatic way possible.

According to Kirkegaard, Denmark adopted a debt limit after undergoing a governmental restructuring in the early 90’s.  

In the new arrangement, the Danish central bank handled the nation’s finances, but the nation’s constitution stated that only parliament could legislate new debts. 

As a way to allow the new arrangement to proceed without running afoul of the constitution, the debt limit was created.

“There no intent ever in Denmark to use this as a sort of political vehicle,” he said. “It was truly done for reasons of constitutionality.”

Beyond having a debt limit, Denmark’s handling of it could not be further from the American way. 

Denmark’s first and last boost to its borrowing limit came in 2010. After running a few years of deficits brought on in large part by the European debt crisis, the parliament agreed to hike the limit to make sure the government would have ample room to borrow. 

The Danish government had accumulated 691 billion Danish kroner in public debt, bringing it to nearly 75 percent of its debt limit of 950 billion.

In contrast, the U.S. has had to employ “extraordinary actions” six times since 1995 because it had effectively exhausted its borrowing capacity, according to a 2011 study by the Government Accountability Office.

And when the Danes decided to boost their debt limit, they made absolutely sure the government would have ample room to operate financially. They doubled the size of the nation’s borrowing capacity to 2 trillion Danish kroner.

“The feeling was, ‘Well, we’re getting a little close to this debt ceiling. So let’s double it,’” said Kirkegaard.

The U.S. actually created its debt limit during World War I. It was created to give the executive branch more flexibility in handling the nation’s finances. Previously, Congress approved each new debt issuance by the Treasury Department.

Most nations approach their borrowing by giving the relevant authorities broad discretion to borrow as needed to fulfill spending and tax policies adopted by their legislative branches.

The U.S., in its own particular way, actually adopted a similar approach for a while. 

Under the “Gephardt Rule” created by former House Majority Leader Dick Gephardt (D-Mo.), Congress would automatically increase the debt limit by the necessary amount when Congress agreed upon a budget — saving members from having to take the politically tough vote of hiking the limit. That rule was scrapped in the mid-90’s when Republicans regained control of the House.

Following the last debt limit brouhaha, some lawmakers are now coming around to the Gephardt idea yet again. 

A small group of House Democrats unveiled a measure earlier this month that would abolish the debt limit. Acknowledging that the limit has been a handy political cudgel for both parties in the past, they argued that the time had come to join the rest of the world and get rid of the “legislative relic” given the bruising battle of 2011.

“It’s time to repeal the debt ceiling, an unnecessary encumbrance that virtually no other country has,” said Rep. Jan Schakowsky (D-Ill.).

Other nations have taken measures to keep public debt in check, but do not have a fixed number like the U.S. and Denmark. 

For example, Poland sets a limit on borrowing, but pegs it to the size of its economy. The Polish government faces mandatory austerity measures if its debt burden exceeds 55 percent of its gross domestic product.