Summary: KEY ISSUES Context: The economy is recovering slowly, driven mostly by private consumption and non-oil-and gas exports. Employment is increasing and unemployment has been trending downward slightly over the past year. Macroeconomic policy: The exchange rate peg to the euro has served Denmark well. Fiscal policy turned slightly supportive in 2014 after a substantial consolidation in 2013. The government’s fiscal stance for 2015 and the medium term imply a slightly negative fiscal impulse and are broadly appropriate in light of the expected gradual recovery. Financial Sector Policy: Stress tests conducted as part of the IMF Financial Sector Assessment Program (FSAP) found that financial stability risks are contained. Important policy actions have helped to safeguard financial stability but the large size and high domestic interconnectedness of the financial system require even greater resilience and further measures are needed to reduce risks. Household Debt and House Prices: Some features of tax, rental market, and financial sector policy should be reconsidered in order to limit house price volatility and to prevent excessive debt accumulation in the future. Specifically, the proposed new supervisory guidelines for mortgage credit institutions should be complemented by reduced tax preferences for housing and less rigid rental market regulations. Productivity and labor market reforms: The government has included reforms in Growth Plan 2014 as a first response to the recommendations of the Productivity Commission. A continued consideration of reforms, including all of the remaining recommendations by the Commission, would be welcome. Increasing labor market participation is a high priority given the fiscal burden of an aging population and the recent actions by the government to address labor market challenges are welcome.

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