DANISH ECONOMY STRUGGLING.

A country of 5.5 million people should maybe not have 120 banks. At the heart of Denmark's current economic troubles lie the banks, in particular the many regional banks. Certainly far from the hardest hit of European countries, Denmark has still taken a beating in the series of crises rolling over Europe since 2007.

The Danish economy, the worst performing of the Scandinavian countries, went into recession in 2009. Now it seems that instead of better times ahead, it is about to go into a double dip.

The trouble started with the financial crisis in 2008 and the unwelcome surprise of how deeply involved Danish banks were in the US subprime loans bubble. Their eagerness to provide credit has also helped create a property bubble, with house prices soaring. A demonstration of their enthusiasm came to light a few months ago when farmers started to go bankrupt, after following their local bank's advice to mortgage the farm and speculate in financial instruments.

Four Danish regional banks have collapsed since 2008, but that is only the tip of the iceberg. In all, 49 banks currently rely on state guarantees in one of the four bank rescue packages put together by the government during the last two years and 18 banks are on the Financial Supervisory Authority's watch list. "There are 75 too many regional banks in Denmark," says the Chairman of the state-backed bank resolution unit, Henning Kruse Petersen.

As elsewhere in Europe, the years after 2005 were happy days in Denmark with houses selling at mad prices, salaries at record levels and exports, particularly of climate-friendly goods and services, being in great demand. The European Commission's repeated warnings of alarmingly low Danish productivity (Danish manufacturing industry wage costs have consistently been higher than in all other OECD countries except Norway) seemed petty against that background.

Then came the financial crisis and a steady deterioration of exports, possibly priced too high but also hard hit by a fall in demand from the main trading partners (Germany, Sweden, Norway and the United Kingdom). In 2009, Denmark formally went into recession resulting in an abrupt decline in private domestic consumption and investment.

In 2010, the Danish government showed a budget deficit of 5.4% of GDP and a general government gross debt at 45.1 % of GDP. Denmark was promptly declared to be in excessive deficit and expected by the EU to introduce corrective measures. Politically this was...