Denmark's Economy Ministry warned yesterday that the government might be forced to tighten fiscal policy should voters reject the euro in next month's referendum. In its quarterly survey, the ministry said the country could maintain the fiscal status quo following a vote in favour of the single currency. But it warned that a rejection could put the krone under pressure and trigger interest rate increases.

This in turn could force the government to tighten fiscal policy in order to prove Denmark's determination to keep the country's finances on an even keel.

"A Danish `Yes' to the euro will ensure a continuation of the economic policy that has given such good results for the Danish economy,` said Ms Marianne Jelved, the Economy Minister. The government has previously said that it would seek to continue its existing fixed exchange rate policy in the event of a `No' vote. At present, the Danish krone is linked with the euro via an agreement between Denmark's government and the European Central Bank. This deal keeps the krone within a narrow fluctuation band of 2.25 per cent either side of a central parity rate against the euro.

The economic report also slightly downgraded forecasts for Danish economic growth. Denmark's gross domestic product is now expected to expand by 1.8 per cent in each of the two years compared with previous predictions in May of 2.1 per cent and 1.9 per cent respectively.

The government also said that Denmark's inflation rate will hit 3 per cent this year before declining to 2 per cent in 2001. The forecasts were based on the assumption that a majority of Danes will vote `Yes' to the euro in the referendum on September 28th, the economy ministry said.

According to opinion polls, the referendum outcome is very uncertain and up to one-fifth of the electorate is undecided about which way to vote.