Analysis: Morningstar DBRS
The incoming U.S. administration has signalled renewed interest in Greenland because of its strategic military position and economic potential.
Greenland is an autonomous territory of the Kingdom of Denmark, and U.S. president-elect Donald Trump’s idea to take control of the island has sparked discussions about its sovereignty and the possibility of a sale. The U.S. administration already floated the idea of a sale in 2019, but it was rejected.
Denmark will eventually provide more financial support and investment to Greenland and cooperate more closely with the U.S. in terms of an expanded military presence.
Greenland’s geostrategic position between the Arctic and Atlantic Oceans is very attractive, and the island is home to an array of raw materials, including rare earths that could be extracted.
The territory lies along the shortest route from North America to Europe, making it an ideal place for the launch of military and ballistic missiles.
About 80% of the land is covered by an ice sheet, but as the ice recedes, new routes through are opening and it will become easier to tap Greenland’s minerals.
According to the European Commission, Greenland is estimated to hold 25 of the 34 critical raw material elements, which are key for batteries, but also for military applications. The island is also estimated to have billions of untapped oil deposits.
In our view, a U.S. purchase is not a realistic possibility at this stage, and neither is a military intervention. Greenland is in an autonomous territory of Denmark and both governments have ruled out a sale to the U.S. as a viable option.
A U.S. military invasion of a NATO ally’s territory would severely undermine U.S.-led alliances around the world. Nonetheless, more co-operation between the U.S. and the Danish-controlled island is certainly possible.
Greenland has been a self-governing land within Denmark since 1979 and its Act on Greenland Self Government of June 2009 gives it the right to hold a referendum for full independence from Denmark. Against this background, Greenland’s government, led by Prime Minister Mute Bourup Egede, seems keen to opt for eventual independence, without necessarily seeking to change its traditional alliances.
Regardless of the independence question, Greenland (and Denmark) would likely agree to host an increased U.S. military presence in the area, and be willing to adopt policies to foster and encourage increased U.S. and European investment into Greenland’s natural and mineral resources.
Danish Funding Key for Public Finances
Greenland receives crucial funding from Copenhagen each year, which averaged around DKK 5.4 bln (€724 mln) from 2019 until 2023. Although Danish state transfers have declined as a share of Greenland’s GDP over the years, these resources are estimated to amount to over 20% of the island’s GDP.
The largest share of Denmark’s support includes the block grant, a type of subsidy, which is regulated by the Act on Greenland Self-Government of June 2009. The rest comprises the cost of some services, including police and defence.
Denmark is responsible for Greenland’s foreign, security and defence policy. In terms of public finances, the overall Danish State funding is even more important, as it represents around 40% of total current revenues.
According to the Greenland Economic Council, public finance projections in the medium to long term for the island are not optimistic, and spending related to the ageing population will strain Greenland’s public finances.
This could require more support from Copenhagen, unless Greenland’s economic model shifts more to extracting activities rather than fishing or reforms of its tax system occur. This is because the block grant is projected to continue to decrease as a share of Greenland’s GDP, as it is calculated according to the price-wage dynamic in Denmark, which is expected to be slower than in Greenland. Therefore, a reform of the block grant could be required.
Currently, the financial cost of supporting Greenland’s public finances each year represents around 0.2% of Denmark’s GDP. This is a modest amount, and should it increase moderately, will likely not undermine Denmark’s fiscal space.
Denmark Control Will Be More Expensive
There is a strong incentive for Denmark’s government to maintain control over its territory.
First, it allows Denmark to sit in the Artic Council alongside the U.S., Canada, Russia, Sweden, Finland, Norway and Iceland, thereby enabling Copenhagen to play a key role in the region in the future.
Second, Greenland’s importance regarding natural resources and the Earth’s climate makes Denmark a leading player in discussions about climate change. Less influence in Greenland, in light of significant untapped resources, would represent a potential future loss for the Danish economy.
From the perspective of Greenland’s residents, increased autonomy and independence from Denmark seems to have some appeal, but not if under threat of a U.S. takeover, and not without adequate financial and security arrangements in place. The island’s economic and security needs will only be met through strong alliances and partnerships with its European and North American neighbours.
All in all, Denmark is expected to maintain its strong ties with Greenland. The Danish government has already announced that it will increase military expenditures in the territory by around USD 1.5 bln and further military spending is not ruled out.
Meanwhile, there are numerous ways in which the United States can benefit from a close economic and military partnership with Greenland without damaging its international alliances.