Sweden is back. Sweden: where high taxes meet economic competitiveness. Sweden: a high-tech nirvana populated by fit armies of Internet explorers and early adapters unafraid of the next new thing. Sweden: cool and cold.
In the winter of its discontent, with Germany and France stagnant and Britain heading for choppier waters, Europe is pining for the Swedish model as it did in the 1930s and again in the 1970s. It's Sweden as object of desire: the way forward for European economies seeking to be both socialist and competitive in a free-market world. Think tanks can't write enough about it, media dote on it and politicians pan it for policy gold. A headline not long ago in London's left-wing Guardian newspaper said it all: the most successful society the world has ever known. Swedes have it good, and we want what they have.
What Swedes have is impressive. Cradle-to-grave health care. An excellent education system, including some of the best universities in Europe (Lund, Uppsala). One of the world's most competitive economies. The world's highest per capita ownership of second homes and pleasure boats in the world. A country of just 9 million people that has produced a startling number of big industrial brands: Volvo, Scania, Electrolux, Eriksson, IKEA. A privileged country that wears its wealth lightly: when a Ferrari-Maserati dealership opened in Stockholm during the height of the Internet boom, it was shunned by most dot-com millionaires, who stuck to their bicycles. This tolerant, liberal country has adapted well to the twists and turns of globalization. "A small country has to be very open-minded," says Swedish Finance Minister Per Nuder, in typically understated fashion.
As models go, Sweden actually has a fair bit of competition, at least along Europe's northern tier. Finland's education system is repeatedly ranked as the best in the world. Denmark gets noticed for giving employers greater flexibility in hiring and firing workers within a generous welfare state. According to a recent report by the World Bank, oil-rich Norway is the most business-friendly country in Europe, thanks to its lack of red tape. Tiny, remote Iceland has one of the highest growth rates in Europe. All in all, Sweden and its Nordic neighbors, Robert Taylor of the London School of Economics wrote in a pamphlet last autumn, are among "the most efficient, affluent and equitable countries in the world."
So what's wrong with this picture? An increasing number of Swedes do not recognize the socialist paradise-cum-economic wunderkind of Guardian headlines. The model is showing "visible cracks," says Klas Eklund, the Stockholm-based chief economist of SEB bank. Among them: the lack of incentive to work, resulting in a real unemployment rate roughly three times the official 6.3 percent; the failure to foster entrepreneurship (Swedes are the Europeans least likely to consider starting businesses), and the "total inability to handle the integration of immigrants," who face an unemployment rate one third higher than native Swedes. The disparity is among the widest in Europe.
The cracks are starting to cause trouble for the Social Democratic government of Prime Minister Goran Persson, in power since 1994. A new center-right opposition called Alliance, led by the Moderate Party, is pulling ahead in the polls, as elections approach in September. The Moderates' 40-year-old leader, Fredrik Reinfeldt, based his challenge on a simple choice: welfare (the Social Democrats) versus work (the Moderates). "The Social Dem-ocrats put the subsidy system first," says Reinfeldt. "We put work first."
As in other European countries, work (or the lack of it) is at the heart of Sweden's present dilemma. Private-sector productivity has grown phenomenally in recent years, behind only South Korea and Ireland. But Sweden's employment profile is decidedly mixed. Lennart Erixon, an economist at Stockholm University, points out that only Turkey has experienced a steeper decline in the rate of work-force participation than Sweden since 1990. Counting the hidden unemployed, including those on disability, paid leaves or "perpetual students" at tuition-free universities, more than 20 percent of the working-age population is out of work, according to some estimates.
Social leveling compounds the problem, says Eklund. Sweden has a relatively narrow gap between high and low incomes, because wages are often fixed by union contracts that keep low wages relatively high--and keep many newcomers out of work. Reinfeldt argues, in particular, that the state encourages immigrants not to work with subsidies that exceed the pay in off-the-books jobs for cleaners, handymen or day laborers. He and other critics also say Sweden undermines its competitiveness by allowing entry more readily to refugees than to immigrants with technical skills that the economy needs.
Few Swedes would suggest that their welfare state has broken down. Most think it simply needs a tune-up. In an unscientific NEWSWEEK Poll of Swedes in Stockholm and Uppsala, only one--a hardworking, hard-pressed farmer, Jan Tannfors, 55--complained about the system itself. "I don't want to feed so many people in Sweden with my taxes," he said with some asperity. More typical was Pers Karin Skogar, 48, who owns a small interior-design company in Uppsala. She would rather that her company didn't have to subsidize her employees' benefits out of its own coffers, but added, "If we're going to continue to have a welfare state, we're going to have to pay for it."
It's hard to argue with a nation that has come so far. In the 19th century, Sweden was one of Europe's poorest countries; Londoners organized charity drives for needy Swedes. Once the country began to industrialize, however, it did so with a vengeance. By 1900 Stockholm boasted more telephones than London or Berlin. Over the decades, as Taylor notes, Swedes achieved "modernization through consensus," constantly reinventing themselves for a changing world. After a severe recession in the early 1990s, political leaders worked with enlightened labor unions to adapt to globalization. They slashed taxes, up to a point. (Though corporate taxes are low, at 28 percent, Swedes still pay the highest income taxes in the world.) They deregulated banking, telecommunications and energy. They granted the central bank independence, and they turned the budget deficit into a surplus.
At Stockholm University, Erixon is bemused by the attention lavished on the model he has spent his career studying. In 2004, he was invited to speak at a conference in Bad Mitterndorf, Austria. The attendees were starry-eyed about the Swedish model, "as if they'd seen the northern lights," Erixon recalls. He describes himself as a fan of the Swedish model, but says he felt compelled to lecture the overexcited crowd on its downsides. "I was not invited back," he says with a laugh.
But of course he will be, if not to Austria then to some other European nation struggling to keep pace with mounting international competition and keep hold of the good life. Right now the Swedish model, for all its shortcomings and no matter how heavily questioned at home, looks about as good as it gets.
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