Jun 9th 2011 | STOCKHOLM | from the print edition, The Economist
ANNUAL growth as high as 6.4% in the
first quarter. Unemployment falling fast. The budget in surplus
this year. Public debt heading to below 40% of GDP. How did the
Swedes do it?
Luck, partly. Like Germany, Sweden is a big manufacturing exporter. In both countries GDP rebounded in 2010 after a sharp fall in 2009. Being outside the euro helped, because the krona fell before climbing back. But the main answer is the prudent pro-market policies of Fredrik Reinfeldts four-party centre-right coalition, which came to power in October 2006.
As Mr Reinfeldts capable (and pony-tailed) finance minister, Anders Borg, explains, Sweden learned a lot from its banking bust in the early 1990s. Budgetary rules and bank supervision were strengthened, helping to avert the risk of another bubble. Tight fiscal policy has pushed the public sectors share of GDP down to only just over 50% (see chart): Mr Borg has ambitions to get it below Britains. Without dumping the generous Swedish social model, the government has tweaked it in the direction of lower taxes and smaller welfare benefits. Mr Borg calls this reinforcing the work ethic. Mr Reinfeldt talks simply of making work pay.
The results have been spectacular. After long being a case study in jobless growth (except in the bloated public sector), Sweden has become a big creator of private-sector jobs. The government has narrowed the tax wedge that deters employment and whittled away at sickness benefits: Sweden no longer stands out for welfare excesses. The retirement age has risen to 67. Inheritance and wealth taxes have gone. Mr Borg and Mr Reinfeldt believe firmly in ownership as a driver of prosperity.
Economic success is changing politics, too. Mr Reinfeldts coalition narrowly failed to win a majority last September, and his minority government has lost a few votes in the Riksdag. But his Moderates look well placed to oust the Social Democrats in 2014 from their 90-year-long status as Swedens biggest party. A lacklustre new Social Democratic leader, Hakan Juholt, has inspired neither the voters nor his party. Mr Reinfeldt is also trying to lure the Greens from their link with the Social Democrats. That might give him other options were any coalition partner to fall below the 4% threshold for Riksdag seats.
Mr Reinfeldts success has not gone unnoticed abroad. He is a good friend of Britains David Cameron (he refers to him simply as David), who is of a similar age and also in a coalition with liberals. Mr Camerons government is interested in Swedens education reforms (Swedish free schools inspired British academies) and health care. Unlike Britain, Sweden is happy to let private schools and hospitals make profits from taxpayer-financed services if outcomes are better.
One of the few clouds on the horizon is the Sweden Democrats, an anti-immigrant party that helped to deprive Mr Reinfeldt of a majority. Mr Reinfeldt concedes that the Sweden Democrats will remain in the Riksdag but insists no mainstream party will talk to them (unlike their equivalents in Denmark and Finland). He has no plans for tougher immigration or asylum controls, and is proud that his government made it legal for asylum-seekers to work.
Some 40 years after becoming the only continental European country to switch its motoring from left to right, Sweden is making a similar political shift. By 2014 Mr Reinfeldt will have been in power for eight years. Given the economys strength, few would bet against his winning again. To many on Europes left, Social Democratic Sweden was once a statist paradise. Now it is the right that looks north for inspiration.