The Global Economy — Is There a Place on Earth Where Things Are Still Working?

I just came back from a two-week trip to Sweden. One of my impressions, purely from a receptive tourist’s perspective, is that Sweden is one of Europe’s best kept secrets. It is a vast and enchanting country, offering a range of breathtaking landscapes, from rolling fields, to sandy beaches, to dense pine and birch forests, to snow-covered mountains. From a financial analyst’s perspective, Sweden’s secret to successful social capitalism should be syndicated, so that the rest of the world could learn a thing or two, such as, for example, that the words “socialism” and “capitalism” can appear in the same sentence and not sound like sacrilege.

As a side note, purely unintentionally, I somehow often end up traveling to countries going through elections or referendums. That was the case with Iceland in March of this year, and that was the case with Sweden in September, too. I mention Sweden’s elections only in the context of what the country’s current pro-business coalition government has done for its economy since 2006.

Before the ruling coalition led by Prime Minister Fredrik Reinfeldt and his Moderate Party came to power, businesses and individuals had been taxed so much that figuring how much is owed to the government required a degree in tax law. Payroll taxes, income taxes, corporate taxes, wealth taxes, etc. — most of which were introduced by Sweden’s Social Democrats — have not only created Sweden’s fabled welfare state, but also much of its economic deadweight.

Then, in 2006, the center-right coalition, The Alliance, came to power and made good on its election promises, most of which revolved around lowering income taxes and jobless benefits, among other things. The idea was that lower taxes would create jobs and actually boost tax revenues, thus removing the deadweight while keeping the welfare state intact.

During the Reinfeldt coalition’s first term, income taxes were reduced by about 70 billion Swedish kronor, or approximately 2.3% of the country’s GDP. But lower taxes meant that other measures also had to be taken, such as tightening the budget. The smart thing was that The Alliance worked at it gradually, not going wholesale against the welfare state. This way, Sweden managed to keep its welfare state and economy not only cooperating, but also working well together.

After Sweden’s economy contracted in 2009, as did the rest of the world, the country’s GDP this year will probably grow by about 4.5%. Sweden’s economic performance will likely be one of Europe’s best in 2010. Additionally, Sweden’s ruling coalition is likely to achieve Europe’s smallest budget deficit. At the same time, while jobless benefits have been trimmed to entice people to seek work instead of relying on the government dole, other social programs, such as free education, free childcare and a universal health system, have remained intact and well-funded.

Now we come to Sweden’s 2010 general election, held on September 19. The governing center-right coalition won a second term, something no ruling party or coalition has accomplished in almost a century. However, Sweden’s conservatives failed to win outright by two seats only, while the Social Democrats lost some seats.

The only dent in the win was the ultra-right party, the Sweden Democrats, which has broken the four-percent threshold to enter Riksdag, or Swedish parliament, for the first time ever after winning 20 seats. Perhaps this is not exactly something anyone would expect of Sweden, because the Swedish Democrats are openly against immigration and have been accused of advocating racism. Thankfully, entering the parliament is not the same as being able to impact policies. According to the re-elected Prime Minister Reinfeldt, The Alliance will not be playing with the hard right on any field. Instead, if they need help, they will turn to the Green Party.

Sweden is a large country with a population of only about 9.4 million. During the Great Recession, the Swedish economy has held its ground well and future prospects are looking good, too. Swedes obviously like where their country is going, but do not trust one party to handle it all, hence the need to form coalitions and the election of minority governments. As I walked on the streets of Stockholm’s Gamla stan and on the manicured-to-perfection grounds in front of the Riksdag, I saw not only one of the most beautiful
cities of Europe, but also a capital city of a country that has made it all work out: social policies and business demands; lower taxes and higher government revenues; political pluralism; and effective minority governments.