THE CONSENSUS IN FAVOR OF SWEDISH THINKING / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( HIGHLY RECOMMENDED READING )

The consensus in favour of Swedish thinking

By Ralph Atkins

Published: August 22 2010 20:35

Glorious weather in Sweden this summer, which made swimming in its normally icy seas a near-Mediterranean experience, has provided a blissful backdrop to campaigning ahead of a general election on September 19. Similarly invigorating has been recent economic news from the geographically vast but thinly populated north European country.

Sweden’s economy would expand by 4.5 per cent this year, the government forecast on Friday – a pace of expansion rarely seen in Europe’s mature economies – and unemployment is falling; Sweden’s public finances make other European countries blush. Fredrik Reinfeldt, prime minister, is one of only a few politicians who can legitimately promise voters both tax cuts and spending increases.

Some sunny optimism from Europe’s periphery is sorely needed. Jitters over Ireland and its banking system returned last week to the markets. Greece remains a storm cloud over Europe’s monetary union.

In that context, Sweden’s recent performance is instructive. Back in the early 1990s, the country had its own, near-catastrophic banking and economic crisis. Might what has worked since for Sweden now also work for others?

First, some reasons why Sweden is not so special. Its economy was among the worst hit by last year’s world downturn. Gross domestic product slumped 5 per cent. Much of the rebound simply reflects the subsequent industry-led global revival, which played to Sweden’s manufacturing strengths. Sweden may also have benefited from not using the euro: a krona devaluation last year helped exports. The outlook for Sweden is not risk-free. Particularly worrisome are the country’s over-inflated house prices.

But Sweden’s strengths go deeper. Before the global economic crisis, academic studies had highlighted the superior performance of an economic model based on “consensus and long-run consistency”, in the words of Karl Aiginger, director of the Austrian Institute of Economic Research in Vienna.

The events of the past three years have only strengthened the case for a system in which politicians, businesses and trade unions agree on the best ways to support long-term economic growth – and then stick to them. The past focus on strong public finances left lots of room for manoeuvre when crisis struck: the fiscal stimulus in Sweden was substantial relative to the country’s size. Companies, meanwhile, have worked consistently with trade unions to balance job security and wages, with the government providing a generous social security “safety net” as a back-up.

The result has been economic security – a valuable commodity at a time when Ben Bernanke, Federal Reserve chairman, sees the US outlook as “unusually uncertain”.

It is no coincidence that other “consensus-based” economies – including Finland, the Netherlands and Austria within the eurozone – also fared well in the second quarter of this year. Germany has also displayed Swedish-style characteristics. Berlin encouraged companies to retain, rather than fire, workers by subsidising short-time working schemes.

Consensus-seeking is popping up in surprising places. In the UK, where traditionally politics is based on confrontation between two main parties, the continental European-style coalition government of David Cameron, prime minister, is seeking broad public support for a sweeping austerity package.

What about the countries hit worst by the eurozone turmoil this year? When Ireland faced an economic crisis in the late 1980s, there was cross-party agreement on a reform strategy. Not so this time, but the country’s long experience of social partnership has tempered the opposition of the trade unions and public to painful budget cuts.

Elsewhere, the “Mediterranean” economic model, in which growth was fuelled by cheap credit, public spending and European Union subsidies, has been discredited. In its place, Greece’s Socialist government needs support for sweeping fiscal and structural reforms drawn up under the auspices of the International Monetary Fund and the EU.

It will not be easy. Greeks have regarded the state simultaneously as a source of patronage and something to be circumvented. There is no cross-party support for the reforms. As in other southern European countries, market economics is seen as a struggle between labour and capital. Athens is a long way from Stockholm in every sense.

Still, Sweden’s example is not irrelevant. Swedish-style thinking is permeating the debate on how Europe’s 16-country monetary union can prevent another Greek style crisis. Reform proposals focus on tougher rules on economic policies over the business cycle, and on stronger economic co-ordination.

For all Sweden’s consistency, its election will not be without excitement. Mr Reinfeldt’s ruling coalition is neck-and-neck with the left-leaning opposition. The small, populist rightwing Sweden Democrats could have a “kingmaker” role in the next parliament. But support for Sweden’s economic model is so widespread that nobody really expects much to change.

Copyright The Financial Times Limited 2010.