Sept. 4 (Bloomberg) -- One of the fastest-growing developed economies in the world. Plenty of jobs. Generous welfare and a stable currency.

What's not to like about Sweden?

Quite a bit -- at least according to the Swedes.

As the country of 9 million people prepares for a general election on Sept. 17, there is a good chance the most consistently left-of-center of European nations will take a rare step toward the right. The four-party opposition spearheaded by the Moderate Party had a lead in recent polls ranging from 3.5 percentage points to 11.5 points over the governing coalition led by the Social Democrats.

That is more than enough to make a change of government a real possibility. ``Almost 10 years without reforms have passed and problems are mounting,'' Johnny Munkhammar of the free-market think tank Timbro in Stockholm said in an e-mailed statement.

``Lower real employment, increased poverty, very high youth unemployment. This only shows that Sweden should do much more of the market-oriented reform that created improvements 10-15 years ago,'' he said.

Plenty of his fellow countrymen are thinking the same way. If the Social Democrats are voted out, there may well be an important message for the rest of Europe. If they can't hang on to power even with the success of their economic policies, the outlook is less than rosy for other European governments that support expensive social systems.

On the surface, Sweden has done well in recent years -- far better than most other European countries.

Healthy Economy

The government says the economy will expand about 4 percent in 2006, after growing 2.7 percent last year. The unemployment rate dropped to 7.5 percent in July, down from 7.8 percent a year earlier. Property prices have been strong, making everyone feel a lot richer -- apartment prices rose 17 percent in July, according to the Association of Swedish Real Estate Agents.

Sweden's government doesn't even need to borrow any money to fund all those generous Swedish social benefits -- this year it is expected to record a budget surplus of 2.7 billion kronor ($372 million), and that should rise over the next few years.

Not much sign of a crisis there.

Indeed the economy has been strong enough for the Swedish central bank, the Riksbank, to raise its benchmark interest rate to 2.5 percent. Some analysts say gross domestic product will grow even faster than forecast. London-based Capital Economics Ltd. said last week it expects the economy to grow ``by something close to 5 percent'' this year.

So how come the Swedes are so grumpy? Most governments with that kind of record could expect to be swept back into power.

While unemployment levels are low by European standards, the government massages the figure by redefining some jobless as ill.

Ill or Unemployed?

``On a normal day, nearly a fifth of the potential workforce is on sick leave or receiving a disability benefit,'' the Paris- based Organization for Economic Cooperation and Development said in a report on the Swedish economy. More days are lost due to sickness than in any other OECD country.

Youth unemployment is running at more than 20 percent, one of the highest rates in the region. Most Swedes might have jobs now -- but they worry about whether their children will.

Economic growth might look strong, but it has been helped along by high levels of immigration. Sweden, like Ireland and Britain, is one of the European Union countries that grant eastern Europeans unrestricted access to the labor market.

Sweden also wisely stayed out of the euro, allowing the central bank to stimulate the economy with lower interest rates. That has helped Sweden do better than the European average.

The country may be getting richer overall, but if people's living standards aren't rising, they won't feel any happier with the government. As Timbro's Munkhammar says, GDP per capita hasn't been growing nearly as fast as the general economy. In short, people aren't getting richer -- and they don't like it.

Tax Burden

Meanwhile, taxes remain prohibitive, even by European standards. Sweden's income-tax rates can be as high as 60 percent, among the most punishing in Europe. With a total tax burden of slightly more than 50 percent of GDP, according to Eurostat, the Swedish government takes more of its people's money than any other country in Europe.

Also, an intrusive tax system discourages business -- Ryanair Holdings Plc, Europe's largest budget airline, said in July it was scrapping some flights to Sweden because of a planned increase in taxes.

A package of tax cuts has been one of the main dividing lines between the two main political groups during the election campaign. Whether the Moderate Party has the will to make any deep changes to the way the Swedish economy works remains to be seen. In reality, its program looks as tepid as its name.

Still, the Swedes suspect that change is needed. Like a new car fitted with a dud engine, the nation may look prosperous, but under the hood it isn't as powerful as it should be.

In many ways, Sweden has been the most successful exponent of the European social model. If the people have decided it isn't working anymore, it may not be long before the rest of the region starts agreeing with them.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net.

Last Updated: September 4, 2006 03:34 EDT