Will Stockholm Give Away The Store?

Business worries about an upcoming hike in social spending

On Jan. 24, a small army of construction workers gathered in Sergel Square in Stockholm's business district. After hearing rousing speeches by union leaders, they marched to the city's elegant government buildings, demanding that officials do something to ease the 30%-plus unemployment in their industry. "The government is trying to starve the country out of its financial crisis," said Mats Hjelte, a mustachioed 36-year-old concrete worker.

Across town, Lars Ramqvist was also complaining about the government. The chief executive of telecom powerhouse Ericsson is alarmed at Prime Minister Goran Persson's promise to spend generously on health and education in 1998. Ramqvist and other business executives worry that Sweden will backslide into fiscal irresponsibility after a much praised austerity program. "This was really a shock," he says. "We are very concerned about the political situation."

Business has cause for concern. Facing a general election in 1998, the Social Democratic government is under pressure to offer its supporters some hope of relief from mounting unemployment--now more than 12%. Labor demonstrations are becoming routine. Persson now says that to force the country to run a budget surplus by 1998 would be "too harsh and too quick." But while he tries to placate workers with public spending, business leaders say the way to create jobs is to cut taxes and free the heavily regulated labor market.

The Social Democrats, who returned to power in 1994, do deserve credit along with their conservative predecessors for bringing the country out of financial crisis. Sweden's budget deficit fell to just over 3% of gross national product in 1996, from 12.3% in '93. Inflation is down to less than 1%, compared with 9.7% in 1991, and interest rates, which spiked to 500% briefly in 1992, are now in the 5% range.

But Swedish executives say it is getting harder to do business. In 1965, some two-thirds of the multinationals' workforce was in Sweden. Today more than 60% is outside. Young people are fleeing individual tax rates that can reach 60%. "The biggest single problem is the overall tax burden," says Peter Wallenberg, patriarch of a family industrial empire that accounts for about 40% of Sweden's market capitalization. Even the mighty Wallenberg conglomerate is beefing up investment offices in foreign capitals to scout for overseas opportunities.

RATINGS DROP. A recent shakeup at Volvo, Sweden's most prestigious company but one that has been struggling, has drawn attention to industry's problems. On Jan. 27, Soren Gyll announced that he was bowing out as CEO of Volvo. He was replaced by a trusted Wallenberg lieutenant, Leif Johansson, chief of appliance maker Electrolux. Johansson was in turn succeeded by another Wallenberg man, Atlas Copco President Michael Treschow. Although sources say Gyll was not forced out, Volvo's operating income for the three quarters ended on Sept. 30 fell 73%, to $322 million.

Industry is unlikely to get much relief from the government as the September, 1998, election approaches. Pressure on Persson will keep mounting from the unions. The party's poll ratings have already fallen to about 30% from the 45% it won in the general election in 1994. To win voters back, the government is likely to keep taxes high to fund unemployment-related spending. Persson also seems to be ruling out leaning on the unions to make concessions on wages, which jumped 5.9% last year--more than seven times the inflation rate.

The financial markets are voting with business. Investors pummeled the krona and pushed up interest rates in late January after Stockholm's new-spending announcement. That reaction had Persson scrambling to soothe international investors. "There is no shift in economic policy," he told a visitor on Jan. 24. "We have paid the price and will not risk [what we have achieved]." But most likely, Sweden will have a bumpy ride for the next two years as Persson plays to two very different audiences.

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