When Swedish telecommunications giant Ericsson announced a long-awaited management shakeup on Sept. 30, Chief Executive and President Sven-Christer Nilsson was chagrined at The reaction. Instead of focusing on the young hotshots he had chosen for his new team, the press played up news that Ericsson would be moving its European headquarters and finance arm to London. "I was so amazed by the force of this issue," says Nilsson.
The CEO vows that Ericsson's official domicile will always be Sweden. But the prospect of the country's biggest private employer shifting key jobs overseas touched a nerve. Sweden's sky-high tax rates, stringent labor laws, and supergenerous welfare programs have long made it a tough place for business. Ericsson's move seems confirmation that Sweden's status as home of world-class companies such as Volvo, Astra, and Saab is in peril. Unless the country's business climate improves, more jobs, capital, and talented workers could flee.
Industry's hopes for government measures to boost competitiveness have been sunk by the Sept. 20 elections, which forced the ruling Social Democrats leftward. Lacking a majority in parliament, Social Democratic Prime Minister Goran Persson must now rely on the formerly communist Left Party and the Green Party. This shaky alliance may not last, but it comes at a critical time for Sweden, which is agonizing over whether to join the European Monetary Union. Executives fear that Sweden will be at a disadvantage to EMU members if it stays out too long, with higher interest rates and exchange rate volatility.
But now Sweden's entry seems more distant. Both the Greens and the Left are fierce foes of EMU, arguing it would let a centralized authority meddle with Sweden's beloved welfare system. Indeed, after the election, Swedish bond yields soared, and the krona plummeted against the German mark.
NO TAX CUT. Until recently, business was banking on economic growth in the 3% range for the next two years. But the turmoil in emerging markets is likely to slam Swedish companies, which are among the world's most adventurous investors. At the same time, the 34% drop in the Swedish stock market since the July 20 high could chill consumer spending. "It is gradually dawning on people that things might get a lot more difficult," says Sten Westerberg, chairman of Maizels Westerberg & Co., a Stockholm investment bank.
Executives had hoped that Persson, who has been in office since 1996, would move ahead with tax cuts and other measures to make Sweden a friendlier place for investment. Now, such plans likely are on hold for a year or two. Swedish business will continue to cope with the world's highest ratio of taxes to economic output--54.7%. Economists say the tax regime and the lavish welfare state that goes with it are largely responsible for Sweden's lagging behind the OECD in economic growth by an average of more than one percentage point for the last three decades.
Taxes are one factor that forces companies and wealthy individuals to consider moves outside Sweden. The corporate tax rate of 28% is not so bad, but the 59% top marginal rate and 35% payroll tax are killers. Anyone earning more than about $62,500 pays this top rate. Sweden also slaps a wealth tax of 1.5% on bank accounts and property worth more than $120,000. Such punitive taxes make it almost impossible for Swedish multinationals to recruit top foreign execs and researchers to Sweden. Taxes are also driving away wealthy Swedes, as well as managers and engineers. The Federation of Swedish Industries says about 1,000 Swedish engineers emigrated last year--representing 25% to 30% of the engineering degrees conferred by Swedish universities.
PAPER LOSS. Sweden's high taxes are costing it not just brains but money. Swedish citizens may have up to $40 billion parked in London and other financial centers. Klas Eklund, chief economist at bank SEB in Stockholm, thinks the shrinking tax base could force the government to rethink some policies.
The unfriendly business climate means that when it comes to mergers, Swedish companies tend to get the short end of the stick. The Swedish business elite, for example, was shocked by the details of two big recent mergers involving neighboring Finland. The headquarters of the $106 billion Finnish-Swedish megabank Merita-Nordbanken was shifted to Helsinki to take advantage of lower tax rates and Finland's plans to join the single currency. And if the proposed merger of two paper giants, Sweden's Stora and Helsinki's Enso, goes through, headquarters will be in Helsinki--along with jobs for managers, financiers, and eNgineers. "Sweden is being marginalized," worries one investment banker.
Executives cling to the hope that the rigors of the global economy will force Sweden to wake up. Already, rampant smuggling has forced the government to slash tobacco taxes. And the wealth tax on company owners has been eliminated in an effort to curb capital flight.
But it won't be easy to shake up Swedish politics. Some two-thirds of Swedish citizens depend on the public sector for their main source of income. They are understandably reluctant to vote for any cuts. Until they do, business will pay most of the price.