Is Stockholm Giving Away The Store?

Business is worried that Stockholm may hike 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 their union leaders, they marched across the bridge 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. "I have been unemployed for five and a half years. I just want work."

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. That has Persson running scared. He now says that to whip the budget into surplus by 1998 would be "too harsh and too quick." But while he tries to placate workers with public spending, business leaders argue that the way to create jobs is to cut taxes and free up the heavily regulated labor market.

TURNING GREEN? Executives are also incensed about government schemes to scrap nuclear power plants, in an appeal to environmentalist Green Party voters. Closing the plants would mean more job losses, because Sweden's big aluminum, steel, and forest-products industries would be deprived of cheap energy. Ramqvist and other execs have taken out newspaper ads warning against such a move. Persson brushes aside the criticism from business. "They are always complaining," he says. And he believes his labor constituents will recognize that his policies are "delivering real wage increases for the first time in many, many years." At the same time, he maintains, "we have stronger public finances than Germany."

In reality, the Social Democrats, who returned to power in 1994, must share the credit 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 1993. 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 Persson draws fire for relying too much on taxes to close the deficit and not doing enough to cut spending, which still amounts to more than 60% of GDP.

LOSING SUPPORT. And Swedish executives say it is getting increasingly difficult to do business. In 1965, some two-thirds of the multinationals' workforce was in Sweden. Today more than 60% is outside. Ramqvist warns that research and development are now threatened, as Sweden's nearly 60% top personal income tax rate has many young engineers clamoring to be transferred abroad. The country could wind up with just the corporate headquarters and financial operations of its premier companies--a classic hollowing-out.

Sweden's big companies are trying to stay competitive by investing overseas, but smaller ones find the going very tough. "The biggest single problem is the overall tax burden, which makes it difficult for small operators to grow," says Peter Wallenberg, patriarch of the family industrial empire that controls companies accounting for about 40% of the country's market capitalization. The mighty Wallenberg conglomerate is shuffling executives (box) and beefing up investment offices in New York, London, and Hong Kong to scout for overseas opportunities.

International alliances may be the only answer for struggling Swedish companies. Industry is unlikely to get much relief from the government as the September, 1998, election approaches. Pressure on Persson will keep mounting from the labor unions, long the backbone of his Social Democratic Party's support. The party's poll ratings have already taken a tumble to about 30% from the 45% it won in the general election in 1994. Most of the lost support has gone to the former Communists and the Greens, putting more pressure on Persson to move to the left.

To win voters back, the government is likely to keep taxes high to fund unemployment-related spending that more than doubled this year, to 4.8% of GDP. 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. He says it is up to business and the unions, not the government, to bring down wage rates.

The markets, of course, are voting with business. Investors pummeled the krona and pushed up interest rates in late January after the government's new-spending announcement. That reaction had the self-assured 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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