Swedish Companies May Vote With Their Feet

As the government moves left, business ponders moving out

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 concentrating on the young hotshots he had chosen for his new team, the press played up the 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 that the country's biggest private employer plans to shift some key jobs overseas touched a nerve. Sweden's astronomical tax rates, restrictive labor laws, and supergenerous welfare programs have long made it a tough place for business. 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 dashed by the Sept. 20 elections, which forced the ruling Social Democrats leftward. Lacking a majority in parliament, Social Democratic Prime Minister Goran Persson must depend on the formerly communist Left Party and the Greens. 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. Execs fear Sweden will be at a disadvantage to EMU members if it stays out too long. But the Greens and the Left are fierce foes of the single currency, arguing it would let a centralized authority meddle with Sweden's beloved welfare system.

Until recently, business was banking on economic growth in the 3% range for the coming 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.

Top managers had hoped that Persson, who has served as Prime Minister since 1996, would move ahead with tax cuts and other measures to make Sweden a more attractive place for investment. Now such plans are probably on hold for a year or two. So Swedish business will continue to cope with the world's highest ratio of taxes to economic output--54.7%. Economists say that 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.

BRAIN DRAIN. 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 taxes 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 talented foreign executives and technical researchers to Sweden. Taxes are also driving away wealthy Swedes, as well as managers and engineers.

Sweden's high taxes are costing it not just brains but money. Swedish citizens may have as much as $40 billion parked in London, Switzerland, 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 of its policies.

Executives cling to the hope that the rigors of the global economy will force Sweden to wake up. But it won't be easy to change the country's 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.

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