Sweden: Fall from Grace*


by Helen Lachs Ginsburg, Economics, Emerita, Brooklyn College of  the  City University of New York; author, Full Employment and Public Policy: The United States and Sweden.  The author wishes to thank Al Burke for his help.

Until recently, full employment was the highest priority of Swedish society and of the Social Democrats, who have governed the country alone or in coalition for all but nine years since 1932. On a continent plagued with high unemployment, only 2 percent of Swedes were jobless in 1990. With support that cut across party lines, the government crafted an immensely popular welfare state, dramatically reduced income differences, maintained full employment, and nearly eliminated poverty.

Today, Europe’s quintessential welfare state is on the ropes. Nearly 13 percent of Swedish workers are officially unemployed or in government programs for the jobless; about as many are too discouraged to look for work, or are employed part-time for lack of full-time jobs. Unemployment benefits, sick pay, parental insurance and child and housing allowances have all come under the knife. So have payments to municipalities, which are responsible for child- and elder-care as well as for public assistance. Schools have suffered. And the medical system has undergone draconian cuts, even as patients face higher fees. These cuts started under the previous conservative-led coalition in 1992 and have been continued by the returning Social Democrats.

What happened? According to a well-worn myth perpetuated by the mainstream media, Sweden’s welfare state was unsustainable. In a familiar reprise, the Wall Street Journal claimed that the conservative-led coalition, elected in 1991, started to slash government expenditures “because the exorbitant cost of the welfare system sent budget deficits soaring.” Yet shortly before that, Sweden still had full employment, a strong welfare state and a hefty budget surplus. To understand why Sweden began to hack away at its social safety net, one needs to examine the power of business interests, the pressures of globalization, the implementation of neoliberal policies and the abandonment of the historic commitment to full employment.

Since the ’60s, the well-heeled Swedish Employers Association (SAF) has been spending a mint promoting the interests and ideology of business, targeting journalists among others. SAF even manages to get its propaganda into schools by providing them with educational materials. As the composition of Swedish business changed, the line pushed by SAF shifted accordingly. By the ’70s, Sweden’s export sector had become dominant. Reflecting this internationalization, power within SAF in 1976 shifted to arch-conservative leadership from global-oriented firms. They rejected the Swedish economic model and the capital-labor compromise on which it was based.

Neoliberal ideas, which were spreading worldwide, finally began to penetrate the Social Democratic Party in the ’80s. A powerful clique in the Finance Ministry, schooled in neoclassical economics, pushed the ruling party onto a deregulatory path. The government freed financial institutions from domestic credit controls, and eliminated restrictions on the movement of foreign exchange. A sweeping tax “reform,” among other things, lowered the top marginal income tax bracket for the well-to-do from 73 to 51 percent. This tax “reform,” which had been billed as self-financed, left a big hole in government coffers. Meanwhile, financial deregulation set off a wildly speculative real estate boom fueled by huge bank loans. When the bubble burst, it sparked a near-catastrophic bank crisis. The government rescue squad had to bail out some of Sweden’s largest banks, draining the treasury of a sum equal to 4 percent of Sweden’s GDP in both 1992 and 1993.

The drive toward European integration propelled the country further in the same direction. In 1990, Prime Minister Ingvar Carlsson’s Social Democratic government reversed longstanding party policy–and shocked most rank-and-file Social Democrats–by announcing that Sweden would apply for European Union (then European Community) membership. Carlsson gave no explanation at the time. But the Swedish budget for 1991-92, released shortly thereafter, explained that “Swedish companies have thrived on intensive foreign competition and are in a good position to use the advantages inherent in greater international integration.” In a closely related move, the government then said price stability had replaced full employment as its main economic priority.

A strong desire for acceptance by the inflation-fighting EU heightened the government’s determination to bring down inflation in Sweden’s booming economy. In the past, Sweden had several ways of curbing inflation without increasing unemployment. Centralized negotiations between business and labor were used to curb wage hikes. Or, by restricting credit to an overheated sector of the economy like housing, the government could use domestic credit controls to slow down economic expansion selectively. This time, however, the Social Democrats jacked up interest rates across the board, throwing the economy into a recession. Unemployment doubled to 3.5 percent, and the Carlsson government got its pink slip in the 1991 elections.

A new conservative-led government performed the coup de grace. It was as gung-ho as its predecessor about joining the EU and obsessed with fighting inflation that was by then nonexistent. It was even more dogmatic about defending the fixed exchange rate of Sweden’s overvalued krona, which was then under speculative attack in global financial markets. Because the government no longer had currency controls, it had to let interest rates skyrocket to stem the outflow of funds. The head of Sweden’s Central Bank bragged that the sky would be the limit. The authorities briefly raised the short-term interest rates to 500 percent. In late 1992, the battle was declared lost. The government let the value of the krona be determined by the market and thereby depreciate.

That fiasco and its aftermath converted a recession into a deep depression marked by three years of declining output, the loss of one-tenth of Sweden’s jobs and record unemployment. Between 1990 and 1993, a budget surplus of 4 percent of GDP became a 13 percent deficit. This jump was due to the banking bailout, tax reform and mass unemployment, which sharply depressed tax revenues and increased expenditures on the newly jobless.

Exports have boomed since currency depreciation lowered the cost of Swedish goods abroad, but slack demand at home has kept the domestic economy depressed. Yet the Social Democratic government has persisted in deflationary policies, bringing the deficit down to about 4 percent of GDP. Sweden could shrink the deficit without harsh measures if it pursued an expansionary policy of job creation and government stimulus, which would increase tax revenues and curb the need for expenditures on the jobless. Such a program is feasible, especially given that Sweden now has the lowest inflation in Europe. But the government spurns suggestions to change course. In the name of meeting convergence criteria set by the EU, it justifies its assault on the welfare state and its abandonment of an historical commitment to full employment, while insisting that current policies are essential for fighting unemployment. But continued deflationary policies ensure that a new plan to halve unemployment by the year 2000 will fail.

In November 1994, a slim majority of voters approved entrance into the EU. Corporate Sweden–more concentrated, powerful and international than ever–couldn’t have been happier. Swedish firms have big investments in the EU, lured by its huge market. Most of Sweden’s largest firms are export-oriented transnationals, with the bulk of their sales, assets and work forces abroad. Abetted by currency decontrol, manufacturing jobs declined in Sweden at the same time that Swedish corporations shipped profits abroad, often to gobble up foreign companies.

Big business lavishly financed the pro-EU campaign. SAF even took thousands of teachers on junkets to Brussels to sell them on the virtues of the EU. The pro-EU campaign outspent opponents by a ratio of at least 10-1. All the non-socialist parties endorsed the EU, as did the deeply divided Social Democrats, whose leaders refused to debate the issue in the l994 elections in which they emerged victorious, held only two months before the EU referendum. The press and even some union leaders supported integration. The main opposition was waged by the dissident “Social Democrats Against the EU,” and the small Left (ex-Communist) and Green parties, both of which made gains in the parliamentary election.

Anti-EU Swedes worried about the impact of European integration on the welfare state, the public sector, employment, women’s equality, labor rights, the environment, democracy, neutrality and national autonomy. Pleas from Social Democratic leaders to “trust us” helped tip the scale. So did raw threats from companies that they would abandon Sweden, fears that the country could not go it alone, promises that membership would usher in a golden age of growth and jobs, and hopes that integration would bring peace to Europe. The pro-EU campaign told Swedes that only EU membership could save the welfare state. Finance Minister Goran Persson (prime minister since Carlsson’s retirement in March l996) more bluntly warned that a “no” vote would mean deeper social benefit cuts.

Although financial markets already exerted the same sorts of pressure, entrance into the EU was a watershed that cemented the government’s fixation on deficit reduction and continuing cuts. The EU, which has long accepted mass unemployment, requires all member countries to have low deficits, debt and inflation, and stable exchange rates–but not low unemployment. Dashing more than a few hopes, the Social Democrats continued to chisel away at social programs when they resumed power.

Many Swedes now feel they were duped into joining the EU, which has grown enormously unpopular. They point to Norway, which voted against joining the EU despite hearing many of the same arguments. Today Norway has Europe’s lowest unemployment rate, and the economy is booming. Some jobless Swedes are even moving to Norway to find work.

The big issue in Sweden now is whether to take the next step and apply for membership in the Economic and Monetary Union (EMU), which has been driving Swedish economic policy for years even though no decision has yet been formally made. The government is resisting mounting calls for a referendum. Admission by the first target date requires meeting stiff criteria, including a deficit no higher than 3 percent of GDP by the end of l997, which Sweden expects to have. While transnationals applaud the EMU, it is a good recipe for permanent depression. Membership would bring continuous pressure to cut social programs, and would preclude any independent monetary or exchange rate policy geared toward low unemployment.

Anti-EMU sentiment is riding high. A poll released in November shows only 26 percent of Swedes favor joining. As the Social Democrats veer to the right, their support has fallen from 45 percent in the 1994 election to 30 percent today. The winners are the Greens and, especially, the Left Party. Their combined support has doubled from 11 to 23 percent. Women, in particular, have been switching to the Left Party, which is ideologically close to where the Social Democrats once were.

Within the Social Democratic Party, the chasm is wider than ever. The “traditionalists” are wedded to egalitarian values, but power is in the hands of those calling themselves the “renewers,” led by Prime Minister Persson, who are tearing down the welfare state and accept the agenda of business.

Historically, the Social Democratic Party and the Swedish Confederation of Trade Unions (LO), the blue-collar workers confederation, have been considered branches of one tree–the labor movement. Tensions between them have been mounting for some time, as have rifts within the LO. At its September Congress, a major attempt by one wing of the LO to cut ties with the Social Democrats failed. LO leaders urged members to regain influence by becoming more active in local branches of the party. Meanwhile, LO continues to provide the Social Democrats with substantial funds, though some union locals, including the Transport and Retail Workers, recently took the unprecedented step of cutting their contributions to the Social Democrats by as much as half. While a symbolic gesture at this point, if the practice spreads, it could have real repercussions for the party.

In contrast with France and Germany, where workers have taken to the streets when the government threatened to reduce their benefits, Sweden has remained surprisingly subdued. Much dissatisfaction, however, has been expressed in tensions within unions and within the Social Democratic Party, and by attrition from the Social Democrats. Weak leadership, LO’s ties to the Social Democrats, a belief among some that nothing can be done, and a tradition of working things out through cooperation and consensus have kept Swedes from taking more overt action. Protest, however, is not contrary to Swedish tradition. The general strike was used in the struggle for the right to vote in 1902; more recently, a strong popular movement in the late ’70s forced a shift in nuclear policy. Since October, rank-and-file and other grass-roots protests seem to be spreading. There have been large demonstrations in Stockholm, Gothenberg, Boras and Gavle. A worried Persson already has postponed implementation of new rules restricting unemployment benefits.

If the government continues along the same path, high unemployment will become permanent in Sweden, as it is elsewhere in the EU, and social and economic cleavages will widen further. Only a strong mass movement can force a real change in course. Even in a globalized economy, there are alternatives.

Sweden ranks number one on the United Nations index of gender equality. Women, unfortunately, are also high on the list of losers in the downsizing of Sweden’s welfare state, as their major gains have been tied to its growth.

For Swedish women, paid employment is the bottom line in the quest for equality. Close to 75 percent of women work–even mothers of young children–though 40 percent do so part-time. Swedish women have used their political clout to create a welfare state that aims to make work and family compatible, to involve fathers in child care and to insure an adequate income for families. This has been accomplished through policies such as subsidized child care, child and housing allowances, paid parental leave to care for a newborn child (which fathers are encouraged to use) and paid days off to care for a sick child.

With the public sector taking a beating, so are women, who make up 80 percent of the municipal and county council work forces. Under mounting pressure from within the Social Democratic Party, the unions and demonstrations, Stockholm has just agreed to provide enough funds to local governments to avert additional layoffs but not to restore jobs. Though the women’s unemployment rate is still slightly lower than the men’s, there is also a vast pool of female part-timers who want full-time work. Partial jobless benefits to supplement their earnings have become harder to get.

Unions have emphasized raising the income of low-wage workers, so the gender pay gap is smaller in Sweden than in the United States. But it is widening. Among full-time workers, women earn 80 percent as much as men–down from 87 percent in 1980.

High unemployment and shrinking social benefits are eroding the security that women formerly enjoyed. Services that enable mothers–especially single moms–to work are under siege. With local governments hard-pressed for funds, Sweden’s renowned child care centers “solve” the problem with higher fees, larger groups of children, reduced staff training and declining quality. One way women are responding is by having fewer children; Sweden’s formerly high fertility rate has plummeted in recent years.

Paradoxically, though women are losing out economically, their political representation is higher than ever. Forty-one percent of parliament members today are women, up from a 70-year low of 33 percent in the preceding conservative regime. The increase occurred mainly because the Social Democrats, alarmed by the threat of a women’s group to form a political party, ran a 50-percent-female slate.

Women will undoubtedly play a leading role in the struggle to rebuild Sweden’s welfare state. An unemployed mother of four from a small town launched a protest movement in October that is picking up steam. She has planned and spoken at demonstrations, and inspires others to do the same. Already described by Sweden’s leading newspaper, Dagens Nyheter, as a symbol of popular revolt, Therese Rajaniemi, and others like her, might yet save Sweden’s welfare state.

*In These Times, Dec. 23, 1996; Copyright 1996: Institute for Public Affairs