A new walk for the Swedish model

The Swedish model is stumbling. Not the blonde on the runway, but the social-welfare state that's the envy of Europe. Among the highest taxes in the world, yes, but also cradle-to-grave services and strong economic growth. Still, Swedes are concerned.

In national elections on Sunday, they rejected their benefactors of the last 12 years, the Social Democratic Party. It was quite a change because the Social Democrats – the inventors of the Swedish model – have been in power for 65 of the last 74 years.

To outsiders, the rejection may even appear puzzling because the Swedish economy is humming along at its fastest annual economic growth rate in six years – 5.6 percent. With low inflation and interest rates, and strong productivity gains, the economy appears to be as safe and secure as a Volvo.

But Fredrik Reinfeldt, who will be the country's next prime minister, sounded the alarm in his campaign – one which apparently resonated with Swedes, and, hopefully, will have a similar effect on European social- welfare countries in far worse shape.

Mr. Reinfeldt, who leads a conservative-turned-centrist party called the Moderates, is worried about Sweden's long-term ability to compete, especially in the global marketplace.

Of particular concern is joblessness. On the surface, it looks pretty good – around 6 percent. But pull back that golden teak veneer and it's rough underneath. A study by the McKinsey Global Institute puts real unemployment at closer to 16 percent. That's because the government doesn't count people on sick leave, in training programs, in early retirement, or students who are studying only because they can't find work.

The Swedish model of high income taxes in exchange for a plethora of social services was workable when it was dreamed up in the 1930s. Unlike other European states, Sweden's history wasn't marked by feudalism, and Swedes had a trusting relationship with a state whose civil servants were efficient. Theirs was a small, homogenous, and well-educated population with a strong work ethic. A social pact between people and state could work, and it did, until succeeding generations became too reliant on the "nanny" state and businesses too restricted by it.

Reinfeldt cites a lack of new jobs. Sweden has created almost no net-private sector jobs since 1950, according to Magnus Henrekson of the Research Institute of Industrial Economics. Thirty percent of Swedes are employed by the government. Small businesses suffer from restrictive regulation and labor rules.

To stimulate job growth, Reinfeldt and his coalition partners plan to halve payroll taxes for employers hiring long-term jobless youths and sell off government stakes in such businesses as telecommunications and airlines. He wants to further deregulate, a move that pulled Sweden out of an economic crisis in the 1990s. And to lure people to work, he plans to reduce generous jobless benefits and cut income taxes for the poor.

Reinfeldt describes these steps as tinkering, because Swedes still love their model. And much about it has paid off, especially investment in education and R&D. But the model, as is, won't hold up to globalization, an aging population, and immigration pressures. Swedes seem willing to face this. Can the rest of Europe?