Sweden's dead-end memory lane: The Social Democrats are back in power, but even they cannot deliver a painless economic recovery, warns Christopher Jarnvall

FOR DECADES, Sweden was presented as the ultimate proof that the third way between unbridled market forces and total state control over the economy did exist. The Swedish model, the supposedly perfect match between a vibrant market economy and an extensive welfare system, appealed to everyone, from Western Europe's socialists through to Mikhail Gorbachev.

But Sweden's public sector debt is now equivalent to the country's GDP, and its public expenditure the highest in the industrialised world. The country's increasing inability to raise the necessary borrowing or reduce its debt has sharply pushed up interest rates and this, in turn, is reducing the scope for economic growth. The virtuous cycle of development has been replaced by a vicious spiral; the much vaunted 'third way' appears to lead to the Third World.

Yet on Sunday the conservative government of Carl Bildt, who came to power three years ago with the avowed intention of burying the Swedish model, suffered a humiliating defeat: with one of the highest swings in recent memory, the Social Democrats, who ran the country for much of this century, have been returned to power. Those who marvel at how East Europeans can vote for Communists less than five years after the end of the Cold War are reminded that the phenomenon is not confined to the former Warsaw Pact countries. Like the East Europeans, the Swedes opted for the past they know rather than confront today's grim choices. And, like the East Europeans, they will quickly discover that the past cannot return, and present realities are only likely to get worse.

Prime Minister Bildt did slash corporate taxes and sought to redress some of the structural ills of Sweden's economy. He also pledged a cut in public spending and launched an ambitious privatisation programme. But he was defeated by two main factors: a worldwide recession and lack of support from his governing coalition partners.

Although triumphant, the Social Democrats are just short of an overall majority in parliament. Theoretically, they can form a left-wing coalition in the Riksdag together with the Environment Party and the Communists. But the mere mention of such a combination terrifies the markets on which the continued financing of Sweden's deficit depends. Ingvar Carlsson, the new Prime Minister, has decided to eschew such alliances for the moment. It is thought he will instead ultimately settle for a deal with the Liberals, thereby giving Sweden's government a reassuringly centrist hue.

Yet the message of the electorate is unmistakable: a majority of Swedes have not even begun to comprehend the magnitude of the crisis facing them, and the reduced room for manoeuvre that their leaders now have. While the private sector is recovering rapidly, it cannot absorb an exploding unemployment rate, which stands at 14 per cent, the worst level since the Thirties. Up to two-thirds of those entitled to vote depend on state payments, either in the form of salaries or handouts. Furthermore, during the opposition years the Socialists' membership has tilted even more towards the public sector workers who are likely to resist any radical expenditure cuts. So it is not surprising that the Social Democrats, while promising budget cuts, have preferred not to specify where these are likely to come from.

Almost regardless of the precise mix between budgetary cuts and tax rises (and the Swedes are still one of the most heavily taxed peoples in Europe), the Social Democrats will have no choice but to accept that the golden days of their welfare state are gone. The only question is how long the country's citizens will continue to indulge in wistful dreaming about their glorious past, before the rude awakening arrives. One suspects it will not be very long. As elsewhere in Europe, the election campaign was conducted on the explicit assumption that it is up to Sweden's people to decide their future course. Correct, but only up to a point. Some of the country's biggest financial institutions have already voiced serious doubts about the wisdom of continuing to lend to a state that seems unable to come to grips with its budget problems. And foreign investors are demanding hefty premiums for continuing to lend.

At the height of the crisis over Europe's exchange rate mechanism two years ago, Mr Bildt's government raised its overnight interest rate to a phenomenal 500 per cent, but this failed to halt a run on the krona. And Sweden's international corporations, forced to remain competitive overseas, have shed a fifth of their labour force in the past few years. Put simply, the country is too integrated in the international market to implement its own national preferences.

Social Democrats, who opted for the inflationary route throughout the Eighties in an effort to avoid painful choices, will quickly discover that a similar policy today can only bring ruin. The new government has already been forced to admit that reducing unemployment is a matter for the private, rather than the state sector.

The country is scheduled to hold a referendum on European Union membership in November. The consensus is that only the Social Democrats, with their disciplined voters, will be able to deliver a 'yes' vote. Paradoxically, therefore, the victory of the Socialists offers an encouraging nod towards the European Union's enlargement, despite the success of some small parties that may be opposed to EU membership. Yet the moment Sweden joined the Union, it would be bound by the financial strictures of the Maastricht treaty. EU membership would also signify the final acceptance of the truth that Sweden's policy of remaining a country between two political systems and two military blocs serves no further purpose.

The ultimate irony, however, is that the Social Democrats, the party that still believes in the Swedish model, is also the only political formation able to bury this model. The Socialists' return to power does not, therefore, signify a return to the past; it is merely a necessary step in the long and arduous process of persuading Swedes that the past cannot return.

The writer is director of RES Politica, a consultancy group in Stockholm.

(Photograph omitted)