The victory by Sweden's Conservative coalition in the Sept. 17 general election was its first since 1991, and as the outcome became clear on a crisp fall night, it triggered ecstatic celebrations. Young people even stripped off their clothes and cavorted in the fountain at Sergels Torg, the gritty center of Stockholm.
Fredrik Reinfeldt, the 41-year-old leader of the Moderate Party, who will become prime minister, ran on a platform of tax cuts and other pro-business incentives. This platform appears likely to charge up already-strong 4.2% GDP growth, encourage hiring, and bolster Swedish stocks, as well as the krona.
"If they keep their promises, small- and medium-sized enterprises will be in for a better ride in the future," says Klas Eklund, chief economist of SEB, the Stockholm-based bank. "Long-term growth prospects may also get a boost—though it is impossible to say how much."
BRINGING IT HOME. Reinfeldt, a Stockholm native who compares himself to Britain's Prime Minister Tony Blair, promised to reduce unemployment—officially about 5% but really more like 7.5% due to undercounting—by cutting taxes employers pay on wages of employees, and by trimming income taxes and other disincentives to investment and work.
The conservative coalition would also cut Sweden's current 1.5% tax on wealth above about $200,000, in a move intended to encourage entrepreneurship and even lure wealthy tax exiles and their capital home. Real estate taxes are also likely to be cut. These are all moves that business has been urging for years, arguing that punitive taxes were a threat to the country's competitiveness.
Sweden's tax system is geared "toward stopping wealth instead of stopping poverty," wrote Urban Backstrom, director general of the Confederation of Swedish Enterprise and a former Central Bank governor, in the Sept. 18 issue of Dagens Industri, the Stockholm business newspaper.
FAMILY HISTORY. The idea isn't to dismantle the cherished Swedish welfare state, Reinfeldt explained in an interview with BusinessWeek last year. That would be too controversial. "I saw my party lose election after election on this," he said. Instead, Reinfeldt will reform and update the Swedish model, keeping winning elements such as the excellent educational system. Reinfeldt, for instance, would resume selling off state hospitals to private companies. "To be able to have a welfare state we have to make it more interesting for people to have a job," was how he summed up his approach.
Sweden's prime minister-to-be grew up a fortunate son of the Stockholm suburbs, where he still lives. He has an M.B.A. from Stockholm University, and got his start in elected office when he was voted to the board of his platoon in the army. Later, he joined the Conservatives because he thought they were prepared to do more for business than were the Social Democrats, who seemed mostly interested in putting up roadblocks. His parents, who are entrepreneurs, have been a major influence on his outlook.
For the campaign, Reinfeldt forged an alliance with the Liberals, Christian Democrats, and the Center Party, which are all to the right of the Social Democrats. The bloc has remained remarkably well-disciplined, a big factor in its win, which was by a mere 2% margin.
RIPPLE EFFECTS? The defeat of the Social Democrats, who have ruled Sweden almost continuously since World War II, will be a boost for right-leaning groups in other European countries, from the Conservatives in Britain to France's interior minister, Nicolas Sarkozy, the leading conservative candidate for next spring's presidential vote.
But the impact could be limited by Sweden's small size and Reinfeldt's gradualist approach. "It's not likely they will be a Thatcherite government," says Simon Tilford, an analyst at the Centre for European Reform in London.
In fact, the Scandinavian or Nordic countries are admired across Europe for their ability to combine respectable economic growth with generous welfare programs. A fine-tuning of the model will likely make their approach even more appealing.
BIG SPENDER. But it is business that is really celebrating. To fund the tax cuts, Reinfeldt has promised a hefty privatization program, floating government stakes in a portfolio of companies including Nordea, a major bank; TeliaSonera, the largest phone company; OMX, the stock exchange operator; and SAS, the airline. The value of these shares is about $30 billion. All of these issues rose briskly on Sept. 18, with the broad Stockholm market up nearly 1%.
Reinfeldt's program is unlikely to be a budget-buster, according to Eklund, who notes that the Social Democrats leave their successors a budget now in surplus. The Swedish krona has already strengthened to $7.24 to the dollar on the morning after the election as investors anticipate higher growth and spending.
So why did the Social Democrats lose when the economy was strong? Analysts say the party is being punished for appearing indifferent to low employment growth, as recovery from the telecom and dot-com crash got underway in the early part of this decade. The electorate is also weary of the Social Democrats and their leader, Goran Persson, who has been prime minister since 1996. Persson, who deserves much credit for Sweden's current fiscal rectitude, has said he will step down as party leader.
While it's only the morning after, there's a feeling in the air that Reinfeldt will be given time to see if his reforms work. After all, the economy and public finances are in good shape. Dan Andersson, chief economist for the Trade Union Confederation, predicts that the conservative win "means greater uncertainty in the job market." But he also thinks the conservatives will last for their four-year term and have a good shot at another one.
Reed is BusinessWeek's London bureau chief, and Sains writes for BusinessWeek.com from Stockholm
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