Opinion of the Economic and Social Committee on "Sweden: economic situation and implementation of the structural reforms envisaged by the Cardiff process and the Council recommendation on economic policy"
Date: 2001-11-29
Institutions: European Economic and Social Committee
Subjects: Sweden, economic and social cohesion, economic policy

21.2.2002

EN

Official Journal of the European Communities

C 48/147

Opinion of the Economic and Social Committee on ‘Sweden: economic situation and implemen-
tation of the structural reforms envisaged by the Cardiff process and the Council recommendation
on economic policy’

(2002/C 48/30)

On 28 February 2001, the Economic and Social Committee, acting under Rule 23(3) of its Rules of
Procedure, decided to draw up an opinion on ‘Sweden: Economic situation and implementation of the
structural reforms envisaged by the Cardiff process and the Council recommendation on economic
policy’.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was
responsible for preparing the Committee’s work on this subject, adopted its opinion on 13 November
2001. The rapporteur was Mr Kenneth Walker.

At its 386th plenary session (meeting of 29 November 2001) the Economic and Social Committee
unanimously adopted the following opinion.

1.

Introduction

1.1.
On 13 February 1998, the Section for Economic,
Financial and Monetary Questions of the ESC published a
report on the Economic and Social Situation in Sweden. In
its report the section listed a number of advantages and
disadvantages which Sweden could have encountered as a
result of not joining EMU, such as:

— it did not have to rely on employment and wages as the
only variables which could be used for regulating Swedish
economic competitiveness;

— unstable exchange rates leading to high real interest rates;

— a decline in foreign investment, with investors preferring
the security offered by monetary stability in euroland and
the resulting trade outlets.

The analysis set out in the present opinion would appear to
point to the fact that Sweden’s decision not to join EMU did
not have a major impact on its economy.

This present opinion is intended as a follow-up to
1.1.1.
that report, with specific reference to the progress which has
been made in the implementation of the structural reforms
envisaged by the Cardiff process and the objectives set out in
the Presidency Conclusions of the Lisbon European Council.
This assessment has to be made against the background of the
EU’s Broad Economic Policy Guidelines, the general economic
situation in the country and the macro-economic develop-
ments that have taken place during the period under review.

1.2.
The Presidency Conclusions of the Lisbon European
Council recognised that the European Union is confronted
with a quantum shift resulting from globalisation and the
challenges of a new knowledge-driven economy. In response
to these challenges it set a new strategic goal
for the
next decade: to become the most competitive and dynamic

knowledge-based economy in the world, capable of sustainable
economic growth with more and better jobs and greater social
cohesion.

1.2.1.
at:

Achieving this goal requires an overall strategy aimed

— preparing the transition to a knowledge-based economy
and society by better policies for the information society
and R & D, as well as stepping-up the process of structural
reform for competitiveness and innovation and by com-
pleting the internal market;

— modernising the European social model,
people and combating social exclusion;

investing in

— sustaining the healthy economic outlook and favourable
growth prospects by applying an appropriate macro-
economic mix.

Implementing this strategy would be achieved by
1.2.2.
improving the existing processes,
introducing a new open
method of coordination at all levels, coupled with a stronger
guiding and coordinating role for the European Council
to ensure more coherent strategic direction and effective
monitoring of progress.

1.2.3.
Since that date, some of the momentum generated
by the Lisbon Council has been lost; other priorities have
supervened and economic growth in the EU has fallen
significantly below the average rate of 3 % which the Lisbon

C 48/148

EN

Official Journal of the European Communities

21.2.2002

Presidency Conclusions envisaged as a ‘realistic prospect for
the coming years’. There is a danger that the objective could
be lost sight of unless firm measures are taken to ensure that
it remains the focus of attention.

government bonds was severely reduced. There were even
rumours that the country might have to resort to assistance
from the IMF. In response, the Swedish government introduced
a budget consolidation programme in 1995.

It is in this context that the Committee has taken the
1.3.
initiative to monitor and report on the progress made in
individual Member States towards achieving this new strategic
goal. This opinion on the state of affairs in Sweden is the first
to be drafted under this new approach

2. Overview of the Swedish economy

In 1970, Sweden had the fourth-highest per capita
2.1.
GDP in the world; a decade later,
it had fallen to eighth
position and by 1998 it had dropped to seventeenth (Table 1).
This progressive decline in relative terms has been mirrored by
the Swedish Krona, which has lost 50 % of its value against a
basket of the currencies of 11 leading competitor countries
over the same period (Table 2).

2.2.
In the 1960s and the early part of the 1970s, economic
growth in Sweden was the highest in the world except for the
USA and Japan. In the 1980s, economic growth began to
decline but employment levels remained high, largely because
the public sector expanded to absorb the surplus labour
(Table 3). At the beginning of the 1990s, the economic
downturn dipped into recession and the public-sector expan-
sion was no longer able to keep pace with the contraction of
private-sector employment, resulting in a sharp but relatively
short-lived rise in unemployment (Table 4).

This consolidation programme, amounting to some
2.3.1.
EUR 5 billion in the first year and a total of EUR 12 billion
over the period 1995-1998, was predicated on significant cuts
in public expenditure combined with substantial increases in
taxation. The programme was deliberately front-loaded, with
the bulk of measures being concentrated at the beginning of
the period in order to demonstrate the determination of the
Swedish government and restore the confidence of the financial
markets in its ability to resolve the problems.

2.3.2.
In order to secure acceptance of the consolidation
programme by the electorate, the burden was balanced almost
equally between expenditure reductions and tax increases. The
distributional effect of this was that the top 20 % of income
earners contributed some 40 % of the consolidation and the
bottom 20 % contributed 10 %.

2.4.
In order to maintain the stability of the economy and
ensure that the effects of the consolidation programme were
not dissipated, major institutional reforms in the budget
process were initiated. The new budgeting model created
a top-down process whose most important feature is an
expenditure ceiling on central government spending. This
takes the form of a three-year rolling ceiling in which the
ceilings for the previous years two and three (now years one
and two) are left untouched and only the ceiling for the new
year three remains to be decided.

Over the period 1970-2000, public-sector employ-
2.2.1.
ment increased by 800 000 and private-sector employment
decreased by 200,000. At the end of last year, 32 % of all
employed persons were engaged in the public sector, compared
to an EU average of 20 %. The total workforce is of the order
of 4 000 000.

2.4.1. While the possibility exists of making subsequent
substantive changes to the ceilings in the light of economic
developments, this has not been utilised since the system was
introduced. One reason for this is that the budgeting process
incorporates a safety margin designed to permit minor adjust-
ments for unpredicted events without exceeding the predeter-
mined ceiling.

2.2.2.
This ratio is reflected in the level of public-sector
expenditure in Sweden which, in 1999, accounted for 56.4 %
of national GDP compared with an average of 46.7 % in the
EU and 38.1 % in the OECD countries (Table 5), although a
decline in this figure took place at the end of the 1990s.

The recession of

2.3.
the early 1990s precipitated an
economic crisis; central government debt doubled in only a
few years, interest rates rocketed, open unemployment rose to
a peak of 8 %, the fixed exchange rate of the Swedish Krona to
the ECU had to be abandoned and the negotiability of Swedish

The precise level of the expenditure ceiling in each
2.4.2.
year is determined by the long-term objectives of the govern-
ment’s budgetary policy.
In order to reduce the level of
accumulated government debt and consolidate government
finances in the face of adverse demographic trends, this is
currently aimed at producing a surplus of 2 % per annum on
average over the business cycle. To date, this target has been
achieved or exceeded in every year. This fact could give the
government room to manoeuvre by allowing the surplus to
undershoot the 2 % target in the current year, if economic
conditions require, provided that the moving average rate is
maintained above the 2 % level.

21.2.2002

EN

Official Journal of the European Communities

C 48/149

2.5.
This programme has been outstandingly successful.
Table 6 demonstrates the extent of the recovery in terms of real
GDP growth, private consumption, government borrowing,
employment, labour factor productivity and inflation. The net
improvement in public finances resulting from this programme
has exceeded 12 % of GDP in the period 1995-2000. Following
a budget deficit of 11 % of GDP in 1993, Sweden achieved a
surplus of 2 % of GDP in 1998, a turn-round which is
remarkable by any standards.

2.6.1.
Indeed, this last factor points to the one possible
cloud on the horizon. Considerable uncertainty surrounds
estimates of the current level of potential GDP and the output
gap. Swedish analysts generally concur that there remains a
certain amount of excess capacity and that the output gap will
close only towards the end of this year or even into next year;
other observers postulate that the output gap may already
have closed last year.

2.5.1.
The Swedish economy expanded at a rate of 4 % per
annum in 1999 and 2000, well above its estimated potential
growth rate of 2.5 %. This rapid increase in total demand has
been broadly based, with significant contributions from both
domestic demand and exports. In addition, business invest-
ment has risen considerably, underpinned by the strength of
other demand components and low interest rates. Against this
background of robust and balanced growth, the fiscal balance
has continued to improve while the current account has
deteriorated only modestly. At some 2 %, economy-wide
labour productivity gains over the most recent three years
have been half a percentage point above the average of the last
two decades. Likewise, the employment growth has been
significantly above trend, leading to a sharp decline in open
unemployment to around 4 % at the end of last year (5.9 %
according to the harmonised Eurostat method of calculation),
in line with the government’s declared target.

2.5.2.
The overall picture of a benign macro-economic
situation is completed by the fact that inflation has remained
remarkably subdued, with consumer prices having increased
by a mere 0.75 % in 1999 and just 1.25 % in 2000. This is
reflected in the level of business confidence; in a survey carried
out by Eurochambres at the end of last year, prospects for
2001 were considered positive by 73 % of responding
companies and almost no respondents expected 2001 to be
less favourable than 2000.

2.5.3.
The post-recession growth has been due in part to
the fact that the recession eliminated the poorest-performing
firms and stimulated the survivors to increase their efficiency.

2.6.2.
This raises the question of the sustainability of low
inflation at the current set of interest rates. While inflation
expectations have been solidly anchored to the inflation target
of 2 %, this must be weighed against indicators of increasing
labour shortages and the fact that nominal wage increases in
Sweden have remained slightly higher than in its trading
partners, even if they have been low by historical standards.
Suppression of rent increases, due to what amount to de facto
rent controls, has contributed to low inflation; in addition, real
wage gains have exceeded productivity increases and profit
margins have been squeezed in recent years, which contrasts
with developments in most other countries. Against this
background, inflationary pressures could gradually build up in
the medium term if the economy continues to expand at rates
above potential. The unexpected surge in both headline and
underlying inflation in April and May of this year emphasises
this danger. In addition, the persistent weakness of the Krona
poses an increasing risk of medium-term inflation. There can
be little doubt that, in recent months, the balance of inflation
risk has shifted to the upside.

2.7.
In this context, the current global economic down-
turn could assist in containing demand within the level of
long-term equilibrium. Looking ahead,
if weaker global
demand were to ease medium-term inflation concerns, this
would permit a more relaxed monetary stance than would
otherwise be appropriate. The adverse impact of the global
slowdown could be larger in Sweden than in other Member
States because of the relatively high dependence of the Swedish
economy on the technology sector, which has been the hardest
hit world-wide.

2.6.
All in all, the Swedish economy is probably stronger
and better balanced than at any time since the heady days
of the early 1970s. With savings/investment balances and
international competitiveness both in reasonably good shape,
there are no imminent risks to activity and a repetition of
earlier sharp recessions is inherently unlikely. Growth has been
strong and based on a solid foundation, although the labour
market is becoming tighter.

2.8.
The most worrying scenario is that of rising inflation
despite continuing sluggish economic growth. This could force
the monetary authorities to raise interest rates in order to keep
inflation under control, thereby prolonging the economic
retrenchment and possibly resulting in recession, the macro-
economic phenomenon known as stagflation. However, the
deft economic management displayed by the Swedish govern-
ment in recent years and the Riksbank’s consistent monetary
framework, widely regarded as an example of best practice in
monetary policy management, should be sufficient to ensure
that this danger is averted.

C 48/150

EN

Official Journal of the European Communities

21.2.2002

3. Social policy

3.1.
Sweden has one of the most comprehensive and
generous welfare systems in the world. It is a system based on
the principles of solidarity and social cohesion, where social
benefits are regarded as a fundamental right of citizenship and
not as a form of charitable dispensation; they are treated as
part of the essential fabric of society and not as a burden on
the State. There is a wide measure of consensus in Sweden on
this issue; even employer representatives largely accept that
high levels of taxation are an ineluctable concomitant of the
social model to which they subscribe. Taxes in Sweden are
amongst the highest in the EU (Table 7).

3.2.
The economic crisis of 1994 administered a severe
shock to this system. Although the government took care to
ensure that the necessary economies were achieved approxi-
mately equally from reductions in expenditure and increases
in taxation, the resulting cuts in benefits hit many people hard
and were hard for many people to accept. In any welfare
system there is a natural tendency for the contributors to feel
that they are contributing too much and for the recipients to
they are receiving too little. These feelings are
feel
enhanced when increases in the contributions occur simul-
taneously with reductions in the benefits; both sides are
inclined to protest that they are not getting value for money.

that

3.3.
It is a measure of the extent of social cohesion in
Sweden that the principles of solidarity were able to survive
this experience. There is still a broad consensus that the welfare
state lies at the heart of a stable society but there is now an
equally wide acceptance of the fact that sound public finances
are an essential prerequisite for the existence of such a system.
It is now recognised that deficit financing leads to a loss of
sovereignty because government policy becomes increasingly
dictated by the demands of the lenders and the servicing of the
debt absorbs such a large proportion of government revenue
that the amount available for spending on social welfare
measures is significantly reduced.

3.3.1.
Therefore, if a government is to preserve its indepen-
dence of action it must balance its expenditure with its income
over the long term. Governments need to retain the confidence
of their electorates and of the financial markets; in order to do
both, they must, inter alia, observe the principle of trans-
parency. In the final analysis, solvency is the key to indepen-
dence.

3.3.2.
The improved state of the Swedish economy has led
to pressures from some quarters for a relaxation or even the
abandonment of expenditure ceilings; it is argued that such
measures are only appropriate to a crisis situation and cannot
be justified as a permanent feature of macro-economic policy.
The government has rejected these arguments; it points out
that each year’s ceilings are determined by an estimate of
the long-term sustainable level of expenditure and not by

predictions of the revenues in any single year. This enables it
to formulate a welfare policy that is capable of being sustained
in the long term and does not leave the welfare state dependent
on the evolution of the business cycle. The government is
determined to avoid a return to the situation where down-
turns in the business cycle force it
to choose between
retrenchments in welfare-state provision or deficit financing
which leaves it at the mercy of external influences.

In this,

it has effectively elected to follow the
3.3.3.
fundamental macro-economic
strategy which has been
employed in the United States since 1990. Prior to that, the
strategy was that the US federal government budget would be
brought into balance by setting statutory targets for the deficit;
although this had the effect of restricting the annual deficits, it
never succeeded in balancing the budget for the simple reason
that government spending was allowed to rise in expansionary
phases of the business cycle and could not then be curtailed
sufficiently in the downswing.

3.3.3.1.
After 1990, the focus was put on strict control of
expenditure without setting specific deficit targets. In a cyclical
down-turn, the budget deficit is allowed to increase to the
extent that the increase results from the effects of built-in
stabilisers; during an economic boom, on the other hand, the
deficit must narrow, as the favourable situation on the revenue
side may not be used to finance additional spending but may
only be used for consolidation. Consequently, this strategy
implies a deficit that ‘breathes’ in rhythm with the business
cycle and one that, moreover, owing to its anti-cyclical
orientation, has the effect of stabilising the business cycle.

This contra-cyclical strategy is similar to that upon
3.3.3.2.
which the Swedish government has now embarked. This policy
has been singularly successful in the United States; as Table 6
shows, there is no reason why it should not be equally
successful in Sweden. Such a policy is, of course, conditional
on other policy areas, especially monetary policy, providing
consistent support to economic expansion. Sweden, which is
not currently a member of EMU, retains independent control
over its monetary policy within the constraints of the Stability
and Growth Pact.

3.3.3.3.
In the short to medium-term, the Swedish govern-
ment will probably have to take a rather more restrictive
attitude to expenditure limits than the US government has
adopted because of the need to combat the negative demo-
graphic trends. Hence the decision to aim for an average
annual surplus of 2% rather than a balanced budget.

21.2.2002

EN

Official Journal of the European Communities

C 48/151

4. Employment

4.1.
Sweden has one of the lowest open unemployment
rates in the EU; in 2000, the actual rate of unemployment,
at 4 %, was below the non-accelerating inflation rate of
unemployment (NAIRU), as shown in Table 8. However, as
with most countries, there are marked regional discrepancies;
unemployment in the north of Sweden is three times higher
than in Stockholm and there are pockets of relatively high
urban unemployment.

Sweden’s employment and participation rates are
4.1.1.
amongst the highest in the world. In 2000, the employment
rate was 75 % and the participation rate was 78 % of the
working-age population. Although this represents a decline
from the position in 1990, when both rates stood at 85 %,
Sweden’s current employment rate is considerably higher than
the EU average and higher than the USA, Japan and most of
the Member States. Nevertheless, the government has set an
objective of raising the employment rate for persons in
unsubsidised jobs to 80 % by 2004; this implies the creation
of some 110 000 new jobs. It will, in fact, be necessary to
increase the participation rate if output growth is to be
maintained, since an increasing number of companies are
reporting labour shortages across a wide spectrum of industrial
sectors. In a Eurochambres survey conducted at the end of last
year, 35 % of responding companies expected to have to
increase their workforce in 2001. Sweden is one of the four
Member States which have announced that they will grant free
and open access to their labour markets to the nationals of
new Member States from the date of their accession.

One unexplained factor of the Swedish labour
4.1.1.1.
market is the high level of absenteeism through sickness,
which now averages some 10 % of the nominal working
capacity. This figure has tended to rise in line with falling
unemployment and has led to a rapid increase in sickness
benefit payments, thereby putting additional constraints on
other areas of government spending in the context of the
expenditure ceilings. The figures are higher in the public sector
than the private sector and lowest of all amongst workers in
SMEs.

4.3.
As part of this strategy, an activity guarantee came into
force on 1 August 2000. It applies to persons registered at
the public employment service (PES) who receive either
unemployment or other social benefits and who have not had
ordinary (i.e. unsubsidised) work for 27 months. This group
comprised 50 000 persons (1.25 % of the workforce) at
the end of
last year, despite the relatively low level of
unemployment.

4.4.
There is a requirement that job-seekers participate in
an ALMP or some other education in order to build their
human capital. Each activation within the framework of the
activity guarantee must be planned for a maximum period of
six months but there is no fixed time limit to the total duration
of the activity guarantee period; in principle, it may be open-
ended.

4.4.1.
by employers and others include:

Criticisms which are sometimes levelled at the ALMP

— that the training provided is not always relevant to the

current requirements of employers;

— that training without job creation merely creates better-

qualified unemployed persons;

— that ALMP have tried to do too much and set themselves

too many objectives;

— that there are too many strata of labour-market activity

and too many layers of management;

— that the process is too slow and focused on the wrong

areas;

— that when people are the subject of ALMP programmes

they cease to look for active employment;

— that the system discourages labour mobility by sub-

sidising commuting costs;

— that employers prefer people with ‘real’ job experience.

The Swedish government favours the use of active
4.2.
labour-market policies (ALMP) to deal with unemployment. Its
strategy is to keep people in the labour market on the
grounds that if early retirement is used as a tool to reduce
unemployment in times of economic slow-down it is difficult
to persuade those people to re-enter the labour market in
times of labour shortages. It is also considered dangerous, as
well as socially divisive, to allow large groups of people to
remain outside the labour market for long periods of time.
ALMP policies are aimed primarily at improving the employa-
bility of people; they do not have the objective of creating
jobs.

4.4.2.
Financial support is available to persons who are
unemployed or in danger of becoming unemployed to enable
them to start up in business on their own account, provided
that they are judged to be capable of running a business.

4.4.3.
Special introductory and follow-up support is avail-
able for job-seekers with occupational disabilities. This support
is given both to the job-seeker and the employing organisation
by a consultant with special knowledge of
introductory
methodology.

C 48/152

EN

Official Journal of the European Communities

21.2.2002

4.4.4.
Including participants in the Adult Education Initiat-
ive, 220,000 persons (full-time equivalents) took part in ALMP
programmes in 2000, corresponding to some 5 % of the
workforce. Total ALMP expenditure amounted to over 2 % of
GDP (Table 9), which, despite the relatively low unemployment
rate, is more than in any other OECD country.

5. Pensions and the demographic challenge

In addition to ALMP, the government pays subsidies to
4.5.
employers who take on long-term unemployed workers.
Both private and public-sector employers can receive General
Employment Subsidies of 50% of wages up to a limit of SEK
350 per diem in respect of workers who have been unem-
ployed and actively seeking work for more than twelve
months; Reinforced Employment Subsidies are available on a
sliding scale of higher rates for workers who have been
unemployed for twenty-four months; for workers aged over
57 who have been unemployed for twenty-four months,
Special Employment Subsidies are available, equating to 75 %
of wages up to SEK 525 per diem, with a limit of two years.
Active Labour Market Policies are twice as expensive as
subsidised employment but there are concerns that employers
may exploit the subsidy system to obtain subsidised labour.

As Table 9 shows,

4.6.
the level of maximum gross
unemployment benefits is amongst the highest in Europe; the
formal stringency of eligibility criteria for unemployment
benefits is relatively high but these are not always strictly
applied. The theoretical duration of the unemployment benefit
period is 300 days but this can effectively be extended by a
further 600 days if the recipient enters a training scheme.
Supplementary benefits permit an individual to work part-
time and receive unemployment benefits for the remaining
hours of a standard work-week;
these
arrangements means that the marginal benefits of working
longer hours are minimal.

the generosity of

5.1.
In common with most other developed countries,
Sweden faces severe demographic problems in the next half-
century. The current situation is set to get dramatically worse
in the near future as the post-war ‘baby-boom’ generation
comes to retirement age. Demographic concerns in Sweden
have been heightened by the low birth-rate which, at 1.4,
represents a sharp fall from the level of over 1.7 in 1995. This
drop is considerably more pronounced than that experienced
by any other Member State and gives Sweden one of the
fastest-ageing populations in the EU. By 2030, the ratios of
people under working age, those of working age and those
above normal retirement age will be 21.6: 54.4: 24 . Even with
a participation rate as high as 80 %, this would mean that
every active person would have to support 1.3 inactive
persons. On present projections,
the situation will have
worsened still further by 2050. The current level of unfunded
pension commitments as a proportion of GDP is 26 %.

5.1.1.
The demographic situation in Sweden is exacerbated
by a national tendency to retire well in advance of the statutory
retirement age and by the high average standard of health
enjoyed by the Swedish population, which increases life
expectancy there well beyond the levels found in some other
Member States. The trend towards longevity in the population
is increasing in nearly all developed countries. Failure to adjust
regularly for these increases in life expectancy has contributed
to the cost crises faced by many national social security
systems today.

4.6.1.
The unemployment benefit replacement rate is fixed
at 80 % of preceding wage income, up to a certain income
level, but there is a strong political commitment to increase
the limit means that a large
this, as the application of
proportion of the workforce receives less than 80 %.

4.7.
A World Competitiveness Report, prepared by the
International Institute for Management Development (IMD) in
indicated that labour market regulations in Sweden
2000,
were still relatively restrictive compared to other EU Member
States and other leading world economies (Table 10).

5.2.
The old pension system was conceived in the 1950s
in an economic environment of consistent 4 % real growth
and life expectancies much below their current levels. As the
rate of per-capita wage growth slowed to an average of about
2 % and labour-force growth stagnated, experts became
concerned that the contribution base would not increase
sufficiently rapidly in future to support the anticipated increase
in old-age pensioners. Actuarial calculations showed that it
would be necessary to raise the contribution rate considerably
in order to meet future commitments, although the extent of
the problem depended, as usual, on the actuarial assumptions
made about the future. The fact that it was not possible to say
today what the likely outcome would be tomorrow was itself
seen to be a problem. There is general agreement that it is
important to be clear about the content of the inter-gener-
ational commitment of the pay-as-you-go (PAYG) system.

21.2.2002

EN

Official Journal of the European Communities

C 48/153

The concerns felt by the experts were shared by the
5.2.1.
general populace.
there emerged an
In the early 1980s,
increasingly widespread belief among the public in general
that the system could not meet its "promises" for the future.
Younger workers,
in particular, were becoming more and
more sceptical about their prospects as pensioners; in short,
trust in the system was eroding. The deep economic recession
of the early 1990s, and the accompanying fall in the contri-
bution base by around 10%, finally brought home the acute
need for reform to a broad spectrum of political interests.

5.4.
The total contribution rate on earnings for the new
system will be 18.5 %, financed equally by employer and
employee contributions, of which 2.5 % will be allocated to a
premium pension element. This can be invested in private
market funds chosen by the employee. This has had the effect
of introducing a funded element into what was previously an
exclusively PAYG system. For those who do not reach a
minimum level, there is a guaranteed supplementary pension
funded by the state.

5.3.
Faced with this situation, the government set up a
Pensions Working Group in 1992 with a mandate to reform
the then existing pension system in order to make it more
sustainable. The first legislation for the reform came in June
1994. Social security reforms are inherently political and, in
the end, inevitably represent compromises between various
interests. One of the strengths of the Swedish reform process
is that the reform emerged out of a political consensus among
five of the seven parliamentary parties in 1994, representing
over 80 % of the voters. This broad political support has
continued.

5.3.1.
The over-riding principle of the reform is that which
has guided Swedish social policy since the 1950s. This is to
provide an adequate earnings-related retirement benefit with
universal coverage for all persons working and residing in
Sweden, backed up by a safety net that guarantees a reasonable
standard of living for the elderly. The Swedish reform has four
main goals, viz:

— fair treatment of persons with different contribution
histories; two persons who have paid the same amount
in contributions and who retire at the same time and the
same age should be entitled to the same benefit;

— transparent redistribution; this goal

is achieved by a
redistribution policy financed by general budget resources
earmarked specifically for this purpose;

— financial stability in the face of changes in demography

and the economy;

— the creation of

financial saving managed by private

financial institutions.

The second pillar in the pensions system comprises
5.5.
an occupational pension funded by the employer and the
employee. This also now includes a premium pension element.
Moreover, many people supplement their pensions with a
private pension.

5.6.
In view of the demographic situation outlined above,
it seems inevitable that there will have to be further moves in
the direction of funded rather than PAYG schemes over the
next thirty years. This does not necessarily involve privatisation
of the system; it is perfectly possible, and indeed desirable, for
governments to operate funded schemes.

6. Research and Development

6.1.
Expenditure by companies and governments on R & D
is the single most important source for the development of
new ideas. Whilst expenditure on R & D is considerably higher
in the USA than in Europe, Sweden has the highest level of
research and development expenditure per capita in the EU.
As Table 11 shows, Swedish expenditure exceeds Japan’s, is
approaching American levels and is nearly double the average
for the EU-14 (excluding Luxembourg).

6.2.
Research expenditure in Sweden accounts for some
3.8 % of GDP but 85 % of this is carried out by companies and
therefore tends more towards applied research than basic
research. A cause of concern in this area is the number of
leading Swedish companies which have been taken over by
foreign-owned multi-national corporations, a process which is
likely to continue. One consequence of this is that research
might be concentrated by these companies in global research
centres, which could have the effect of down-grading their
Swedish research operations.

5.3.2.
Thus, during the period during which the large birth
cohorts of the 1940s will drain the reserves of the present
PAYG pension fund,
the public financial saving will be
maintained through the creation and growth of new second-
pillar saving from younger workers. A result of the reform is
that older workers will be able to combine earnings from work
and retirement income in any way, with the same tax rules
applying for both earnings and benefits.

Universities have traditionally been seen as the home
6.3.
of pure research but they are becoming increasingly involved
in the field of commercial exploitation. The principal source
of revenue for university research departments is now the
spinning-off of companies rather than the patenting of inven-
tions. In this context, the fact that Swedish law gives all patent
rights to the inventor, no matter how the research has been

C 48/154

EN

Official Journal of the European Communities

21.2.2002

funded, acts as a constraint on basic research activity by
reducing the income available to the university to fund further
research projects.

7. The New Economy

The last decade has seen the emergence of a ‘new
7.1.
economy’ based on the exploitation of Information Tech-
nology (IT). One of the main reasons for this is that the
Internet has created and imposed a global standard. This is
possibly the most significant standard that has ever been
this standard, computers
created. Before the creation of
used different technical platforms, which were incompatible;
customers were therefore locked in to a given system. The
effect of the standard has been to empower IT users as never
before and, in the process, bring about a widespread and
fundamental restructuring of all types of commercial, indus-
trial, governmental and private activity. The process of glo-
balisation stems from the capability for the free exchange of
information.

7.2.
Traditionally, technology has been regarded as the
application of scientific discoveries; today’s IT has changed this
— the discoveries are now being made at the technological
level. IT differs from previous leading-edge technologies in
that it rationalises and accelerates information flows rather
than moving objects. The New Economy involves new con-
ditions for the entire economy; IT is not merely a question of
successful IT companies but also the effects of the use of IT in
all
including the
public sector. The new technology involves a fundamental
restructuring of the flows of corporate information. The old
boundaries are disappearing:

types of enterprises and organisations,

— between nations;

— between industries;

— between goods and services;

— between and within companies;

— between employers and employees;

— between blue and white collar workers;

— between work and leisure;

— between work and home.

7.3.
Individuals experience the impact of the New Economy
in many ways. As consumers, they can benefit from better
information, from a greater choice of goods and services and
from lower prices through access to a global marketplace; as
employees, they can benefit from more independent work,
both individually and in teams, from greater responsibility
and authority, from the scope for higher earnings and the
opportunity to learn new skills throughout their working lives;
as citizens, they can be better informed, more influential and
able to maintain closer contacts with government.

7.4.
Sweden was one of the pioneers of the use of IT.
Swedish companies and government authorities were quick to
in the new technology. This
invest, and invested heavily,
process was facilitated by the following factors:

— a high level of management skills in Swedish companies;

— a generally high level of education in the population;

— an absence of trade union resistance to the introduction

of new technologies.

7.4.1.
On the domestic front, the government made a
major contribution to the spread of computer literacy by
introducing a tax-break scheme for the purchase of personal
computers for home use. As a result, Sweden’s total
IT
expenditure as a percentage of GDP is not only higher than
that of any other country in Europe but higher than the USA
and considerably higher than Japan (Table 12). In terms of the
Information Society Infrastructure Index compiled by IDC
(part of the International Data Group) in 2000, Sweden leads
the world (Table 13).

7.5.
This New Economy is characterised by high total factor
productivity growth and low inflation. Table 14 shows that
the Nordic countries (Sweden, Denmark, Finland and Norway)
have shown a sharp drop in inflation combined with a strong
increase in total factor productivity over the reference period;
the USA has exhibited the same trends but not to the same
extent. Conversely, the EU (excluding the Nordic countries, the
UK, the Netherlands and Luxembourg) has shown reduced
inflation but a dramatic decline in total factor productivity;
Japan has shown a similar pattern but to a less marked degree.
This is reflected in the positions of the leading and lagging
countries in the New Economy according to the European
Commission’s benchmarking study in 1998 (Table 15).

21.2.2002

EN

Official Journal of the European Communities

C 48/155

7.6.
One of the Lisbon objectives was for Member States to
ensure generalised electronic access to main basic public
services by 2003. This is the only indicator in which Sweden
does not feature amongst the leading IT countries; in this
respect, Sweden falls marginally below the EU average
(Table 16). This is a benchmark of the progress which national
governments have made in exploiting the potential of the
Internet. It measures the capacity of governments and com-
panies to use the Internet to complete mandatory administrat-
ive processes (B2A); more effort is needed in this area in
Sweden.

7.7.
In order to maintain Sweden’s lead in the New
Economy and exploit the benefits it offers, certain measures
will have to be taken. Swedish companies, employees and
households have been quick to adopt the new technologies
but there is a need to increase the acceptance of change. Trade
unions will need to maintain the flexibility of their approach to
new technologies, new working methods, new organisational
techniques and new forms of remuneration. Exploiting the
potential of the New Economy requires capital; improvements
need to be made in the availability of equity-based risk capital,
particularly venture capital and particularly for SMEs. Another
beneficial measure would be the creation of shared commercial
facilities to enable SMEs to develop their business-to-business
(B2B) and business-to-consumer (B2C) capabilities.

8. Privatisation and deregulation

amounts

8.1.
Deregulation and exposure to competition of publicly-
financed activities began on a large scale in Sweden in
the 1990s. At the same time, competition laws have been
strengthened and aligned more closely with EU norms. How-
ever, a substantial part of
the Swedish economy is still
protected from competition. Public-sector activity in Sweden
to SEK 650 billion, of which around
still
SEK 150 billion is open to competition. Some sectors both
under public and private ownership, continue to be under-
exposed to competition, notably in retail distribution, while
others, such as housing, remain heavily regulated. In some
areas, notably telecommunications, more needs to be done to
regulate the position of the incumbent supplier and remove
barriers to entry.

in the EU, although a very sharp general price rise in 2001 has
prompted the government to review the competitive situation
in this sector. The average family can save a substantial amount
each quarter by choosing the appropriate service provider. The
deregulation of taxis has led to a reduction in prices and a
25 % increase in the number of taxis available. Deregulation
of the service markets has led to strong growth.

8.2.1.
On the other hand, the privatisation of commuter
trains in the Stockholm area initially led to a year of chaos
because the process had been badly prepared and there have
been some instances of a deteriorating standard of care for the
elderly where these services have been privatised.

8.3.
In general, consumers have been the principal benefici-
aries of the process but employees have also benefited from a
wider choice of employers and the positive effects which
privatisation has had in most cases on job creation. A recent
public survey showed that 46 % of those surveyed thought
that, overall, the results had been positive, while 27 % thought
they had been negative; 65 % were in favour of the principle
of being able to choose between public and private service
providers and only 15 % were opposed to it.

8.4.
Some concerns have been expressed that, following
deregulation, state monopolies in other countries have entered
the Swedish market, creating distortions of competition by
taking advantage of their monopoly situation in their home
market. It is felt that this is tantamount to the re-nationalisation
of parts of the Swedish economy by other Member States.

8.5.
The government has taken the initiative of reducing
the burden of bureaucracy on small companies by exempting
the smallest firms from some regulations. This should have the
effect of encouraging company formation and improving the
success rate.

9. Taxation

8.2.
As in other countries, the results have been mixed.
Trade in electricity and the production of electricity has been
opened to competition and there are now approximately
160 firms engaged in these activities. As a result, Sweden has
the lowest prices for electricity supplies to domestic consumers

As has already been indicated, Sweden has very high
9.1.
levels of taxation. The strategy for the future must be to build
on the achievements of recent years by enhancing the efficiency
of the tax-benefit system and its effectiveness in delivering
social support. In the medium to long-term there remains
substantial scope for the continuing rationalisation of the tax
benefit regime without compromising its social objectives.

C 48/156

EN

Official Journal of the European Communities

21.2.2002

9.2.
The taxation system should be designed to maximise
the incentivisation of the workforce. At the same time, it is
necessary to mitigate the incentive to transform labour into
capital income that is a central difficulty of the dual-income
taxation regime. Structural reforms to the wealth tax, removing
exemptions favouring the wealthiest and raising the threshold
to exclude moderate property wealth, would also be beneficial.

way in which they operate. The OECD has stated that the
functioning of the labour market would be improved by
further easing of employment protection regulations, by
enhancing regional mobility and by continuing the trend of
reduced wage compression. The desirability and feasibility of
these measures are currently the subject of heated debate in
Sweden.

10. Conclusions

10.1.
The Swedish economy has made a successful recovery
from the recession of the mid-1990s and is now in better
shape than at any time over the past three decades.

10.2.
Central to this recovery has been the imposition of
three-year rolling ceilings on government expenditure. This
has introduced a counter-cyclical measure into Swedish macro-
economic management, which should have the effect of
stabilising the business cycle and ensuring the sustainability of
the recovery; it should also assist the government to achieve a
sustainable level of welfare provision, independent of fluctu-
ations in the business cycle. One negative factor is the
possibility of resurgent inflation if output continues to rise
above potential. Increasing labour shortages indicate that the
output gap will close in the near future if it has not already
done so.

Sweden subscribes to the Nordic social model, which
10.3.
is characterised by a highly-developed system of social protec-
tion and correspondingly high taxes. There is a general
consensus that the social model must be retained but also that
it must be sustainable and adaptable to the paradigms of the
New Economy. As Leif Pagrotsky, the Swedish Minister for
Trade, has said, ‘The challenge is not to dismantle the European
social model but to modernise it so as to provide Europe’s
citizens with security in support of change, rather than security
against change’.

Sweden has both lower unemployment rates and
10.4.
higher participation rates than most other countries. The
Swedish government’s policy to combat the surge of unem-
ployment in the mid 1990s combined active labour-market
policies with subsidised employment. The former are more
expensive but are deemed to be more appropriate in the long
term; however, some criticisms have been levelled at the

In common with most other countries, Sweden faces
10.5.
severe demographic problems. The government has recently
introduced reforms to the pension system aimed at combating
these. While the reforms have improved the sustainability of
the pension provisions, more will have to be done if the
current expectations of the working population are to be met
when they come to retire.

10.6.
Sweden spends a higher proportion of GDP on R &
D than most other countries but this work is carried out
mainly in companies and therefore relates to applied research
and development rather than pure research. The internationa-
lisation of Sweden’s major companies could lead to these
activities being relocated to other countries.

10.7.
Sweden is one of the leading players in the New
Economy but the pace at which this is advancing and the
magnitude of the changes being generated means that it cannot
afford to relax its efforts if it is to maintain this position. It is
well positioned to take advantage of the opportunities present-
ed but much will depend on the extent to which it is successful
in bringing its ample expertise to market.

10.8.
There has been a great amount of activity in the area
of deregulation and privatisation of state monopolies but
substantial portions of the Swedish economy are still protected
from competition. Deregulation has not
always been
unequivocally successful and there are mixed views as to the
extent of privatisation which is desirable and the form which
it should take but, in general, there is majority support for the
principle of enhanced competition. Further down-sizing of the
state ownership of market activity appears inevitable. There is
need for a wider recognition of the importance of re-training
managers who have worked exclusively in a public-sector
environment to enable them to adapt to the disciplines of a
competitive market place.

The government has moved to assist small companies
10.9.
by exempting them from some regulations but the develop-
ment of better systems for financing SMEs remains a priority.

21.2.2002

EN

Official Journal of the European Communities

C 48/157

10.10.
In many ways, the economic, social and technical
evolution of Sweden over the last decade has been a success
story. The challenge for the future must be to build on this
lead, enhancing
success by maintaining the technological

productivity, modernising the labour market and refining the
taxation system in order to create a sustainable and improved
welfare system which will support the spirit of social cohesion
which lies at the heart of Swedish society.

Brussels, 29 November 2001.

The President

of the Economic and Social Committee

Göke FRERICHS