Mundus Brief – August 2021

In post-pandemic fashion, we welcome you back to your workspace, formerly known as the office, but now more likely to be your kitchen table. After a break over summer, we recommence with our monthly Mundus Briefs, a summary of the news, highlighting our analysis of the deeper issues facing Sweden.

To understand Sweden’s current position, we cast our minds back two and a half years, to January 2019. The SARS coronavirus lay in wait for the world – as a malevolent, destructive change agent, with Swedes, like others blissfully unaware of the challenges ahead. But, as cathartic as the experience was, an analysis of Sweden’s major economic and political parameters shows that not that much has changed domestically. 

Gridlock

The Mundus Monthly Policy Review from January 2019 looked at the challenges ahead for Sweden’s economy. GDP growth in 2018 was 2%, the inflation rate was 2% and interest rates were non-existent – the Riksbank repo rate had just been increased from -0.5% to -0.25%. House prices were a big issue, having risen significantly, but with prices capped temporarily by the new amortisation requirement introduced in 2018. Our outlook for 2019 described an anxious future, as Sweden’s economy rebalanced following sustained housing construction-driven growth, with momentum dictated by “the Riksbank’s future interest rate changes, Sweden’s growth figures, the fallout of the FSA’s sharpened amortisation requirement, Trump’s trade wars with the EU and beyond, as well as Brexit.”

Politically, a new experiment was being tested, as the Social Democrats put together a centre-green government under the January Agreement (JA), with the Centre and Liberal parties support. Could that be the game changer that created a political centre with sufficient force to take Sweden forward? Our review of the January Agreement summarised the political priorities.

A major (and green) shift in economic policy

The initial feature of this part of the reforms was to be the removal of the austerity tax (sw: värnskatten) –  a 5% penalty tax on “high income earners”. That happened, but the political thrust of taxation was meant to be a “powerful green tax reform” with increased environmental taxes exchanged for reduced tax on work and entrepreneurship. Although there has been some progress on this front, the reality is that measured against its own target of becoming the first fossil-free welfare state, Swedish policy lacks the fiscal incentives to drive change. 

Big labour market changes

Amongst the changes contemplated to make Sweden’s labour force more competitive was a reform to the Swedish Employment Service (Arbetsförmedlingen), which was criticised for its lack of competence in matching labour to jobs. This is underway, but after some hefty budget cuts it is unclear that Employment Service is any more effective. Although a big shake up for that organisation, the major policy initiative for the labour market was a reform to LAS – the Employment Protection Act. The JA parties, labour unions and Confederation of Swedish Enterprise (Svenskt Näringsliv) worked hard to find an acceptable compromise, which we covered in Mundus News on 8 June. As covered in our analysis in the July edition of the Monthly Policy Review, this political agreement was planned to be processed into law and enter into force in June 2022. Given that that JA is now defunct, whether that will happen is now uncertain. 

Immigration and integration

Almost everybody in Sweden agrees that these are issues. The problem is that there is little agreement on the solutions – especially when it comes to integration. Actually, there is a silent consensus around immigration. This was something of a free-for-all five years ago, but in practice has become tightly constrained even under the liberal JA parties and total numbers have more than halved. But integration is altogether different and prima facie, little appears to have been achieved.

Liberalising the rental market

As already mentioned above, Sweden’s dysfunctional housing market is a major economic problem. Even if house price affordability is an issue in many countries, the August Monthly Policy Review assesses why Sweden’s prices are amongst the worst in the world (for buyers). This is of course an issue we will continue to follow in Mundus Business Insights this autumn.

But it is not only house prices that are the problem. The JA said that the rental market for new apartments should be reformed, “so that more people’s needs can be met.” This always looked like a difficult reform to deliver, and despite the JA parties finalising an agreement between themselves, it proved to be impossible to deliver, as the Left Party provoked a vote of No Confidence in the Löfven Government, which brought the Government down in June as covered blow by blow in Mundus News. As political theatre this may have been entertaining, but at a more sinister level it shows just how difficult it has become to govern Sweden. Our August Monthly Policy Review looks at the winners – chiefly the Left Party and the Sweden Democrats – and the losers – chiefly the Greens and the Centre Party. 

Possible to administer, but much harder to govern

The two and a half year long January Agreement was an interesting, but failed experiment. During this period the Government navigated the pandemic with poor, but not disastrous results from a health perspective. Economically, the Sweden that emerged looks much like the successful Sweden of January 2019. GDP is back to where it was pre-pandemic and the GDP growth outlook appears strong. Inflation is not currently an issue, but the unemployment rate is high – especially for foreign-born workers. And house prices, already a problem in 2019, have risen a further 20%. Crime and violence, also a problem in 2019, have worsened and are a topic that is, unfortunately, a recurrent theme in Mundus News

Experience has shown that issues that are primarily within ministerial purview get made relatively effectively. But the big issues facing the country; climate action, reforms to the labour and housing markets and integration require initiatives which the centre-green government was unable to get through the Riksdag under the January Agreement. And it looks even less likely to succeed with these in the year remaining before the September 2022 election, as Löfven walks the tightrope between the Left Party and market-oriented Centre Party.  

Looking across at what the right side of politics might achieve gives a similarly pessimistic outlook. The chief problems are caused by the Sweden Democrats – an untested, but powerful force. The party has had very little experience in government – some locally, but none at all at the national level. Its policies are untested and its compatibility with mainstream thought in Sweden is questionable. A Moderate-Christian Democrat government that relies on support from the Sweden Democrats, or possibly even includes them in the government will face significant internal tensions and fierce ideological resistance from the other side of politics. It is telling that a year out from the election the parties have no plan to agree on a platform as to how they would govern the country if they got the chance. And it is somewhat bizarre that the Moderates and Christian Democrats voted for the No Confidence motion and then manifestly failed to have themselves installed as the new Government.

While it is possible that the next election could provide an outcome that gives one side or other of politics a clearer mandate, voting intentions have been relatively stable over time – particularly in terms of the left-right divide. Until voters change their preferences or unless there is an unexpected realignment in the political centre ground, Sweden faces contested politics and policy stagnation even post-election.

With Sweden’s elections less than 400 days away, we will watch the politics closely throughout our publications. Follow the daily election coverage in Mundus News and our explanation and analysis of the main election issues, deep dive into the political parties, and the post-election analysis in the Monthly Policy Review. This is the fourth election we will cover at Mundus and we plan to do so via some start-of-the-art tech solutions. Stay tuned!

Photo: Shutterstock

Related Posts