Peter Wolodarski: The French nightmare should worry Sweden

It was a satisfied finance minister who presented his economic forecast this week. The next government will come to a set table, Elisabeth Svantesson made it clear: "I have a low national debt and 3 percent growth. There are many of my colleagues in Europe who would envy that."

Yes, or as the Sun King would have said: the state, that is Elisabeth, and her debt is certainly low.

The French situation is different. The recent mass protests are a reminder that most social issues are connected to the economy. The deficits in public finances in France require action, but the decisions risk deepening the political crisis.

During large parts of the 2010s, the economy was characterized by very low interest rates. During the 2020s, pandemics, wars and inflationary shocks have put an end to the zero-interest economy. When interest rates rise, the loans become heavier to bear. The space for other expenses is reduced. Freedom of action is shrinking.

France is not alone in having a high national debt and a large budget deficit – if you compare it to the US, there are several similarities.

But there are also clear differences. In the US, high consumption and massive tech investment have helped keep the dollar-based economy going, even as there are concerns about an AI bubble. And growth plays a decisive role in how heavy a national debt becomes. When GDP increases, the debt's share of the economy can decrease, but only if the debt does not grow even faster.

Weak growth makes France's debt problem harder to solve. When the economy is at a standstill, a larger part of the adjustment must be through tax increases or savings.

The need to regain control over state finances brings to mind Sweden in the early 1990s - with an important nuance: the political situation is much more complicated in France today.

The protests in the streets expose a gap between generations.

So far, politicians have chosen to curb deficits through cuts for the younger generation, while spending on pensions has continued to rise.

In 2023, President Emmanuel Macron pushed through the gradual raising of the minimum retirement age from 62 to 64. It provoked gigantic strikes, riots and political crisis, and has therefore been partially paused. The French left-wing opposition and Marine Le Pen's right-wing nationalists, both of whom have headwinds ahead of next year's presidential election, are now pledging to return to 62 years.

The pension battle shows why a budget cleanup is so difficult: the politicians have to distribute the costs between generations, and the groups that risk losing mobilize against the changes.

Finance Minister Elisabeth Svantesson has reason to be proud of what has been achieved in Sweden. But what makes life easier for Swedish politicians was founded by both bourgeois and social democratic governments after the crisis in the 1990s.

The first step was to reduce spending, raise some taxes and make the pension system sustainable. It was extremely tough. The pension agreement became cross-block. And some time after the 1994 election, the Social Democrats concluded that they had to settle with the Center instead of the Left Party in order to pass the budget cleanup.

The next wave of reforms was completed in the first decade of the 21st century. The coalition government's line of work made it more profitable to work, which had positive effects on employment. When more people work, the economy is strengthened over time.

DN's series "Facts in question" recently investigated whether Sweden is still a high-tax country.

The answer was that we no longer stand out like we used to. Since the turn of the millennium, Sweden has gone from having the OECD's highest tax rate to the eighth highest. At the same time, public debt has declined as a share of the overall economy and is now down to around 35 percent of GDP – compared to close to 120 percent in both France and the United States. How is that possible? It has become this way in Sweden thanks to many years of responsible economic policy combined with high growth.

When the economy grows, it facilitates the financing of welfare, while at the same time the share of debt in GDP can decrease.

It is usually said that Europe has a hard time bringing new fast-growing companies to life. During the 2000s, Sweden has shown that it is entirely possible. Spotify is a global platform from Europe. During the AI ​​era, Swedish-founded companies such as Legora, Lovable and Sana have become red-hot.

There is fertile ground for entrepreneurship in Sweden. There is no indication that a general welfare policy stands in opposition to successful entrepreneurship, on the contrary. But if the welfare systems are not looked after, if the driving forces to work and start businesses are weak, if growth as a consequence stagnates and the state finances are careless, then eventually the bill comes.

And not only that: an economic crisis in one of Europe's largest countries will automatically spill over to everyone.

Elisabeth Svantesson seems to be getting praise in Brussels. At home in Stockholm, more skeptical voices are heard. The question is whether EU colleagues are aware of the serious criticism from the Fiscal Policy Council.

Apart from the pandemic year 2020, the council assesses that Sweden currently has the largest budget deficit in 30 years. And that in a situation when the economy, according to the finance minister's own statement, is running like a train and large incentives should not be required.

The starting position of the next government is good. But the international turmoil in the interest rate market is a reminder of how quickly fortunes can turn. Anyone who begins to be careless with state finances quickly discovers that freedom disappears at the same rate as interest rates rise.