The European economy is in a bad way and Sweden has been more badly hit than many other EU countries. However, this has not dented the confidence of the new pilots of the European ship, Swedish Prime Minister Fredrik Reinfeldt and his Finance Minister, Anders Borg.

As Reinfeldt said in Brussels recently when presenting his Swedish Presidency plans: “In the autumn we will be facing the need for continuous crisis management. This must be done with vigour and intelligence. Many references have been made to the successful handling of the Swedish banking crisis in the 1990s, and I understand why.”

Borg is just as confident: “One important instrument – and here I am speaking from my own experience in Sweden – is good fiscal rules that are observed even when they are under pressure. In Sweden, we have had very good experience with fiscal rules.”

The Swedish economy may be facing, according to Borg, the worst situation since the end of the Second World War. But luckily, the two pilots are convinced they know the way out of the crisis.

Until recently, Sweden had a budget surplus of SEK130 billion. This year, according to the government, the deficit will be close to SEK200 billion. The economy will shrink by nearly 5% and only pick up in 2010. Unemployment last year stood at 6%. By the end of 2009, over 9% of the population will be out of work and next year the figure is expected to rise to nearly 12%. The economy’s contraction is more dramatic in Sweden since it is extremely open and highly dependent on commodity exports such as steel and wood.

That is not the whole story. The Swedish financial sector was rocked by the global financial crisis. In addition, the larger Swedish banks are heavily exposed in the Baltic countries. If things do not improve, Borg may well face a real nightmare.

The government will not hesitate to take over any bank in trouble. This is a solemn promise from a Conservative government that until last year was busy selling off all state owned companies in the firm belief that the state should not run businesses. The banking sector, however, is different. It is vital for running the whole economy. “We are not in this to save bank owners, we are in it to save people that have put their money and trust in the banks,” Borg explains.

The sector hardest hit in Sweden apart from banks is the car industry. Volvo and Saab are laying off tens of thousands of people and cancelling all orders to the multitude of SMEs that depend on them to make a living. Car makers are a different story. The Conservative government has no intention of bailing out ailing Swedish industrial giants owned by America’s GM and Ford. As Reinfeldt says: “When a ship is sinking, my main aim is to save the sailors, not the ship”.

For Borg, when an economic crisis hits, it is essential to keep public finances in order. Discipline, long term-thinking and no squandering of public money are the order of the day. In such a situation, it is essential to safeguard public finances’ long-term sustainability. The Swedish government´s decision, much contested in the country’s political debate, has been to keep any public economic stimulus to a minimum.

What needs to be done, according to Borg and Reinfeldt, is to build strong rules for public finances, ensure any stimulus is directed towards the working population, possibly in the form of tax rebates, and push vigorous labor market policies where people not retraining or actively seeking employment may not claim support.

Borg aims to spread this message to Europe. He is not impressed by the Stability and Growth Pact, which he feels is not taken seriously. In his view, the disciplinary rules of the pact should be enforced. There should be agreement on new and stricter budgetary criteria. Everyone should apply the same strict discipline nationally.

That is an ambitious programme for a finance minister from a non-euro country. Even more so for one not at all keen to take his country into the euro area. In theory, Borg and Reinfeldt, both from the Moderate party, support Sweden joining the euro. This is the line they took in opposition, when the ruling Social Democrats wobbled so badly that voters finally turned the proposal down in a referendum in September 2003. This was an embarrassment for the Swedish political establishment since the country basically fulfills all the criteria for membership and has no opt-out or opt-in like the UK or Denmark. But Brussels politely pretends the dilemma does not exist.

Now, the euro is being raised again. The Liberal party very much wants to join, as do several heavyweights in the Centre party – both are in the government coalition. The fact that Iceland and Denmark are now talking euro as well may be the factor that, apart from the economic crisis, has changed Swedish public opinion. According to the latest poll, 47% favour joining, while 44% are against.

But the prime minister is not impressed. He recently said: “In my position, you have to take a broad and long term responsibility.That means being careful even when one feels the euro has worked well. You can´t go ahead simply on a single opinion poll with a slight majority. There has to be agreement between myself and the Social Democrats on moving forward.”

That kicks euro membership into the long grass since the Social Democratic Party leader, Mona Sahlin, has said she is not willing to even open a discussion on the subject before 2014 – ten years after the referendum. Borg is fine with this. He prefers to run the economy without outside interference. But, if other EU countries take his advice and accept his way of doing things is much the best, maybe we will see Borg, after the Swedish Presidency, advocate for joining the euro.

Sweden

Area: 450,000 km² (third largest country in Western Europe)

Longest north-south distance: 1,574 km

Longest east-west distance: 499 km

Population: 9 million

Languages: Swedish; recognised minority languages: Sami (Lapp), Finnish, Meänkieli (Tornedalen Finnish), Yiddish, Romani Chib (a Gypsy language).

Parliament: Riksdag, with 349 members in one chamber

Religion: 82% belong to the Evangelical Lutheran Church of Sweden

Average life expectancy: men 77 years, women 82 years.