Sweden's economy has been likened to a bumblebee - its big-bodied public sector and tax burden should stop it flying. Yet the country is facing a fresh downturn in 2012 in confident mood: public finances are sound, its top companies relatively upbeat despite worries over the euro zone and consumers took retail sales to a record in 2011.
Its record shows that a high-tax state with a big public sector and relatively generous welfare can more than give Anglo-Saxon-style lower-tax models a run for their money - Swedish growth over 2001-2010 averaged 2.2 percent, versus 1.7 percent for Britain and 1.6 percent for the United States, according to OECD data.
The key for Sweden has apparently been a responsible spending of the taxes it takes in, along with not being afraid to deregulate to increase competition and efficiency. It also learnt key lessons from a home-grown 1990s crisis which have led to stable public finances and a sound banking sector.
"There is a lot of talk about crisis, the word 'crisis" was used a lot in the autumn of 2011, but if you look at Sweden things have gone pretty well for us," said Bjorn Odell, chief financial officer at Landshypotek, a co-operative farmers bank "Swedes in general do not really relate to these crisis headlines, people do not see that in their everyday life."
He noted that one of the key confidence-giving factors was solid public finances. After a 1990s bank crash and fiscal crunch, Sweden set a target for a budget surplus over the business cycle and put a cap on spending rises. This year it expects a small budget deficit and a small surplus next year.
Sweden could easily loosen its purse strings to backstop growth without jeopardising its prized AAA debt rating, which stands in stark contrast to plans for continued euro zone and British austerity. The size of the public sector has fallen, but remains well above the average in the OECD club of mostly rich economies at about 48 percent of output over 2000-2010 versus about 34 percent.
The European Commission predicts the euro zone will shrink 0.3 percent in 2012, while Sweden is likely to grow 0.5-0.7 percent. This puts it in line with Germany, Britain and France. Such prospects are surprising given that around 40 percent of exports, which form half of GDP, go to Europe, but the current crisis is also different. In 2008-2009, global demand fell off a cliff, whereas as this time it is the euro zone that is in trouble. The US market is picking up speed and emerging markets remain robust.
Like any developed country, Sweden faces challenges - youth unemployment is among the highest in the world and private debt is large at more than two times the size of output. But overall the lesson seems to be that it is not the size of the public sector, but how you spend the revenues you get.
Sweden, for instance, invested 3.6 percent of output in research and development in 2009. It also regularly gets high marks in competitiveness and innovation surveys and has one of Europe's most generous parental leave systems, allowing women to stay in the workforce, benefiting productivity. Sweden also has among the highest levels of public confidence in state institutions, implying trust that the taxes gained will be spent well.
"Overall, the size of the public sector and tax levels apparently do not have a major impact on economic performance (of Sweden)," said SEB bank chief economist Robert Bergqvist. "But what is important is the predictability of the tax system, that corporates and households know what to plan for," he added, pointing to broad political consensus.
The centre-right government, in power since 2006, has cut income tax, but has been forced largely to embrace the principles of the broad welfare state, founded by its long-ruling Social Democratic rivals after World War Two. But the Social Democrats in turn were not afraid to deregulate if needed, with telecoms a key example.
Deregulation was one of the causes of the 1990s Swedish banking meltdown, but lessons learnt afterwards meant the sector became more sober and stable. It came through the 2008-2009 global crisis in much sounder shape than elsewhere in Europe, even if banks suffered losses from a lending boom in the Baltic states. Ordell, whose bank finances the farm and forestry sector, said demand for loans remained high at growth of more than 7 percent in 2011 to 55 billion crowns ($8.39 billion).
The big banks, SEB, Nordea, Swedbank and Handelsobanken, also all reported higher 2011 profits and are among the safest financial groups in Europe. The post-1990s crisis caution meant Sweden avoided a housing boom and bust, something which hit neighbour Denmark.
The authorities also actively head off future problems - they now want tougher bank capital rules than elsewhere in Europe and when they feared a housing bubble in 2010 they imposed a cap on mortgages of 85 percent of the property value. Industry also feels relatively confident about 2012 having enjoyed a recovery in 2010 and 2011 and withstanding years of rising competition, particularly from low-cost countries.
Many firms have outsourced production to cheaper nations, but there is also an effort to compete on added value and innovation rather than cost, part of a model which protects standards of living rather than indulging in a race to the bottom. Such is the stance of Christina Strandberg, chief executive of Sweden's only fine porcelain producer. By producing hand made items in a high cost country in a sector facing competition from cheap imports, the existence of her plant, Gustavsbergs Porcelain, defies common views about which firms can survive in a globalised marketplace.
Like the big Swedish hallmark names of Ericsson, Volvo and bearings maker SKF, the trick is a find a niche - in this case high quality goods rather than high quantity. "We had problems in the Japanese market after the disaster there (the earthquake and tsunami), but now South Korea is an up and coming market," she told Reuters.
"We think (2012) will be about the same as last year," she added, speaking in the factory in this small town, about 15 km to the west of capital city Stockholm. Her comments were reflected in a poll of 129 companies carried out by Axholmen Consulting and released late last year. The companies expected a worse economic picture in 2012, but were confident about increasing sales and keeping profitability.
"They have a strong belief in themselves and a more positive view of their own development (in contrast to the economy as a whole)," said Jakob Holm, head of Axholmen. So even if the headlines have been gloomy, Swedes have stayed cheerful - perhaps that explains why champagne sales reached a record high last year.
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