'Flexicurity' is under strain and generous Nordic welfare states are getting meaner

When the global financial crisis began to gather pace in 2007, policymakers around the world scrambled for ideas that would lead them out of the mire. The Nordic countries' apparent resilience to the storm attracted much admiration and curious officials swamped the region seeking elements they could poach.

Outside the region the Nordic model and its Danish derivative, 'flexicurity' -- a portmanteau of labour flexibility and social security -- still have their fans. Earlier this year, Mario Monti, the Italian Prime Minister, based his wide-ranging reform plan on making markets more flexible, encouraging mobility and attracting foreign investment -- all key elements of flexicurity.

In public at least, Nordic political leaders still profess their faith in the template. 'The Nordic welfare model has shown its worth precisely by being able to withstand economic times of pressure and at the same time taking care of the vulnerable in society,' said Helle Thorning-Schmidt, the Danish Prime Minister, at the annual get-together of leaders from Sweden, Norway, Finland, Iceland and Denmark in Helsinki in November.

But while the countries agreed that the Nordic welfare model has demonstrated its strength as a shield against the global financial crisis there were also indications that the model was in urgent need of adjustment. Finland's Prime Minister, Jyrki Katainen, said his government had been forced to cut the state budget and increase taxes -- cutbacks equivalent to €5 billion this year.

'There is no way of combining an overstretched public economy with a generous welfare state. You have to do what is necessary to make the welfare state work, and this is where the universal responsibility of the individual comes into the picture,' Katainen said.

This was a broadside against those who believe that the welfare state is obliged to underwrite every aspect of a citizen's life.

But though the notion of a 'cradle-to-grave' welfare system is still bandied about, the reality is that it has long since been on the wane and its demise is actually accelerating.

As leader of a conservative party, it is no surprise that Katainen is focused on trimming welfare excess and balancing budgets. But the same trend is evident in those Nordic countries with social democratic prime ministers -- Denmark, Norway and Iceland.

And nowhere is the welfare-paring more evident than Denmark. When Thorning-Schmidt became Denmark's first female prime minister in November last year and ended a decade of centre-right rule, large sections of the electorate expected a speedy return to welfare largesse with substantial spending on schools, hospitals and other public programmes.

They didn't get it. Instead, one of the new government's first acts was to sign a budget deal with the centre-right that included cutting the time limit on unemployment pay from four years to two.

While this has since been softened somewhat by emergency measures for the first six months of 2013, up to 20,000 unemployed Danes could be left without any financial assistance from the state in coming months.

Trade union leaders thunder that slashing benefits is undermining the Nordic welfare model and slowly strangling flexicurity.

This peculiarly Danish twist on the Nordic model relies on three pillars for its success: flexibility, employers can hire and fire at will; social security, fired workers receive good benefits; and active labour policies, measures to help the jobless back to work.

Besides public policy initiatives, flexicurity is also being squeezed by other forces. Take Scandinavian Airlines System, the struggling airline that is 50 per cent owned by the governments of Sweden, Denmark and Norway. After a bruising decade that saw it fighting a losing battle with discount carriers such as Ryanair, the Scandinavian flag carrier has just announced another round of swingeing cuts.

As well as plans to shed 40 per cent of its 15,000 workforce through lay-offs and divestments, SAS took the unprecedented step of tearing up its pay-and-conditions agreements with 35 trade unions. Captains and crew contested the legality of this unilateral action saying it under-mined the Nordic model by disregarding a century-old tradition of labour market consensus.

For all their outward devotion to the Nordic model, the airline's largest shareholders -- the three Scandinavian governments, all backed the SAS plan.

Something similar occurred in Sweden where throughout the protracted death throes of the carmaker Saab, the Swedish government steadfastly refused to pour in state aid to save 3,800 jobs at the Trollhättan plant. The three-year struggle for survival ended a few days before Christmas last year when it filed for bankruptcy.

As liberal politicians and free market supporters, neither Fredrik Reinfeldt, the Prime Minister, nor Anders Borg, his

Finance Minister, could have been expected to intervene to save Saab. More difficult to spot, however, are the enormous changes they have made to Sweden's welfare state -- or folkhemmet -- since first coming to power in 2006.

Though they had campaigned to tweak the model rather than remove it, and Borg in particular has won many plaudits for his steadying hand on economic and fiscal policy, Sweden no longer has the catch-all safety net that many outsiders still believe exists.

Change has been gradual in Sweden over the past six years but now, for example, the country's unemployment benefit rate as a percentage of former earnings has slipped behind those of several countries, including Portugal, Ireland and Belgium.

Given Borg's recent warning that a slump in exports might well trigger an economic downturn in the near future, there is little reason to expect Sweden to leapfrog back to the top of the generosity tables any time soon. Ongoing fiscal constraints in Finland, Denmark and Iceland mean we should not expect a return to the days of plentiful welfare there either.

Clare MacCarthy writes for The Economist from Copenhagen


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