REINFELDT, BILDT, AND BORG: MAKING THE COALITION

C O N F I D E N T I A L SECTION 01 OF 03 STOCKHOLM 001400

SIPDIS

SIPDIS

E.O. 12958: DECL: 11/16/2017
TAGS: PGOV PREL PINR SW
SUBJECT: REINFELDT, BILDT, AND BORG: MAKING THE COALITION
GOVERNMENT WORK

REF: A. STOCKHOLM 1354

B. STOCKHOLM 1101

Classified By: Ambassador Wood, reason 1.4 (b) and (d).

Summary
--------------

1. (C) As Foreign Minister Bildt heads to Washington for the
Annapolis Conference -- his third visit to Washington in two
months -- we want to provide the domestic context to his new
activist Swedish foreign policy. It has been a difficult
first year for Prime Minister Fredrick Reinfeldt and the
center-right governing coalition. While they have
successfully carried out the tax and labor reforms promised
voters, they continue to slide in the polls. Part of this
drop is attributable to scandals, part to inexperience, and a
good measure reflects angst among swing voters who feel
threatened by the reforms. Nonetheless, the coalition
appears to be ahead in the war of ideas and expects that
reforms will yield fruit -- jobs, tax relief, and economic
growth -- sufficient to carry the day in the 2010 election.
Managing the coalition, Reinfeldt grants fiefdoms (Education,
Industry, Health ministries) to coalition partners while
deferring to Foreign Minister Carl Bildt on international
relations and Finance Minister Anders Borg on cross-cutting
domestic programs. Bildt has demonstrated he sets the
Swedish agenda on policy issues ranging from Kosovo to Iraq.
End Summary.

Paying the Price for Keeping Campaign Promises . . .
-------------- --------------

2. (SBU) Sweden's governing coalition took office on October
6, 2006, having won the election on the promise to get more
Swedes working while preserving the cradle-to-grave welfare
net they hold as a birthright. The government has been
largely successful in implementing the adjustments it
promised. It has done away with the wealth tax, reduced the
property tax, and lowered unemployment and sick leave
benefits, particularly for those on extended unemployment and
long-term sick leave. In a country that is among the
healthiest and most long-lived in the world, it has always
been an anomaly that Swedes also have exceptionally high
levels of absence for illness and early retirement for
medical reasons.


3. (SBU) But to every silver lining there is a cloud: the
coalition has a good start on fulfilling its reform platform,
but reforms have proven more unpopular than expected and
contributed to a sharp slide in the opinion polls. The
coalition has fallen from 48 percent of the votes in the
September 2006 election to 38-41 percent approval in November
2007 opinion polls. According to the polls, the opposition
Social Democrat party alone has more support, 46 percent,
than the four parties of the government taken together.
Finance Minister Borg told the Ambassador November 16 he is
concerned with the polls. Calls to reinstate more generous
sick-leave rules and unemployment benefits have become
rallying calls for the opposition.

. . . and for Breaking the Rules
--------------

4. (SBU) The government's downward trend in the polls has
been exacerbated by a series of scandals. Three ministers
and three state secretaries have been forced to resign over
hiring black market (untaxed) workers, failing to pay other
administrative fees or taxes, public displays of bad judgment
(ref A),or intra-party strife (ref B). The press has worked
over the government with a public inquiry into how many of
the State Secretaries (deputy ministers) admit to having
employed workers without paying the employer portion of
social security taxes (17 of 33, according to news service
TT).

But Still Winning the War of Ideas
--------------

5. (C) Urban Ahlin, the opposition Social Democrats' foreign
policy spokesman as well as Deputy Chair of the Parliament's
Foreign Affairs Committee, told us November 14 that the
opposition intends to keep beating down the government with
scandals. Ahlin was not sanguine about the Social Democrat's
long-term prospects, despite their history of having governed
Sweden 65 of the past 75 years and their soaring scores in
the polls. "We are up now, but 2010 elections are a long way
off. And we are behind in all the major cities: Stockholm,
Malmo, Gothenburg." He also said that the Moderates and
their coalition partners were winning the war of ideas.
"There is no debate here," Ahlin said. "The government --
ours, theirs -- just makes decisions and puts them in force.
The Moderates have a program. All we (the opposition) are
doing is saying 'no'. We have no think tanks generating
ideas, no alternative program."


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6. (C) For its part, the coalition government has seen its
economic reforms as a kind of stealth revolution. Moderate
Party Secretary Per Schlingmann told us the reform program is
"revolutionary" and will irrevocably change the structure of
the welfare system. Schlingmann ("Sweden's Karl Rove"),was
the ideological architect for the Moderate-led coalition
victory a year ago. He dismissed to us the current poll
results as a side effect of a necessary inoculation. The
voters were a little ill-at-ease with their medicine, but the
long-term effect on the health of the economy and labor
market would be positive, and the polls would go up.
Schlingmann said Reinfeldt hoped to push through the package
of reforms remaining, including decreasing the power of the
unions and making it easier to start businesses. He was
confident that the polls would bottom out soon, as the
benefits became visible, and the rebound would coincide with
the run-up to the next elections in 2010.

How the Coalition Works
--------------

7. (C) Moderates accounted for over half of the total votes
received by the four coalition partners. They control the
power ministries of Foreign Affairs, Defense, Justice, and
Finance. The other three coalition party heads have
Education, Industry, and Health. Prime Minister Reinfeldt
has been criticized for his invisibility. In significant
contrast with his predecessor, Goran Persson, he lets his
ministers do the talking. In large measure, this amounts to
ceding fiefdoms to the other coalition partners, and helps
keeps the coalition together. But pundits note that
Reinfeldt also seems to defer to fellow Moderates Foreign
Minister Carl Bildt on international relations and Finance
Minister Anders Borg on domestic and defense programs. For
example, when the Ambassador asked Reinfeldt's foreign policy
adviser Nicola Clase the government's position on Kosovo, she
said she would have to check with Carl Bildt. For his part,
Borg fought and won a budget battle with the Ministry of
Defense dealing with defense procurement; this precipitated
the resignation of the Defense Minister (ref B).


8. (C) According to those closest to him, Reinfeldt
delegates effectively and has strategic vision. Critics
complain that his lack of assertiveness means no one is in
charge. They also note that he has surrounded himself with
aides who lack experience and make novice mistakes, citing
the incidents that forced resignations of several close
associates, including his 35-year-old Chief of Staff (ref A).
Reinfeldt's staffing challenges arise in part from a split
within the Moderate party, with Reinfeldt and the less
dogmatic and youngish "New Moderates" having won the election
and the turf battle within the party, but lacking experience
in bare-knuckled battles with the opposition. In our
dealings with Reinfeldt, we find him engaging, exceptionally
well informed, and strategically inclined, if a little stiff.


9. (C) On foreign policy, Bildt (with the departure of
former Minister of Defense Odenberg, the last of the Moderate
old guard still in office) is personally engaged on every
issue of Euro-Atlantic interest. He seeks to have his own
and Sweden's roles given due weight. Kosovo is an example.
Bildt proposed cuts in 2008 of Sweden's troops in Kosovo from
385 to 250 because Sweden, a major donor and troop provider,
is not on the steering board. He has also argued for the
need to go slower in order to ensure EU unity. At the same
time, he has placed himself squarely in the U.S.-EU nexus,
including through his travel to Iraq and his pressure for the
EU to do more there. He is widely seen as aspiring to the
new position of new foreign policy head under the EU's
proposed reform treaty.

Getting to 2010 and Beyond
--------------

10. (SBU) Reinfeldt brought the coalition to power by
convincing the electorate that he was not calling for radical
change, just fine-tuning the welfare state. Yet his closest
advisers call his changes revolutionary. Early indications
are that his labor and tax reforms are working: unemployment
is down, and the economy is booming. The economic growth
rate for 2007 is estimated to be 3.4 percent, above the
EU-wide figure of 2.9 percent.


11. (C) But the voters are nonetheless wary, concerned that
with tightening of sick leave standards and decreases in
unemployment benefits, the welfare safety net has been
lowered closer to the ground. At the same time, reforms such
as changes in the property tax -- billed as a benefit to all
-- are coming under fire. Home owners -- and that includes
most Swedes -- are increasingly suspicious that the tax
reform is indeed revolutionary, and provisions such as a cap
on property tax will largely benefit the well-to-do
supporters of the Moderate and other "bourgeois" parties.
Even these parties are finding their constituents restive

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with divestiture of partially state-owned companies
(including the largest bank, the Swedish stock exchange, and
the distributor of Absolute Vodka). Polls show 28 percent
"for" and 49 percent "against" selling the government's
interests in state-owned companies.


12. (C) For their part, business leaders are also not
completely satisfied. They tell us the government has done a
good job of improving the supply side of the labor market by
increasing incentives to work, but not enough has been done
to promote job growth through tax reductions and
deregulation. They also say that government policies favor
established large businesses but do not encourage
entrepreneurship. For the time being, the economy's overall
health and steady growth are keeping the job market growing.


13. (C) The government is banking on its early investment in
reform to pay dividends in the midterm, with the good news
peaking and reaching the pocketbook of the electorate as the
2010 election approaches. This would enable the center/right
to achieve a second term -- a rarity for non-Social Democrat
governments -- and give the Moderates and their allies an
opportunity to seek more radical reforms, including in
foreign policy. NATO membership is among the issues that the
coalition has said publicly it will not take up in a first
term -- but Schlingmann, among others, has told us privately
could be on the agenda for a second term.
WOOD