Sweden has long been a role model for both left and right in British politics. Now it's facing economic and social problems of its own, as the fall-out from the eurozone crisis heads North 

For many years, admiration for the Swedish economic and social model was a preserve of the British left. That started to change in 2006, when the centre-right Moderate party took power in Sweden under the youthful and dynamic leadership of Fredrik Reinfeldt.

After taking over the party leadership in 2003, Reinfeldt tacked across to the centre ground of Swedish politics and broke the historic stranglehold of the social democrats on political power, securing re-election in 2010. He was an obvious model for David Cameron as the new Conservative leader set about repositioning his party after 2005.

The social democrats were disorientated and demoralised by their defeat in the 2010 election and suffered further poll slumps until earlier this year when Stefan Lofven was elected the new party leader. An intelligent, respected former union leader with a compelling back-story (he spent the first months of his life in an orphanage before being adopted by a lumberjack and health visitor), Lofven has turned the party’s fortunes around.

He has placed tackling youth unemployment and returning to full employment at the top of his priorities, but he has also ensured that extra stimulus spending is fully costed and pledged that tax increases will not fall on ordinary families. Fiscal responsibility is at the core of the political identity of the social democrats.

As a result, the alternative coalition of social democrats, the left and the Green party are now backed by 48.6 percent of voters, compared with the government’s 42.2 percent, according to a recent Sifo poll for the Svenska Dagbladet newspaper. Lofven currently has every chance of becoming Sweden’s prime minister in 2014.

If he does, he will have his work cut out. Sweden’s stellar economic performance has come to an abrupt halt as the effects of the eurozone crisis have seeped north. Some 50 per cent of Sweden’s exports go to the EU, and its leading companies have been badly hit by the crisis in its key markets.

A wave of plant closures and job losses among household names like Volvo has shocked the country, piling pressure on the centre-right coalition government. The central bank has cut its forecast for GDP growth in 2012 to 0.9 per cent, down from 1.5 per cent, and signalled it will cut base rates later this year.

So the social democrats are thinking hard about how to secure the future of their high-skill, high-tech economic model. Sweden invests 3.5 per cent of its GDP in R&D, putting it at the top end of OECD countries. It is determined to raise innovation still further, driving significant change to its economy through the transition to low-carbon energy use.

Its early education and childcare provision is both universal and world-class, underpinning its high female employment rate, while its social partnership model provides workers with high levels of training and education as well as decent wages. Swedish trade unions are respected, not sneered at. They are partners in a collective enterprise for the prosperity of their country.

These are strong foundations for renewed prosperity in the future. But Sweden cannot go it alone. As an open economy, heavily integrated into European markets, it needs the eurozone to recover.

Hitherto, austerity has placed the burden of adjustment on the deficit countries of the south, but the consequences are now being felt in the surplus countries of the north. The eurozone’s imbalances will only be overcome when both take the strain.

Nick Pearce is director of the Institute for Public Policy Research. This blog first appeared on its website