KNOWN for decades as "the middle way" between East and West - between collectivism and individualism - Sweden is shifting. Now that the confrontation between Communism and capitalism is dissipating, this Nordic nation is trying to find its place.The new government of Prime Minister Carl Bildt - ushered in with the Conservatives' historic win in September's national elections - signals the change. A socialist model for Soviet perestroika economists in the mid-1980s, Sweden today has realized that its formula of market economics mixed with state subsidies and controls over every conceivable sector but manufacturing has been a costly failure. Swedish voters visited the polls with their pocketbooks, protesting the sacrifice of huge portions of their incomes for services the government can hardly deliver. Anders Aslund, the country's leading economist, says, "Sweden is in a very severe recession. There is a crisis in every major part of the public sector - health, education, childcare, and aged care." Mr. Bildt plans to curb government interference in the domestic economy and to push for Sweden's speedy integration into the 12-nation European Community. His policies reflect a strong move toward competitive markets and privatization. They also pose a challenge to Sweden's long-maintained neutrality. Jan Palmstierna, a senior Foreign Ministry official, explains the government's focus on EC membership as a response to "the end of the bipolar Europe and to Sweden's economic problems." Because Western and Eastern Europe are fusing into a broader structure, he says, Sweden's application to join the EC is not an expression of "choosing between two military blocs." Sweden's policy of "nonalliance in peacetime, neutrality in war," does not conflict with EC policy today, he says, conceding that the EC may forge common defense and foreign policies. Sweden's new leadership is anxious to give the no-growth economy a jump start, to make the most of the EC's investments and vast marketplace. The new government wants to empower private business while it deflates the costly state sector. The government can now ill-afford the cradle-to-grave welfare apparatus financed by a tax system that acts as an income equalizer. Taxes are among the highest in the world, and interest rates are prohibitive. At 10 percent, inflation is nearly twice the rate of the country's international competitors. All of this has practically smothered the once-robust private sector. Swedish industry, with no incentive to stay, is now scrambling to set up operations abroad, where the returns are higher. Nearly 4 percent unemployment is uncomfortably high in a society that had none. It is bound to worsen as the public sector, employing 32 percent of the workforce, is pared down. Still, for jobless Swedes, the vestiges of socialism are better than what's offered in capitalism's champion, the United States. Unlike the US, where unemployment hovers around 7 percent and the government's funds are depleted for a growing number of jobless, the Swedish system retrains workers and can provide them with two years of pay. Charlotte, a young woman bussing a table in a Stockholm cafe, captures the country's mixture of frustration and hopeful spirit. "I know, they're awful," she sympathizes with a patron over the exorbitant prices of food, goods, transportation, and lodging. Like many Swedish youth, she's only managed to find part-time work. "When we join the EC, I'm going to London to find a job," she says, beaming. She checks herself and sighs, "But we've got some time before then."