Election outcome: Q&A on the new political situation

SEB's experts Robert Bergqvist, Håkan Frisén and Daniel Bergvall answer 15 questions about the outcome in Sweden's general election held on September 9.

As expected, the outcome of the September 9 parliamentary election confirms a new, complex domestic political landscape. The people and policies that will govern Sweden are not yet certain. We are sticking to our earlier conclusions that political compromises will lead to looser fiscal policies, that the door to key structural reforms is not yet closed, that the risk of 'Swexit' is low and that Swedish financial assets will not carry any major risk premiums. Below are 15 questions and answers about the new political situation and what it means to Sweden's economy and growth. After the Q&A, we explain how a new government is chosen, why deadlock may complicate this process and some relevant Nordic experiences with changing domestic political landscapes.

Question 1: Who won Sweden's 2018 parliamentary election?

Answer: As expected, the preliminary outcome confirms the picture of a new, complex domestic political landscape. Voter turnout was high (85.4% in 2014), showing heavy voter involvement. The right-wing populist Sweden Democrats (SD) made big gains, while the Social Democrats (S) and Moderates (M) lost heavily compared to the 2014 election. All eight current parties made it over the 4% voter threshold to keep their seats in Parliament.

Question 2: What is the next step in forming a government?

Answer: The first step depends on whether or not Prime Minister Stefan Löfven chooses to announce his resignation. If he resigns, the current Speaker of Parliament may immediately begin exploring the conditions for forming a new government. If Löfven does not resign, we expect the Alliance bloc and SD to declare their intention to vote his government out of office through a 'no confidence' vote when the new Parliament convenes on September 24.

Question 3: What government is the most probable?

Answer: The reason why the situation is so complex is that during the campaign, various parties adopted positions that block virtually all governing solutions. Even if the Alliance gets fewer seats than the red-green bloc, the most likely scenario is still a Moderate-led government after Parliament convenes on September 24. M and KD have declared they will do all they can to bring about a change of government, even in such a situation. This puts the spotlight on how the 'middle parties', C and L, will act and whether they can honour their earlier pledges not to make themselves dependent on SD under any circumstances. But the question is whether C and L have any better alternative than to join forces with M and KD.

Question 4: What makes a continued S-led government unlikely?

Answer: There are various reasons why the Alliance parties can hardly accept continued unofficial observance of the 'December Agreement' (DA), which was concluded in 2014 to enable the largest bloc to rule even in the absence of a majority of its own. The DA formally collapsed in 2015. For example, the Alliance parties could not accept letting an S-led government stay in power while it is being pulled further left to enable V to support its budget, or even let V join the government. C and L are also unlikely to imme-diately kill the Alliance by joining an S-led cross-bloc government, not least because S and C are rather far apart on a number of major issues, especially regarding the labour market and methods for resolving immigrant integration problems.

Question 5: How stable would an M-led minority government be?

Answer: The crucial question for an Alliance government in this situation is how to manage its relationship with SD. Can M strike a balance that ensures that SD will not actively oppose the government, without alienating C and L? It is hard to say how well and for how long M can walk such a tightrope, but only when it fails do we believe that other solutions will be considered. In that case, one first step might be for C and L to leave the coalition, letting M and KD form a narrower government. If this also fails, cross-bloc solutions will be considered, either in the shape of middle-of-the-road solutions such as S+MP+C+L or a grand coalition between S and M, perhaps including other parties as well. It is very unlikely that S would support an Alliance government, unless ensured a major influence of its own.

Question 6: How will SD behave and manage its new situation?

Answer: During the last two parliamentary terms, SD has tried to take advantage of opportunities to boost its political influence. During the 2010-2014 parliament term when the Alliance government nearly had its own majority and SD was a small party with voter support of about 6% it was mainly a matter of inflicting 'pinpricks' on the government. For example, SD supported S in blocking some Alliance tax cuts. After more than doubling its voter support in 2014, SD raised its profile, especially by defeating the red-green government's 2015 budget in the autumn of 2014. Various Alliance parties have advocated trying to form their own government even if the red-green bloc has more seats than the Alliance. We expect SD to be initially reluctant to block an Alliance government. The party has recently moved to the right, making the process easier. Unlike the situation in various other countries, SD will hardly make immediate far-reaching policy demands on the Alliance. The Alliance's dilemma is that SD will probably raise its profile and later demand extensive changes in integration policy, for example.

Question 7: How does the process look in the near future?

Answer: The following steps are the most important in next 2 weeks.

Sep 10-24	The government will probably resign if not expected to have enough support in the new Parliament. The departing speaker then begins talks with parties on forming a new government.
Sep 14 (prel.)	Final election results are announced.
Sep 24	New Parliament meets, electing a new speaker.
Sep 25	Parliament convenes; earliest date to vote on a new government or hold a vote of confidence on the old one if it has not resigned voluntarily.

Question 8: What role does the speaker play, and who will it be?

Answer: The speaker plays an important role, mainly by proposing a new prime minister to Parliament. A new speaker is elected when the new Parliament meets (see above). The speaker usually comes from the largest party in the largest political bloc. Mainly in light of M's view that the size of the Alliance should be compared to voter support for S, not with the entire red-green bloc, the battle over choosing the new the speaker will be tough. In some respects the speaker performs duties discharged in other countries by the head of state, so it is important for the speaker to be above partisan political battles to the greatest possible extent. Given a complex parliamentary situation, this role is even more important. For more information on how a government is formed.

Question 9: How big is the risk of an extra election?

Answer: Over the next four years, the risk of an extra election will be higher than usual, due to the heightened risk of government crises. Such an election might enable parties to reassess the positions they assumed in the 2018 election campaign, thereby opening the way for fresh thinking on how to form a government. Meanwhile the 2014-2018 Parliament showed there is a strong aversion to calling an extra election, since it will hardly make the parliamentary situation less complex. We thus believe that an extra election is not especially likely as long as public opinion does not shift markedly.

Question 10: Is there a 'Swexit' risk?

Answer: We believe there is a very low risk that Sweden will hold a referendum on continued European Union membership in the foreseeable future and that the outcome will be a vote to leave the EU. Although both SD and the Left Party (V) which both have withdrawal from the EU on their party programmes made strong gains in voter support, V has declared that it does not wish to pursue the issue together with SD. Nor is there much enthusiasm within SD, at least in a short-term perspective. Swedish voters generally have a sceptical attitude towards far-reaching EU cooperation, including euro zone membership, but a large majority (67%) believe Sweden will have a better future inside the EU than outside (27% of respondents say the opposite). Corresponding figures in the United Kingdom in the midst of the Brexit process are 43% for and 44% against.

Question 11: How will the election affect the economy and economic policy?

Answer: Its impact on the economy and economic policy is not expected to be especially large, regardless of which governing alternative comes out on top. During the campaign, parties tried to conjure up a picture of major ideological economic policy differences. The Social Democrats contrasted their proposed investments in a national development plan with the Alliance's tax cuts. The Alliance responded, in turn, by accusing S of being a 'dole party'. But differences along the traditional left-right scale, for example between S and M, are not so wide nowadays, and the taxation proposals they have unveiled during the campaign, for example, are hardly system-changing. Both parties strongly emphasise the importance of trying to guarantee the continued quality of the schools, health care and social services and other core public sector activities, thereby calming fears of breaches in the social contract. Furthermore, a minority government would have a hard time pursuing overly ideological policies. We also expect a slightly expansionary fiscal policy equivalent to 0.5-1.0% of GDP per year in 2019-2020 regardless of which parties sit in the government.

Question 12: Can a minority government enact structural reforms?

Answer: During the 2014-2018 term of Parliament, several important cross-bloc agreements were achieved in areas like energy and defence policies, but there were major ideological blockages in labour market, tax and housing policies. To some extent these conflicts also dominated the 2018 campaign. Yet we believe there is a decent chance of reaching broad agreements on taxes and portions of housing policy early in the coming term. The parties seem to be aware of the weaknesses in today's systems, and there are clear signs of behind-the-scenes research work on such matters as major cuts in marginal income taxes. The compromises that led to the big tax reforms enacted around 1990, after only a very brief period of negotiations, also suggest that such a scenario is possible.

Question 13: How will the outcome affect Sweden's global image?

Answer: International interest in this Swedish election has been unusually heavy. This is because the outcome represents a major change in the Swedish political landscape, with SD ending up nearly as large as the historically dominant Social Democratic Party. The tensions that have arisen in Sweden on migration and integration issues, especially due to the 2015 refugee influx, are expected to continue attracting great interest. Sweden risks becoming a battering ram in an increasingly polarised international debate, and the ability of Swedish political leaders to manage the new challenges is likely to influence what path other countries will choose. The Swexit issue is also beginning to draw increasing international attention, especially in the UK, where people see parallels to Brexit.

Question 14: Will investors demand a risk premium for Sweden?

Answer: Although the domestic political scene is now entering a new phase, including continued uncertainty about whether decisive governance is possible in Sweden, several factors make a general risk premium unlikely. Compared to the lengthy political crises in various other European countries, the challenges in forming a Swedish government appear relatively minor. Strong government finances, viewed in an international perspective, also represent an important protective buffer. There is also broad political consensus on the value of strong government finances and of preserving the existing fiscal policy framework. The situation in the bond market, especially for mortgage-backed bonds, also suggests that a risk premium in financial markets is remote. The krona may be an exception, though. Although the weakness of the currency is mainly due to the Riksbank's negative key interest rate and quantitative easing, the krona will have a hard time appreciating in the short term. Rough patches in the process of forming a government may also lead to some further depreciation in the near future.

Question 15: Will the election influence the Riksbank and monetary policy?

Answer: Hardly. Governor Stefan Ingves is set to remain in his post until late 2022, which promises continuity. The replacement of the Riksbank's General Council after the election normally has little impact either, since a broad political consensus supports the independence of the central bank. We also expect a continued slightly expansionary fiscal policy regardless of government. If anything, this will make it easier for the Riksbank to take the first steps towards normalising monetary policy. The ongoing commission of inquiry on the Riksbank (chaired by Mats Dillén) may propose changes in important areas such as the allocation of responsibility for macroprudential supervision and the Riksbank's mandate related to currency interventions, but its proposals will not be affected by the election.