15 Sep 2014 10:00

Good morning, Stefan – it’s Political Monday

Preliminary election results show a change of government in Sweden, with Social Democratic leader Stefan Löfven as the likely new prime minister. The current Prime Minister, Fredrik Reinfeldt, has already announced his resignation as chairman of the Moderates, an indication that his party will abstain from any high-stakes effort to stay in power. This will reduce the risk of an extra election in the near future. During the coming weeks, the government’s parliamentary support base, a Statement of Government Policy for the 2014-2018 parliamentary term and a Budget Bill for 2015 will take shape in concurrent political processes. This is expected to be a complex challenge for Löfven, who has little political experience – not only during the coming weeks but perhaps to an even greater extent later in the parliamentary term. Sweden is waking up to a new political landscape.  Although minority governments are hardly unique to Sweden, the combination of bloc-based politics, an un-usually strong kingmaker party and a historically weak Social Democratic Party has changed the prerequisites for government work. Political authority and stability will be determined by the potential for informal cross-bloc cooperation and by inter-party agreements and resolve to isolate the Sweden Democrats, the populist anti-immigration par-ty that holds the balance of power.

The questions and answers are based on the information provided on the website of the Swedish Election Authority, www.va.se as of 5.00 CET on Monday.

1. What will Sweden’s new government look like?

The election results are in line with expectations, but a final determination of how the new government will look is likely to take a couple of weeks. Our main scenario is that the Social Democrats (S) will form a minority coalition government with the Green Party (MP). S leader Stefan Löfven has been clear about his reluctance to let the ex-communist Left Party (V) into the government, and V leader Jonas Sjöstedt has signalled that his party can abstain from ministerial posts in exchange for other opportunities to exercise influence on government policy.

Stefan Löfvén, flanked by Green Party spokespersons Åsa Romson and Gustav Fridolin and the logos of the eight parties with seats in the Swedish Parliament.

2. How should the election results be interpreted?

A heavy voter turnout, preliminarily estimated at 83 per cent (82.1 per cent in 2010), gives high legitimacy to the election results. Meanwhile the two biggest parties, S and especially the Moderates (M), did poorly compared to earlier elections and their targeted results, which is expected to trigger internal party analyses of future strategies. At the same time, in terms of votes and parliamentary seats, Sweden now has a powerful kingmaker party, the Sweden Democrats (SD). None of the other seven parties in Parliament (the Riksdag) want to work with SD.

3. What will now happen, in purely formal and constitutional terms?

The Speaker of Parliament (currently Per Westerberg) will begin exploratory talks on forming a government. The parliamentary vote on a new Speaker will be held on September 29. The newly elected Speaker will present a proposal for a new prime minister (PM). The Speaker will have two weeks – and may make four attempts – until no later than October 13 to gain approval for a PM candidate in Parliament. In order to reject a candidate proposed by the Speaker, a majority of Parliament must vote No to the proposal. This means it is possible for parties to passively allow a government to take office by abstaining from voting. If the Speaker fails to gain approval for a PM candidate, an extra (“snap”) election must be called. In practice, however, a PM candidate has never been rejected in a vote the Swedish Parliament.  

4. Can an S-MP government get its budget passed?

In order for Social Democratic leader Löfven to accept an invitation and try to form a government at all, he must have a clear strategy for how he will be able to get a budget through Parliament. Constitutionally, he will have two months to submit a Budget Bill. The budget voting procedure is different from the PM vote. A so-called elimination method is applied. First the budget proposals with the least support in Parliament are pitted against each other. When a party has lost a vote on its budget bill, the customary practice is for that party to abstain from subsequent budget voting.  According to the election results, S+MP will have fewer seats in Parliament than the Alliance. This means that S and MP will have to win advance backing from V for their budget. They are thus dependent on V to abstain from submitting its own budget bill and to vote instead for an S-MP budget. Since SD now enjoys a kingmaker role, the party may choose to vote for the Alliance’s budget, thereby creating a dilemma for the Alliance: a) either abstain from voting on the S-MP budget, or b) receive SD support and thus need to be prepared to take power in case of a probable extra election.

5. What challenges will an S-MP government face?

The form of so-called negative parliamentarism that Sweden applies in different versions to the PM and budget votes makes the situation of a minority government easier, since the opposition must join forces in order to unseat a government. Meanwhile, an S-MP government will have to be careful about submitting proposals that all opposition parties will clearly dislike. This will hamper its ability to pursue vigorous government policies. Regardless of whether their formal Alliance structure remains in place or not, the Moderates (M), Liberals (FP), Centre (C) and Christian Democrats (KD) will be fairly reluctant to sabotage an S-MP government early in the four-year parliamentary term. But later in the term, once the parties have shaped new strategies and in some cases elected a new leader, they will certainly be more inclined to challenge the S-MP government for power.

6. What is Sweden’s experience with minority governments?

Minority governments have been common in the modern era, but they have usually based their policies on organised cooperation with other parties in Parliament. During several periods, the Social Democrats have enjoyed indirect support from V (previously known as VPK). While the Social Democrats were in government between 1994 and 2006, there was organised cooperation first with C and later MP and V. The 1991-94 non-socialist government often received support from the now-defunct right-wing populist party New Democracy. In the past four years, the Alliance has been in a minority government without systematic cooperation with either the red-green opposition or SD. This has clearly weakened its ability to act forcefully, especially compared to 2006-2010 when it had a majority.

7. What will now happen to the Alliance?

The future of the Alliance, in terms of structure and cooperation, is strongly connected to the leadership of the dominant Moderates (M). As a phenomenon, the Alliance has undoubtedly been a political success, resulting in an eight-year non-socialist government. After significant losses in this year’s elections both to the European and Swedish Parliaments, M leader Reinfeldt has announced his resignation. In case of an extra election, there is a lingering possibility of a new change of government, especially due to the relatively limited gap between voter support for the respective blocs and questions about political stability. Yet it is most likely that the non-socialist parties will need to examine the reasons for their election loss and possibly work out new future strategies on their own. The disappearance from politics of Moderate duo Fredrik Reinfeldt and Anders Borg (who served eight years as finance minister) would greatly affect the future of both the Moderates and the Alliance; a new framework and structure will need to be worked out. The replacement of party leaders will change the conditions that determine how the Alliance will look, but also increase the potential for cooperation with S. During the coming weeks, the non-socialist parties are expected to reveal their strategies for how to deal with the new political landscape.   Fredrik Reinfeldt and Anders Borg have been the dominant figures in the Alliance.

8. A cross-bloc coalition – could it happen?

We believe that Social Democratic leader Löfven will need to take into account the rather strong leftist currents evident in the election outcome. It will also be complicated for the Alliance parties to immediately enter into organised cooperation with S without risking an outcry from voters who feel betrayed. But looking a bit further ahead, there are many reasons why more cross-bloc cooperation may occur. In pure policy terms, S is closer to the Alliance parties than to its fellow red-green parties on many issues. The Alliance should also have an interest in trying to steer policymaking towards the middle of the road, thereby preventing S from being forced too far left. In terms of power politics, cooperation between S and FP or C would also be a triumph for S since it can thereby isolate M, at least for a while.

9. Can S-MP handle Sweden’s long-term challenges?

Sweden is in great need of broad-based political solutions on such issues as energy, defence, taxation, housing, social services and health care issues. Partly because of the gradual hardening of fault-lines between the blocs in recent years, crucial decisions on a number of long-term issues have been postponed. An S-MP government with weaker parliamentary support (38 per cent excluding V according to preliminary election results, compared to the Alliance’s 49.4 per cent during the 2010-2014 term) will unfortunately have difficulty breaking out of this pattern of paralysis. Although there is potential for agreements in the parliamentary standing and select committees, these long-term challenges nonetheless provide a strong incentive for the government to engage in cross-bloc cooperation.

10. How will fiscal policy be affected?

Our forecast is that the government’s fiscal policy stance will be rather neutral or weakly expansionary. It may be tempting for the new government to try to make a flying start in the labour market by increasing fiscal stimulus programmes, especially in light of the shaky economic situation. But complicating this is the fact that the Social Democrats have long criticised the Alliance government for being fiscally irresponsible. But an initial easing of the surplus target for government finances has already occur-red, since Mr Löfven has toned down the possibility of achieving a balanced budget by 2018. Fiscal policy will be characterised by higher income and excise taxes and the removal of the rebate on employer-financed social insurance fees for young employees. Meanwhile we expect a red-green government to raise fees to a greater extent, for example by boosting unemployment insurance benefits. Overall, there will be a mix that provides an extra short-term dose of stimulus, while a higher tax burden will risk worsening long-term growth potential.

11. What changes in taxation are being considered?

The Social Democrats have declared that they do not in-tend to bring back inheritance, gift, wealth and real estate taxes. They will, however, raise various excise taxes, which will have little economic impact even though this will push up the inflation rate during part of the parliamentary term. But it is reasonable to expect increasing pressure for a mo-re far-reaching review of the tax system. In such a context, there is a great risk that S will be forced to backtrack on certain taxes by maintaining that tax hikes will occur in “a different way that previously”.

12. Will the mandate of the Riksbank be changed?

It is unlikely that an S-MP government will change the central bank’s mandate, even though there has been lively discussion within the red-green bloc on the possibility of giving the bank greater responsibility for the labour market and resource utilisation. This discussion has been fuelled by international criticism of the Riksbank’s key interest rate hikes in 2010-2012 and long-term tendency to undershoot its inflation target. The Riksbank has recently shown a growing determination to defend the credibility of the inflation target. Political leaders thus fundamentally have little long-term interest in further expanding or complicating the mandate of the Riksbank.

13. Will the fiscal policy framework change?

An S-MP government may very well formulate clearer visions and goals related to economic variables, for example in line with the Social Democrats’ unemployment target in the 1990s. But we believe that political leaders will preserve the distinction between such visions and the actual framework, whose purpose is to clarify overall fiscal policy rules of the game. A minor reform transforming the existing surplus target for general government finances (1 per cent of GDP over an economic cycle) into a zero balance target is likely, which is quite reasonable in light of Sweden’s low public sector debt.

14. How will monetary policy be affected?

The change of government will have only a limited impact on monetary policy. At the margin, however, S-MP government policies may lead to somewhat tighter monetary policy. Expected tax increases will push the Riksbank’s CPIF inflation target variable upward by some ½-1 percentage points over the next few years. Under normal circumstances, the Riksbank could completely ignore such inflation impulses, but in the prevailing situation we expect the bank to also use tax-driven inflation impulses to argue that deflation risks are less imminent. Since a red-green government will pursue policies that will lead to higher actual short-term growth at the expense of a bit lower long-term potential, this also suggests slightly tighter monetary policy than before.

15. How will the krona be affected?

Our forecast is that the krona will weaken to around 9.40 per euro over the next few months. This is primarily because during the autumn, the Riksbank will follow the lead of the European Central Bank (ECB) and carry out further stimulus measures, but a degree of uncertainty about the formation of a new government and about its economic policies will also weigh down the krona in the next few months. Looking further ahead, however, we still believe that stronger macroeconomic fundamentals suggest that the krona can regain lost ground against the euro and that the Riksbank will begin raising its key interest rate earlier than the ECB. This tendency may be marginally reinforced by an economic policy following the change of government that puts a bit more emphasis on measures to stimulate demand.

16. Should Sweden carry a political risk premium?

The fog of uncertainty that has swept in over the Swedish political landscape, at least at this writing, is connected to questions about Sweden’s political resolve and the probability of long-term political deadlocks as well as the shape and impact of a new economic policy. The inability of Parliament to make vital decisions on such issues as the tax climate, jobs, social and health care services, schools, residential construction, integration of immigrants, the defence system and energy will have little short-term impact but will carry a growing price tag over time. Meanwhile, the fiscal policy framework will limit budgetary excesses that have the potential to add extra percentage points to the government’s borrowing costs. Because of its fundamentally strong economy, Sweden’s immunity to political uncertainty is very high in historical terms. This reduces, but does not entirely eliminate, a certain political risk premium. This premium has already risen somewhat in recent weeks as a change of government has become more probable.

Important dates in the political process

Sep 29: New Speaker of Parliament appointed – a no-confidence vote may now be proposed

Sep 29-Oct 13: Speaker may ask a candidate for Prime Minister (PM) to form a government

Sep 30: Parliament opens; a PM may be proposed

Oct 3: Possible Statement of Government Policy from a new PM (but no later than three weeks after the PM is chosen)

Oct 13: Deadline for choosing a PM; an extra parliamentary election will be held if the Speaker fails after four attempts

Oct 24: Earliest date for new government to submit Budget Bill

Nov 15: Deadline for new government to submit Budget Bill

Dec 30: A formal decision on the 2015 budget must be made