While the election in Sweden on Sunday 9th September may not have any direct political impact on other European countries, it nevertheless once again serves as a dire reminder that political uncertainty is not good for markets.
Neither of the traditional Swedish political blocks can form a government without the consent from either the other side or from the Swedish Democrats — which all have refused to do. But the problems go further. The Social Democrats (28.3%) have refused to discuss any terms for supporting a Conservative Alliance government (comprising of the Liberals, Centre Party, Moderates, Christian Democrats).
Moreover, this same Conservative Alliance will call a no-confidence vote when parliament reconvenes on 24th September which the Social Democrats PM is sure to lose. Yet without the support of the Red-Green bloc (comprising of the Social Democrats, Green and Left Party), an Alliance government would be fragile and powerless, especially if the Sweden Democrats joined in to bring it down.
It is clear that Sweden will be unstable for weeks to come and that coalition negotiations are likely to drag on with parties squabbling various issues and perhaps fail to have an agreement, which will inevitably lead to a new election.
So, what does this mean for the economy?
In the short-term experts believe Sweden will be able to operate on auto-pilot due to a robust institutional framework — there are at the moment no economic emergencies. However, looking to the medium-term, things might become problematic. A weak government would not be able to bring meaningful reforms to the country and navigating through economic downturns and turbulences will not prove easy.
Sweden’s open economy leaves it somewhat vulnerable to global trade fluctuation, especially to the US-China trade row which is far from being resolve.
In addition, the Swedish krona has been this year’s worst performing major currency against the dollar and the euro. Analysts contend that the krona’s plunging volatility has something to do with the Riskbank’s (the Swedish central bank) erratic decisions throughout the year, but the electoral stalemate is bound to have further negative repercussion on the economy.