Sweden: Government crisis

Yesterday the right-wing party Sweden Democrats (SD) announced that it will support the former alliance government’s alternative budget bill, which effectively means that the present government’s (Social Democrats and Greens) budget bill will be rejected. The prime minister late last night called the alliance parties to negotiations, talks that apparently did not lead anywhere.

Constitutionally (as far as we know) the prime minister can still postpone the budget vote today and send back the budget bill to the Riksdag finance committee. However, since the alliance parties have declared that they will vote for their common alternative proposition, this option seems less likely. If the vote takes place, the government’s bill will be rejected. The result of that is likely (but constitutionally not necessarily) that the government resigns. This, in turn, does not automatically trigger a new election. Instead the speaker of the Riksdag will see what possibilities there might be to form another government. One alternative that has been discussed is a minority government with Social Democrats but without the Greens. If such attempts to find a new government fails four times the speaker must call for a new election. Such a call can be made at the earliest on 29 December and the election takes place three months later, i.e. in March.

There is a significant amount of ifs and buts here and the reason is that this situation is unique for Sweden.

Market-wise one can say that uncertainty is usually a bad thing. However, a few factors should be considered. First, Sweden does not have a US-style borrowing cap, so there will be no fiscal cliff. Secondly, the current budget accepted by the Riksdag a year ago continues to run. Thirdly, Sweden is not in an economic crisis by any standard where a number of sharp policy decisions have to be made quickly. Fourth, the Social Democrats and Greens’ budget proposition (supported also by the left party) has a clear tilt to the left. In fact, the prime minister has been criticised for giving away too much to the left party. So we reckon a new budget would have less of a tilt to the left.