Today Swedish voters take to the polls to elect members of the domestic legislature (Riksdag) which will in turn, appoint the Prime Minister, in what has been tipped as “Sweden’s most important election in decades.” Surveys show the center-left bloc with a slim lead but the far-right Sweden Democrats may still emerge as the largest single party.

As the turbulent Swedish election campaign comes to a close with little sign of compromise ahead as the establishment parties pleaded with voters to beat back an ascendant nationalist movement, there is the potential for a blockbuster surprise as yet another European state is rocked by growing populist, anti-immigrant sentiment.

The reason: record immigration in recent years and lingering economic hardship from the financial crisis have stoked populism even in a country as rich and egalitarian Sweden. The threat to the political establishment comes on the heels of a wave of election surprises around the world, such as the U.K. Brexit vote, and the rise of populist leaders in countries such as Italy and Hungary and – of course – the U.S. As Deutsche Bank recently noted, “the Liberal world order is in jeopardy” as global populism has risen to levels not seen since World War II.

Today, it may be Sweden’s turn.

MPs are elected to Sweden’s single-chamber system using proportional representation with candidates either appointed on a regional basis or a proportional balancing mechanism. A party must receive at least 4% of the national vote or 12% of a constituency vote to enter the Riksdag.

With regards to appointing a PM, the leader of any party that wins over 50% is appointed as PM. However, this is unlikely to be the case given polling data and historical performance. As such, the appointment of a PM will most likely be as the result of a coalition-building process.

As shown in the chart below, the center-right and center-left blocs were in a virtual tie with voting starting on Sunday as the conservative-led opposition gained ground in recent days. But the blocs will be far from securing a majority since the anti-immigration Sweden Democrats look poised to win almost 20 percent.

Parties and Potential Coalition Options

Neither government nor opposition looks likely to gain a majority

While the center left and right have minimal policy differences, the disruptive force in Swedish politics has been the meteoric rise of the Sweden Democrats. They hold stances that include Euroscepticism, saying that Sweden “pay an enormous amount of money and get overwhelmingly little back” alongside repeatedly calling for a referendum on EU membership. All Swedish parties have ostracized them in parliament due to this, alongside their harsh immigration policies.

Polls by party

The success in polling for the Sweden Democrats, allied with the Social Democrats and Moderates polling at record lows, leaves a high possibility for a messy election season due to government formation concerns and the lack of cross-party cooperation in parliament.

As a note of caution with regards to polling, Nordea highlight that “pollsters are divided on the anticipated support for SD, but two pollsters (Sentio and YouGov) stand out with much bigger anticipated support for SD than the rest of the field”. Nordea explains that “If Sentio and YouGov are ‘on to something’ and SD gets close to 25% of the votes, the election result could have a big impact on markets”

However, the true consequences of the election may take a while to filter through to markets (Italy is a good comparison from recent history!) as ING expect the formation of a new government and budget for 2018 “easily taking up the rest of the year”. The possibility of a second election also cannot be discounted, as was almost the case in 2014, and would extend this period of uncertainty into 2019.

That said, ultimately, Swedish fiscal legislature limits major changes, regardless of governmental composition as there is a legal requirement to run a surplus of 0.33% of GDP over the economic cycle and keep debt anchored around 35% of GDP. This, allied with a lack of support in the Swedish populace for leaving the EU (below 25%), the likelihood of a weak minority government, and opposition to joining the EUR (less than 20%) leaves analysts expecting a maintenance of the status-quo in relation to fiscal and policy status.

Market views of the election outcome

ING: Hold a bearish view on SEK post-election, citing the possibility of a hung parliament, a dovish Riksbank, a slowing Swedish economy and the looming trade war threat on the open Swedish economy. As such they see EURSEK hitting 11.00 at some point this year, with a recovery seen in 2019.

Credit Agricole: Expect only short-term volatility in EURSEK and see it trading nearer 10.10 by year-end, as well as saying that at best it may trigger a small delay to the Riksbank’s outlook.

Danske Bank: Hold a bearish view on the SEK, based on the election, Riksbank and inflation. Danske holds a 1-month target (as of Aug 24th) of 10.50 and a 3-month target of 10.60; both of the levels were breached last month.

Goldman Sachs: GS believe that the market response to the election is likely to be contained, adding that any possible spikes in market prices are unlikely to be persistent. GS suggests that if polling is correct, the largest bloc from the main two blocs will form a government and repeat the political dynamics over the past four years.

Nordea: Have recently closed their long EUR/SEK position and have instead decided to go short. The call was largely based on the potential for a hawkish read to the upcoming Riksbank meeting. However, Nordea adds that they believe the upcoming general election is overstated as a macro driver and look for a potential unwind of ‘SD hedges’ after the results are released.

Election Day

Polls in Sweden opened at 8 a.m. local time (0600 UTC). Voters will be casting their votes Sunday in three separate ballots: The general election, regional elections and local elections. As many as 3 million Swedes are estimated to have already cast their ballot last month, when pre-voting opened on August 22. A handful of leading candidates used the opportunity to skip the queues, including incumbent Prime Minister Stefan Lofven of the Social Democrats (SAP).

All eyes will be on whether the far-right Sweden Democrats (SD) can emerge as the largest single party in a country known for its high quality of life and developed welfare state. Surveys suggest the SD could take around 20 percent of the vote, well above the 13 percent it scored in the previous election in 2014.

Overall, the polls predict political gridlock. The left-wing bloc, made up of the Social Democrats and Left Party, was backed by almost 40 percent of the vote, while the four-party center-right Alliance trailed narrowly behind on 38.5 percent. That means some form of “grand coalition” between the center-left and the Alliance may be necessary to break the deadlock, unless one of the groups agrees to govern with the Sweden Democrats.

* * *

As Bloomberg notes, establishment party leaders took the last moments of the campaign to warn voters that the political turbulence will be far from over come election day, and that they can expect hard talks in the days or weeks ahead on forming a viable government. All parties have vowed not to seek the support of the Sweden Democrats. The tension has showed no signs of subsiding, with an eruption of vitriol between the smaller pro-immigration Center Party and the nationalists in Friday’s last big debate of the campaign.

Center Party leader Annie Loof voiced loud protests as Sweden Democrats leader Jimmie Akesson said that immigrants find it hard to get jobs because they’re not Swedish and “don’t belong.” Asked again about the controversy on Saturday, Loof said that Akesson showed “his true face yesterday.”

But Loof also said that Prime Minister Stefan Lofven should step down immediately if it becomes clear his Social Democrats have lost power, in order not to slow down the process of forming a new government. “If he steps down tonight that process could start tomorrow morning,” she told newspaper Expressen. “If he doesn’t resign, we will vote him down in a couple of weeks.”

Ulf Kristersson, head of the conservative Moderate Party and front-runner to become the next prime minister, said integrating refugees is key for Sweden to maintain its extensive welfare state. “This is something that erodes Sweden’s social contract,” he said. “So many people could do so much good in our country, if we just had a well-functioning integration.”

On the other hand, the angry response to Sweden’s immigration problem is precisely why the country’s nationalist movement is ascendent, as the labor market has had a tough time absorbing the inflow of about 600,000 people over the past five years. Unemployment among the foreign-born is about 20 percent, compared with just above 6 percent overall. This has led to a surge in violence in the past few years, much of it at the hands of recent immigrants.

Saying he had slept well, Prime Minister Lofven – whose political career may end as soon as today – early on Sunday left the prime minister’s residence in central Stockholm to go vote with his wife, Ulla. After casting his ballot, he reiterated that the election amounted to a referendum on the welfare system. It’s also a vote “about decency” with the Social Democrats as a guarantor of not allowing an “extremist racist” party to gain influence, he said to reporters.

We now await the results.

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