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Krona and Euro Vulnerable to Unprecedented Political Gridlock

Krona and Euro Vulnerable to Unprecedented Political Gridlock

Dimitri Zabelin, Analyst

TALKING POINTS – KRONA, EURO, EU, SWEDEN DEMOCRATS

  • Swedish Krona may be vulnerable amid continued post-election gridlock
  • Budget deadline eyed amid unprecedented delay in government formation
  • Turmoil in Stockholm compounds pressures from Italy, Brexit on the EU

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Political gridlock has gripped Sweden since the inconclusive elections on September 9th that resulted in a hung parliament. The rise of the Sweden Democrats (SD) – a nationalist group with origins in neo-Nazism – has greatly complicated coalition-building negotiations.

All the big parties and coalitions – such as the Red-Greens and The Alliance – have refused to cooperate with the Sweden Democrats on principle. Any party seen publicly working with the nationalists risks hurting its credibility, providing ammunition for critics to allege sympathy with the extreme right wing.

So far, the speaker of the house has picked two candidates to form a government to lead Sweden.Both have failed. Moderate Party leader Ulf Kristersson was initially asked, and was then followed by Stefan Lofven, the current prime minister of the caretaker government. Kristersson has been asked once again to form a government. However, the outlook appears unnerving.

“I do not see any indication that anyone has changed their minds about anything at all,” Kristersson said.

If he and the next candidate fail, it will trigger another election, to be held in three months. Another poll is likely to yield a similar outcome, only with the possibility that the Sweden Democrats expand their support base. A pickup in European market volatility amid worries about growing political instability in the region will probably follow.

Krona and Euro Vulnerable to Unprecedented Political Gridlock

The fracturing of parliaments and rise of nationalism has been a growing characteristic of European politics. The macroeconomic implications of political fragmentation – especially from nationalists – will negatively affect EU stability and undermine the Euro, as it has in Italy.

Adding to the pressure, Sweden’s parliament has to approve a budget for 2019 by November 15th. Under normal circumstances, a government would have already been formedby this time. Absent that, there are measures to put forward a “neutral” budget by the current care-taker government.

However, it is somewhat difficult to imagine such thing as a “neutral” budget. The allocation of resources by the state is predicated on the values and objectives of the dominant party in the government. To that end, the Moderate Party is contemplating pushing forward its own version of a “neutral” budget to counter whatever Mr Lofven and company come up with.

The growing pressure from the impeding deadline may push political parties to radically shift their positions. While all major parties have refused to cooperate with the SD’s, their refusal to work with each other has undermined progress. Compromise is necessary, but with whom and when is unclear. That is understandably a cause of concern for markets and may inspire an exodus from SEK- and (to some extent) from EUR-denominated assets.

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--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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