Mundus Brief: April 2019

The Mundus Brief is your chance to read a summary of what happened in Sweden last month and our chance to let you know what we’ve been looking into. We try to keep the Mundus Brief brief and entertaining; a counterbalance to our more serious news and analysis. 
/The Mundus Team

Swedish news in April had a sense of transition, especially for politics and the economy. After the months of national political deadlock and the Swedbank implosion, April’s stories were anticlimactic. It’s not that the country lacked for direction. Rather, it was more that the past is still getting in the way, and slowing things down.

One area where this was especially obvious was in the Spring budget. The Spring budget is an amending budget, meaning that the government can propose changes to what has already been agreed earlier, but it is not able to influence some parameters – in particular, tax rates. So, the new Löfven 2.0 government has to live mainly with the Moderate (M) and Christian Democrat (KD) budget passed by the Riksdag last year, during the post-election muddle. As the M+KD budget gave away significant tax reforms, the government decided that there was limited room to take many initiatives. A total of SEK 4 billion of new measures were announced, mainly to fund pro-climate initiatives. Another sign of the times was M and KD presenting their budget response together – a poor shadow of the once victorious Alliance, not yet regrouped into a powerful right faction with SD. Without its liberal partners, M+KD’s budget was a return to traditional conservative politics, proposing more funding for police and the elderly.

One policy area facing scrutiny is Sweden’s labour market. The Liberals (L) and Centre Party (C) extracted labour market reforms as a concession of their support for Löfven. Its not that the right of the Social Democrats particularly minds this change, but the left of the party is aghast, as are the unions. Jonas Sjöstedt’s Left (V) party say that they will attempt to bring the government down if it pushes forward with reforms. If M, KD and the Sweden Democrats (SD) agree to support him, he could even succeed, although that would be a highly unusual outcome.

The Liberals are certainly a party in transition, and one that is fighting desperately for its existence. Not only is the party struggling to maintain its head above the 4% parliamentary threshold, but it is going through a leadership transition. So far, Nyamko Sabuni is the front runner, with few willing to step forward to challenge her. The Liberals challenges are most acute at EU level, with Cecilia Wikström being forced out, and lesser known replacements having to fight desperately to win a seat. L has decided to run on a platform of “Yes to Europe”.

This gives them a distinctive position, at a time when the other parties are more circumspect to the European project. S focus for the EU elections will be values, jobs and the climate. But what S is against is having to pay billions more to the EU as a contribution towards the Brexit budget gap. M plans to campaign on crime, climate and immigration. The KD wants the EU to abandon big projects, and return to a more “lagom” EU, “avoiding the extremes of supranational federalists and nationalists”. Lagom seems to be winning the day, with KD’s vote doubling in polls to over 10%, while the nation is more No, than Yes to the Liberals, at only 3%.The SD are forecast to do better, with their opinion rating approaching 20%. Read our full analysis of opinion polls and what European Commission positions Sweden will be seeking in the May edition of the Monthly Policy Review.

The country’s politics is clearly in transition. The 1970s social-liberal utopia is hardening, with the political party opinion polls just one sign of this. The annual SOM study, conducted by the SOM institute at Gothenburg University, found that more Swedes find their hearts on the right than on the left and increasingly fewer are identifying with the political centre. The number on the ideological right has grown from 35% to 40% and the number of those who identify on the left has grown from 32% to 34%. Consequently the centre ground is squeezed, shrinking from an equal third share with right and left to a quarter. The results show other interesting political trends, such as the increased support for the Swedish police, courts and especially defence. Support is also rising continuously for the EU and the Commission, and for labour market migration.

Societal trends also in flux

One very unfortunate trend in recent years is for the rise of violent crime, resulting from drug and gang wars. For a while the police seemed to have gotten on top of the problem, but for Stockholm, to date 2019 is the deadliest year on record, with 9 deadly shootings by mid April. There seems little cause for doubt that such events are leading to a hardening of attitudes. The government promised to give police extra resources to fight the crimes. Another reason for the change in political views could also be the economic changes. An OECD report found that Sweden’s middle class was hollowing out. The proportion of Swedes defined as middle class has fallen from 72.6% in the 1980s to 65.2% today. The OECD warned on the consequences of the trend, which was more than twice as high as in other OECD countries.

Housing is another area at risk of dividing the country, although in this case, it is more between age groups than class structures. Those who bought their homes many years ago find themselves in a far stronger position than those who are trying to enter the housing market today. Mundus has reported on the severe challenges of the housing market on a number of occasions. In April, the insurer, Skandia, released a report which identified that in 13 out of Sweden’s 25 larger towns, an average 28-year-old is denied a loan for a studio flat with the new amortization requirement, even if they have permanent employment and have saved a deposit.

The government finally is beginning to take steps to correct the economics, but the severity of the problem means that much more will be required. One step taken is to criminalise unlawful subletting of apartments, so that people who take advantage of their incumbent tenancy, often gouging newly arrived or the young 50% more than they are paying as rent.

The issue of the children of IS parents raged in April. With the fall of the Caliphate, Swedish politicians struggled to resolve the conflict desires felt between punishing Swedish adults who got involved in the war, and accepting that their children were innocent accomplices. There are also legal requirements, that cannot be avoided. Ministers were reportedly at odds over whether to try to extract and fly home the 80 Swedish children caught up in the conflict.

Sweden’s economy “goes off the boil”

Sweden has enjoyed robust growth of since it exited the Financial Crisis in 2012. From 2014 to 2018 GDP growth averaged almost 2.5%. But, the good years are not going to continue, with the government’s own GDP forecast projecting 1.6% growth for the next 3 years. The OECD agreed, and the IMF thought growth was likelier to be even lower. Lower Swedish GDP growth reflects partly the gloomier trends in European and global growth and the unsettling impact of trade wars on Sweden’s export-oriented economy. But, it is also a consequence of the poor management of the housing market, which both the Reinfeldt and Löfven government’s allowed to inflate, and then the Löfven government suddenly popped in 2017. With prices dropping unexpectedly, the construction of new buildings is falling. Not only does this mean that there will not be places for young Swedes or foreign talent to live, it also affects economic activity, and GDP.

This unhappy situation also has consequences for the trinity of inflation, interest rates and the exchange rate. The Riksbank is in a difficult position – it needs to get the interest rate positive again to give itself room to fight a future downturn and to stabilise the exchange rate. But, simultaneously it needs to keep interest rates low to force inflation up. The dilemma was on open display in the Riksdag Finance Committee, as Mundus News reported.

Stockholm Stock Exchange hits new records

The financial markets were happy to ignore the sober analysis, hitting record highs on the back of a global bull market and great corporate results. Both Volvo cars and Volvo Group (the trucks) had excellent quarters, as did Ericsson. Even Swedbank had a good quarter, providing some rare good news for its new management team. For those who would like to catch up on all its bad news, see our coverage here.

Swedish energy system takes strain

It is not news that Sweden is boldly attempting to transition its energy system. This has been bipartisan policy now for several years, with a stable framework agreed to by the Riksdag and a major part of the January Agreement devoted to delivering it (Subscribers can read our 5-page analysis in the May Monthly Policy Review). But, what is less well-understood is the impact that this is already having on the energy network. Electricity network costs have increased by 68% since 2008, making them the second highest in Europe, and with the network promising to increase costs for years to come to fund further investments. The situation is so challenging that Svenska kraftnät, the network operator has thrown its hands in the air, declaring in a debate article published in Dagens Industri, that it was “unable to resolve Swedish electricity consumption on its own.” It is a collective effort and all stakeholders must take responsibility, including politicians and the energy sector. The carbon reduction challenges are made all the harder given the cross-party agreement to phase out nuclear power, which is the reason why the M and KD elevated the issue in April, threatening to pull out of the agreement.

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