Week Ahead (14 September)

W/C Monday, 14 September – Swedish election remains too close to call as centre-left holds razor thin lead

Sweden's general election remains too close to call, with former Prime Minister Magdalena Andersson's centre-left opposition holding only a marginal advantage over Prime Minister Ulf Kristersson's right-wing bloc after Sunday's vote. With almost all votes counted, the latest count puts the opposition on 176 seats against 173 for the right in the 349-seat parliament, although earlier projections had narrowed the difference to a single seat. Late postal and overseas votes will be counted from Wednesday, meaning the final outcome could still change.

The result represents a significant late recovery for Kristersson's bloc. The centre-left had led by around 10 percentage points earlier this year and by two to three points heading into the election, while initial exit polls also suggested a clearer Andersson victory. As official results came in, however, the gap narrowed sharply. Andersson said that while the outcome remained “even”, “right now we are leading and if this holds up, Sweden will get a new government”; Kristersson acknowledged that forming a government could prove “complicated”. 

Interestingly, the Sweden Democrats themselves appear to have lost ground despite the right's stronger-than-expected performance. The party is currently on around 17.6%, down from 20.5% in 2022 and behind Kristersson's Moderates. Nevertheless, if the right ultimately prevails, Kristersson remains committed to bringing the Sweden Democrats formally into government for the first time.

Government formation could nevertheless prove difficult regardless of which bloc ultimately finishes ahead. The four parties supporting Andersson broadly favour higher welfare spending but remain divided over taxation, nuclear energy and other economic policies, while the liberal Centre Party continues to reject governing alongside the Left Party. By contrast, the right has sought to present itself as the more coherent governing alternative, although bringing the Sweden Democrats formally into government would still represent a significant further political shift.

The campaign itself was less dominated by a single policy issue than by the question of who could assemble a viable government. Migration and integration remain important after four years in which asylum applications have fallen to their lowest level in decades and the government has tightened residency, citizenship and deportation rules. However, the political centre of gravity has already shifted considerably on these issues, narrowing some of the differences between the blocs. Household purchasing power, welfare provision and the economy also featured prominently, while falling inflation and declining levels of shootings somewhat reduced the salience of two issues that were central in 2022.

Foreign and security policy is considerably less divisive. There remains broad cross-party support for NATO membership, higher defence spending and continued military and financial assistance to Ukraine, meaning even a change of government is unlikely to produce a significant shift in Stockholm's security orientation.

From an EU perspective, the election therefore matters more for Sweden's position on migration, climate and economic policy than for defence or Ukraine. A Kristersson government incorporating the Sweden Democrats would reinforce the broader European trend towards tougher migration policies and could make Stockholm somewhat more receptive to the rightward shift underway on regulation and competitiveness. An Andersson-led government would likely place relatively greater emphasis on social and climate policy, although the coalition constraints on the centre left would limit the scope for a dramatic change in Sweden's traditionally fiscally cautious and pro-European approach. 

The immediate focus will therefore remain on Wednesday's counting of overseas and late ballots, which should provide greater clarity over which bloc has the parliamentary advantage before the potentially difficult coalition negotiations begin.

W/C Monday, 14 September – UPM and Sappi to defend €1.42 billion paper joint venture

UPM-Kymmene and Sappi are expected to defend their proposed €1.42 billion graphic-paper joint venture at a closed-door European Commission hearing this week, in a case that is becoming an important early test of how DG COMP treats resilience and industrial efficiency arguments under its emerging merger control framework.

As outlined in our previous reports, the transaction would combine UPM's communication papers business with Sappi's European graphic paper operations in a 50/50 joint venture. The companies argue that consolidation is necessary in a structurally declining European industry facing falling demand from digitalisation, excess capacity, high energy costs and increasing import competition. Their case therefore speaks directly to the greater emphasis on resilience, investment and dynamic efficiencies contained in the Commission's draft Merger Guidelines.

DG COMP has nevertheless pursued the transaction through an in-depth investigation (launched in April), which was temporarily suspended in May before resuming over the summer. In late August, the Commission issued a Statement of Objections setting out its preliminary conclusion that the combination could significantly weaken competition in coated mechanical and coated woodfree paper. Brussels is concerned that the joint venture would create a sufficiently powerful market leader to facilitate capacity reductions, increase prices and weaken quality and innovation.

This week's hearing will give UPM and Sappi an opportunity to challenge that assessment before Commission officials and interested stakeholders. In particular, the parties are expected to argue that the claimed cost, environmental and supply resilience benefits should be weighed against the Commission's concentration concerns; DG COMP has so far indicated that it is not convinced those efficiencies sufficiently offset the potential competitive harm.

The case is therefore particularly relevant to the Commission's wider merger policy shift. As Competition Commissioner Teresa Ribera and senior DG COMP officials have stressed recently, Brussels is increasingly willing to consider resilience and broader efficiencies earlier in merger reviews. However, UPM–Sappi demonstrates that the emerging Guidelines do not provide a free pass for consolidation as companies still need to substantiate those benefits sufficiently to overcome conventional competition concerns where significant horizontal overlaps remain.

The Commission currently faces an 11 November deadline for its final decision.

Wednesday, 16 September – Von der Leyen to set out Commission priorities in State of the European Union address

On Wednesday, Commission President Ursula von der Leyen will deliver her annual State of the European Union (SOTEU) address to the European Parliament, setting out the Commission's priorities for the coming year against an increasingly difficult economic, geopolitical and domestic political backdrop. 

Although the content of the speech remains a well-kept secret, competitiveness is likely to be one of the central themes. Two years after Mario Draghi warned that Europe faced a “slow agony” without significantly stronger investment and productivity growth, member states and MEPs are pressing the Commission to demonstrate more tangible progress on reducing regulatory burdens, lowering energy costs, strengthening the Single Market and supporting European industry. Von der Leyen discussed the speech with EU ambassadors earlier today, with national representatives expected to have emphasised competitiveness, jobs and economic growth alongside migration and border security.

However, there is considerably less agreement over the policy response. Poland, Czechia and others are pushing for further flexibility in climate legislation, including the ETS, to relieve pressure on industry, while Sweden and several northern and Baltic countries warn against undermining investments already made in decarbonisation. Similar divisions exist over migration, where Denmark, Italy and others are seeking tougher measures despite falling irregular arrivals and implementation of the Migration Pact already under way.

These disagreements are increasingly being framed through the rise of the far right across Europe. Interestingly, different political actors largely agree that mainstream governments need to respond to voter dissatisfaction but draw very different conclusions about its causes: the centre right emphasises competitiveness, migration and regulatory burdens; the left focuses more heavily on living costs, housing and social protection, while Greens argue that weakening climate policy would compound rather than address Europe's longer term vulnerabilities.

Parliament President Roberta Metsola has accordingly called for “answers and concrete action”, pointing to household costs, security, competitiveness and border control. Beyond the economy, von der Leyen is also expected to address continued financial and military support for Ukraine, European defence and economic security, alongside a new initiative on children's access to social media. Notably, Canadian Prime Minister Mark Carney will also attend the address as a guest, amid efforts on both sides to deepen EU–Canada economic and security ties. Carney has called for a “unique alliance” with the EU short of membership, while Ottawa is contemplating participation in an EU-backed financing package for Ukraine.

Wednesday’s speech should therefore provide an important indication of how von der Leyen seeks to reconcile these competing pressures around competitiveness, climate policy, migration and social protection as the Commission enters the second half of its mandate. 

Thursday, 17 September – Bank of England expected to hold rates as focus shifts to year-end tightening outlook

The Bank of England is widely expected to leave Bank Rate unchanged at 3.75% on Thursday, extending the pause that has been in place since the escalation of the Middle East conflict earlier this year. All 65 economists surveyed in the latest Reuters poll expect no change, while market pricing currently implies only around a 20% probability of a 25bp increase this week.

The decision nevertheless comes against a finely balanced economic backdrop. Headline inflation increased from 2.6% in June to 2.9% in July, remaining above the Bank's 2% target, while core and services inflation stood at 2.6% and 3.4%, respectively. At the same time, economic activity has proved more resilient than anticipated. Last Friday, the Office for National Statistics (ONS) revealed that the GDP expanded by 0.4% month-on-month in July, considerably stronger than economists had expected. The MPC will also receive fresh labour market figures on Tuesday and August inflation data on Wednesday, meaning the final data immediately preceding the meeting could still influence the tone of Thursday's decision.

The more important question is therefore likely to be the MPC's assessment of the remaining 2026 policy trajectory. July's decision to hold was relatively hawkish, with six members supporting no change but Megan Greene, Catherine Mann and Huw Pill voting for an increase to 4%. The majority judged that weak underlying demand and limited evidence of second-round effects allowed the Bank to wait, whereas the dissenters were more concerned that prolonged higher energy prices could feed into wages, expectations and broader price-setting.

Last week, Governor Andrew Bailey pushed back against interpreting higher market rates as evidence that another increase is inevitable. Speaking before the House of Commons, Bailey stressed that the MPC has no “secret plan” to tighten and argued that part of the upward slope in market pricing reflects a risk premium associated with further energy price shocks rather than the Bank's most likely policy path. Bailey nevertheless acknowledged that activity has been “reasonably resilient”, while markets continue to price approximately one 25bp increase by year-end.

The differences among MPC members remain important. In the same parliamentary hearing, Deputy Governor Dave Ramsden described domestically generated inflation pressures as “relatively benign”, pointing particularly to the labour market, while Alan Taylor argued that maintaining restrictive rates provides insurance against external inflation risks. Greene remains more concerned that an extended oil shock could eventually alter inflation expectations and voted for an immediate hike in July.

Thursday's meeting should therefore be viewed less as a live decision between holding and hiking than as an indication of how close the Bank is to another move later this year. The vote split, the MPC's interpretation of the latest inflation and labour market data and its assessment of second round effects from energy prices will be the main signals to watch.