By Alistair Scrutton and Alister Doyle
STOCKHOLM/OSLO (Reuters) - Years of political instability and policy impasse may be the price Sweden is about to pay for its traditional parties' refusal to countenance deals with far-right politicians.
A collapsed budget deal has upset the genteel consensus of center-right and center-left, prompting talk of a snap parliamentary election that could see the far-right gain and lead to even more policy gridlock.
The stalemate underscores how Sweden is out of step with other Nordic countries that have opened their doors to anti-immigrant and parties skeptical about the European Union, either by allowing them in coalition governments or negotiating with them in parliament.
It may now come down to choosing the ability to govern over traditional Nordic principles of openness and tolerance - the result of the emergence of a rightist third force that fits uneasily with mainstream politics.
"Consensus politics is like two gentlemen boxing and agreeing on the Marquess of Queensbury rules," said Frank Aarebrot, professor of political science at the University of Bergen. "All of a sudden a kick-boxer comes into the ring."
Both Norway and Finland now have rightist populists in their ruling coalitions. Denmark's minority center-right government talks to the Danish People's Party, which is the second biggest party in parliament and supports the government from outside.
In Sweden, the "kick-boxer" is the Sweden Democrats (SD), which emerged after last year's election to become the third biggest party. Some recent polls have put them above 20 percent and closing in on becoming Sweden's second biggest party.
The SD insists on sweeping cuts to immigration as a condition for its support. But it would be political suicide for center-left Prime Minister Stefan Lofven to collaborate with a party founded on the extreme right fringes.
So after last year's election, mainstream parties made an accord to shut the SD out, allowing Lofven's minority government to pass budgets. But on Friday a small opposition party quit the accord and other center-right parties followed.
Although the opposition would have to unite on a budget bill for the government to fall, it raises chances Lofven will call Sweden's first snap election in half a century. It comes as calls grow for reforms to ensure the triple-A-rated economy remains one of Europe's economic stars.
"Sweden faces some of the toughest challenges in modern times," Lofven said in Friday, warning of parliamentary deadlock. "The schools crisis, high unemployment and the refugee crisis must be addressed."
That Nordic dilemma is already being felt. Sweden will welcome up to 150,000 refugees this year, with automatic residency to Syrians. But parliamentary gridlock may have to put issues like diffusing the threat of a housing bubble on the backburner.
"Sweden's image as politically stable and innovative with strong leadership may largely be an item for the history books," said Fredrik Erixon, director of the Brussels-based ECIPE think-tank. "Substantive policy issues are off the agenda."
In contrast, Finland's Eurosceptic, anti-immigration coalition members the Finns party pushed through plans to cut asylum seekers' benefits, as well as abstaining from an EU vote on refugee quotas. In turn it complied with the center-right government's austerity program.
Denmark has published adverts in Lebanese newspapers discouraging refugees and increased border controls. But the government may also find support from the anti-immigrant Danish peoples' Party for its budget.
Some in the Nordic countries say welcoming the populists has diluted their impact.
Support for the Finns Party has dropped from 17.7 percent in April elections to 10.7 percent in a recent poll by public broadcaster YLE.
In Norway, the populist Progress Party won power in 2013 and is a junior partner within a Conservative-led government. But in local elections last month, Progress won just 9.5 percent of the vote, its worst result since 1993.
Progress has failed to cut immigration but it has helped Norway to openly question it. It has also pushed Norway to dip into its sovereign wealth fund for the first time to cut taxes.
"When they (the far right) are accommodated they tend to die," said Aarebrot. "The kick-boxer has stopped kick-boxing and starts playing by the Marquess of Queensbury rules."
Some argue Sweden's mainstream will never talk to SD because it is rooted in the far right rather than, like Progress, emerging from more moderate anti-tax movements.
Meanwhile, a grand coalition of the center right and center left - as in Germany - is unlikely. There is little precedence and such a move could backfire, cementing SD as the only opposition.
Instead, Sweden's mainstream may take on some SD policies. The opposition Moderates party already wants to end automatic permanent residency rights for refugees.
That won't go down well with the center-left, another sign of growing deadlock for a country that has for decades depended on consensus and pragmatic reform to keep its extensive welfare state affordable.
(Added reporting by Teis Jensen and Alexander Tange in Copenhagen and Jussi Rosendahl in Helsinki; Editing by Jeremy Gaunt)