Extremist parties’ strong performance will add pressures to the Germany’s ruling coalition
The far-right AfD’s came first in the state elections in Thuringia, gaining 32.8% of the vote and well-ahead of the CDU’s 23.6%, which came second. Similarly, the party performed strongly in Saxony, gaining 30.6% of the vote and coming in second to the CDU’s 31.9%. The AfD is likely to also win the elections in Brandenburg on the 22nd of September, where it has been polling well-ahead of both the CDU and the SPD, with the recent strong performance likely to further energize potential voters. The party’s electoral successes are in line with our expectations, and we do not expect that it will enter a governing coalition in state parliaments. However, the AfD has clearly shook German politics, especially considering the ruling coalition’s weak performance, which will present significant challenges to Chancellor Olaf Scholz’s premiership ahead of the 2025 elections.
Business Implications:
The immediate effect on multinationals is likely to be minimal, especially given that the AfD is unlikely to be a part of any governing coalition both in the state and federal governments. The robust performance of extreme political movements, however, will likely force traditional parties to abandon certain political positions, with a curb on immigration becoming increasingly likely. The latter might add to existing operational challenges, especially given the persisting labor market shortage. As such, a new government in 2025 will need to present a cohesive plan that ensures that the market is still attractive to skilled migrant labor, while restoring confidence in its migration policy. More importantly, the government may rethink spending priorities in the medium-term, especially given its slump in support, which may add a new dimension to policy and public expenditure uncertainty.
What’s behind the AfD’s performance?
While many might be tempted to attribute the AfD’s strong performance to regional preferences, and admittedly East German region’s stronger support for more extreme political movements is at play, the party is also performing strongly in national polling, coming in second with 19.0% support and ahead of the ruling SPD, suggesting that the AfD’s rising prominence is a national issue. The latter suggests a broader disillusionment with politics, with the AfD anti-immigration rhetoric seeing a significant appeal with German voters. The attack in Solingen, which saw a suspected Isis member fatally stabbing three individuals, has also likely given a strong boost to the AfD just prior to the state elections. Additionally, majority of voters continue to see the ruling coalition as failing to address persisting economic challenges, including inflation and wages, which in combination with tightening fiscal policy, is set to add additional pressures on the ruling coalitions. What is also notable is the hard-left Sahra Wagenknecht Alliance’s (BSW) strong performance in Saxony in Thuringia, which won 10.0-15.0% of the vote, and which has also employed anti-immigration rhetoric and has often parroted pro-Kremlin talking points with the AfD. The AfD’s and the BSW’s strong electoral performance also suggests that fatigue over Ukraine is likely settling in with some portion of German voters.
The AfD’s victory is concerning, especially given the country’s troubled history with extremist political movements and the fact that the AfD is considerably more extreme in its positions than other far-right populist movements in Europe, but we do not expect the party to enter a ruling coalition in both state and federal elections. Major parties have already ruled out such a possibility and the inherent “firewall” against such movements is likely to remain at play, with the CDU being much more likely to enter a grand coalition with the SPD and the Greens in the aftermath of the 2025 elections instead. The results of the state elections, however, will send a clear signal to major parties and we have already seen the CDU’s leader, and likely next Chancellor, Friedrich Merz suggesting “national emergency” curbs to migration. The SPD has also relented on certain immigration issues, approving the deportation of several failed asylum-seekers to Afghanistan last week. On the issue of Ukraine, the current government is also likely to become more cautious when it comes to military aid to Ukraine – the government has already halved military aid to EUR 4.0 bln in 2025 budget but has insisted that the G7 EUR 50.0 bln funding should make up for that loss. While the cut is admittedly a result of the self-imposed debt break and tight fiscal rules, additional cuts are not out of the question, especially given that they will be seen as more palpable to voters. The rise of extremist political ideologies is thus a structural challenge, which will continue to weigh on domestic politics in the long-term.
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