Far-right win in Germany puts Europe’s biggest economy under pressure

A landslide electoral victory for the far-right in the small but significant state of Saxony-Anhalt over the weekend is sending shockwaves through Europe and piling pressure on Germany’s federal government.

Alternative for Germany (AfD) secured the highest share of the vote at 43.8%, well above the 17.2% of the incumbent Christian Democratic Union Party (CDU), which also leads the country’s national coalition under Chancellor Friedrich Merz. Initial results show the AfD securing 39 of 83 parliamentary seats, leaving it three seats short of an outright majority and uncertain over its ability to form a new state government.

A so-called “firewall” sees other parties in Germany agree not to cooperate with far-right in a way that would give it political power. However, AfD candidate Ulrich Siegmund said Monday that the party would hold discussions with “individual parliamentary groups or individual MPs” to see if they would support it in governing.

In a press conference, Merz said the election showed the need for reform but said Germany’s “institutions were resilient and stable.”

“This message is also directed at our friends in Europe and across the globe,” he said, according to a Reuters report.

The “extraordinary” result may be the “most consequential German state-election result of the postwar era,” Mujtaba Rahman, managing director for Europe at consultancy Eurasia Group, said Monday.

While the AfD has been growing in popularity for years, particularly in eastern Germany, the result raises the prospect of the hard right taking power in a German state for the first time since the Nazi era.

At the state level, the party has pledged stringently anti-refugee and anti-migrant policies, including accelerating deportations and separating the children of refugees into different classrooms, while encouraging SMEs to use AI rather than migrant workers and financially incentivizing families to have more children.

Voters “seeking a genuinely radical break” voted AfD, while liberal and left-wing voters swung to the Greens and Social Democratic Party of Germany (SPD), squeezing the CDU from both sides, Rahman said in a note.

If it continues, that trend could see upcoming elections in Mecklenburg-Western Pomerania and Berlin turn “a regional earthquake into a rolling national crisis,” he added.

Saxony-Anhalt, a traditional hub for German chemicals and motor supplies, has “suffered disproportionately” from the post-unification collapse of east German industry and the recent spike in energy prices, Berenberg Chief Economist Holger Schmieding said in a Monday note.

The result also deals a hammer blow to the federal government of Merz, who polling suggests is deeply unpopular.

Questions over the future of German industry, innovation and welfare were dominant themes in the electoral race, Peter Altmaier, former Minister for Economic Affairs and Energy for the CDU, told CNBC on Monday.

Though it was a state election, Altmaier said dissatisfaction with national-level answers to those questions contributed to the result.

The public is “furious” and turning to challenger parties on both the left and right after five years of economic stagnation and a lack of job creation at a time when many traditional jobs are being lost in Germany, Altmaier continued.

“We expected the worst, but this result yesterday night was a kind of disaster … and of course it will affect political debates across the country and upcoming state elections in other states,” Altmaier said.

“Saxony-Anhalt is one of the smallest states, of course, and the German democracy is strong and resilient. But this is unprecedented, and it will be a matter of concern not only for us but also for our neighbors in Europe.”

On Monday, ministers in both Poland and France — also facing the prospect of mounting electoral gains for the far-right — called the German result worrying, according to local media reports.

The Saxony-Anhalt election alone is very unlikely to derail Germany’s planned increases in defense and infrastructure spending or the majority of unpopular cuts and pro-growth reforms set to be passed this fall, Berenberg’s Holger Schmieding said.

Those include pension system savings, tax and health-care reforms and measures to reduce bureaucracy, as well as hikes to defense and infrastructure spending.

“The alternative – namely to shy away from reforms to strengthen Germany’s growth potential – would likely be even worse for the outlook for the coalition parties in the long run,” he said.

It also seems “more likely than not” that Merz and his coalition will “soldier on” until the end of their federal parliamentary term in early 2029, Schmieding said.

However, that is largely due to a lack of alternatives — and the result is still a “huge blow” to the chancellor and adds to the risk of his government falling apart, Schmieding added.

German markets were calm on Monday, with yields on government bonds, known as bunds, slightly higher, in line with the rest of Europe.

George Lagarias, chief economist at Forvis Mazars, said the risk in Saxony and Germany as a whole was “a loss of centrist consensus which could hamstring decision-making and exacerbate present economic dislocations.”

“Rising debt to pay for defense, challenges to the export-driven economic model, geopolitical upheaval and limited government can eventually challenge Bunds’ stature as the risk-free asset of Europe and Germany’s ability to cheaply fund its growth,” he told CNBC.

“As it sits at the heart of the euro zone, worries over the German economy could reverberate across Europe. We are not there yet. But we shouldn’t be completely comforted by the mild initial reaction as a proof of long-term stability either.”