Germany: Political risks cloud reform outlook – ING

ING’s Carsten Brzeski highlights how upcoming state elections in Saxony-Anhalt, Mecklenburg-Vorpommern and Berlin could reshape German politics and indirectly affect the economy. He notes the AfD’s strong polling, the fragile standing of Chancellor Merz’s CDU-SPD coalition, and the risk that internal party reactions to election outcomes could slow or derail agreed reforms needed to tackle Germany’s prolonged stagnation.

State votes test reform momentum

"Now three state parliaments are up within a fortnight: Saxony-Anhalt on 6 September, then Mecklenburg-Vorpommern and Berlin together on 20 September. Roughly 5.4 million people are entitled to vote across the three, about 8% of the German electorate – and yet the outcome will set the political weather in Berlin for the remaining three years of this legislature, or could even end the coalition before the legislature officially does."

"Government and country are struggling to agree on the far-reaching reforms needed to pull the economy out of a stagnation that has lasted far too long, regain competitiveness and confront structural challenges from demographic change to China’s shifting role in the global economy. CDU and SPD agreed a reform package just before the summer, but not everyone in the parties supports it and implementation is cumbersome."

"The direct impact on the German economy from the September elections will be very limited. At best, new state governments could undermine support for the federal reform package and slow implementation, or eventually derail it."

"Beyond the symbolic effect one or several AfD wins would have on foreign investor sentiment, there are potential reactions inside the parties themselves that could slow reform further and eventually bring down the federal government. Three triggers are worth watching."

"For the economy, nothing will change in September. What the elections could change is the price of everything the government still wants to do."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)