German state elections: Two states, two extremes
The recent state elections in Germany illustrate a fragmented political landscape that complicates Chancellor Friedrich Merz's reform agenda, reflecting a deeper societal divide. With the right-wing AfD emerging as the largest party in Mecklenburg-Vorpommern and the left-wing Left Party securing a historic victory in Berlin, these results contribute to an increasingly challenging governance environment. Per the full note from ing-think, the AfD garnered approximately 37% of the vote in Mecklenburg-Vorpommern, edging out the SPD at 35%, while the Left Party captured around 25% in Berlin, doubling its previous results. This political volatility could hinder Merz's ability to implement necessary reforms, suggesting heightened market risks for the Eurozone as political stability remains elusive.
What the desk is arguing
The desk frames this as a critical juncture for Germany, where regional election outcomes raise alarms about federal governance stability. The electoral results, characterized by the rise of extremist parties at both ends of the political spectrum, imply that Merz’s administration may struggle to maintain a cohesive reform agenda. As noted in the commentary, the juxtaposition of the AfD in one state and the Left Party in another suggests a polarized electorate that could lead to deeper structural challenges for the CDU.
The data reveals significant shifts: the AfD's win marks a historic achievement, demonstrating its firm grip in regions previously dominated by traditional parties. Moreover, the Left Party's unprecedented victory in Berlin, which included a robust performance from the Greens and the SPD, indicates a potential coalition dynamics that could frustrate Merz’s initiatives. Such electoral trends reinforce a sentiment of uncertainty, which could weigh on Euro sentiment as reform momentum stalls.
Where it sits in our coverage
As it stands, our consensus target on EUR/USD is set at 1.075, with a range bracketed between 1.04 and 1.12. Notable targets from peers include: - jpmorgan: 1.10 - bofa: 1.04
The desk's bearish stance regarding Euro prospects amid domestic political unrest finds alignment with bofa, while diverging from jpmorgan, which holds a more optimistic outlook at the upper end of the estimated range.
How other firms see it
Firms such as jpmorgan anticipate some potential resilience in Euro against structural challenges posed by ongoing political dynamics, while bofa expresses caution, reflecting wider concerns of reform stagnation triggered by recent election outcomes. This duality in perspectives outlines a market teetering between cautious optimism and bearish sentiment.
Currency pairs like EUR/SEK and EUR/CHF may also exhibit volatility linked to these political developments, especially if market participants adjust forecasts based on the perceived stability of the German coalition going forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The AfD's victory in Mecklenburg-Vorpommern and the Left Party's win in Berlin signal a fragmented German political landscape.
- 02Chancellor Merz's reform agenda faces increased difficulty amid polarized electoral outcomes, raising concerns for Euro stability.
- 03These results suggest heightened risks for the Eurozone, with market implications necessitating close attention to political developments.
- 04Potential coalition dynamics in Berlin may further complicate governance and reform progress, influencing investor sentiment.
Market implications
Traders should monitor the EUR/USD pair closely, looking for resistance around 1.075, as political uncertainty could drive volatility in the coming days. The evolving coalition talks in Berlin may also serve as a significant catalyst for movements in the Euro, with implications for broader Eurozone stability.
Risks to this view
A decisive shift in the political landscape, such as an unexpected alliance among centrist parties, could shift the dynamics in favor of reform implementation. Additionally, any signs of effective governance from the Merz administration might mitigate current bearish sentiment and bolster the Euro’s recovery prospects.
Older quick take Quick take Published 18:42 Germany German state elections: Two states, two extremes The AfD has won Mecklenburg-Vorpommern, the Left Party has won Berlin. Neither vote was a referendum on Friedrich Merz's reform agenda – but both make that agenda harder to deliver A win by the right-wing populist party in one state and a win by a left-wing populist party in another state will make it more challenging for Chancellor Merz to deliver on his reform agenda Two regional elections, two winners from opposite ends of the political spectrum, and one federal government in Berlin that looks weaker tonight than it did this morning. In Mecklenburg-Vorpommern, the AfD has become the largest party for the first time.
In Berlin, the Left Party has won a city-state election for the first time ever. The Chancellor felt compelled to speak within minutes of the exit polls, which tells you most of what you need to know. Mecklenburg-Vorpommern: a narrow win with a long shadow In Mecklenburg-Vorpommern, the AfD is narrowly ahead of the SPD, with around 37% against 35%.
Manuela Schwesig's SPD had closed the gap in recent weeks, but not quite enough. At 7:30pm CET, the CDU stood at 5.3% and still risks missing the threshold altogether, which would be a political disaster for the party. The Left Party came in at 7.5%, just ahead of the Greens at 5.5%.
And in case you were wondering: the FDP remains stuck in political no-man's-land at around 1%, out of yet another state parliament. Berlin: housing wins elections In Berlin, the Left Party won for the first time ever with some 25%, doubling its 2023 result. The governing CDU came second at 20%, the Greens at 15% and the SPD at 12%.
The AfD took around 14%. Together, the three left-wing parties are on course for a majority, opening the door to Berlin's first Governing Mayor from the Left Party. During the campaign, however, the SPD and Greens kept a clear distance, stressing their unwillingness to go along with the Left's core proposal to "socialise" the large housing corporations.
On a personal note: as someone born in West Berlin, I do remember that the Left Party stands in the long line of succession from the SED, East Germany's ruling party. The AfD's rise continues The AfD is now the largest party in three states: Thuringia, Saxony-Anhalt and now Mecklenburg-Vorpommern. In the two remaining eastern states, it finished a strong second at the last elections.
But there is more to the AfD than protest votes in the East. Since the federal election in February last year, it has risen to become the largest party in Germany in national polls, consistently close to 30%. The coalition maths In both states, forming a stable government will be a challenge.
In Mecklenburg-Vorpommern, it currently looks as if the SPD will try to lead the next government, but it would need two partners. The AfD will also try to build one. In Berlin, the Left Party could, in theory, lead a coalition with the SPD and Greens, if it can live without the expropriation of large landlords that neither partner has been willing to support.
Implications for the federal government This is the regional story. The federal one matters more. Tonight's results clearly echo the low popularity of the entire federal government, and of Chancellor Friedrich Merz in particular.
How combustible the situation has become was illustrated by Merz himself, who gave a short speech once the ballots closed and the first exit polls were out. That is unprecedented: comments from national government figures on state election results normally come later in the evening, if at all. Merz stressed the need to implement the announced reforms.
Read the appearance for what it was, an attempt to choke off the speculation about his possible resignation that has been building in recent weeks. These elections were not a referendum on structural reform. In Berlin especially, the result was probably driven above all by the lack of affordable housing, with distinct echoes of last year's New York mayoral race.
But they do reflect the standing of the federal government, and they will bring new tensions. The CDU faces a more intense internal debate about how to handle the AfD, while on substance it will push ahead with reforms, knowing that it will only regain popularity if the economy finds momentum. The SPD, meanwhile, may be tempted to reopen the reform package — particularly on pensions — hoping to win votes back by shifting left.
All in all, another reminder of an increasingly fragmented political landscape: a win for a right-wing populist party in one state, a win for a left-wing populist party in the other. Years of economic stagnation helped produce that fragmentation. Now the fragmentation will make the stagnation harder to escape.
Politics Germany GDP Eurozone Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Carsten Brzeski Global Head of Macro Older quick take
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