Three German elections, one bill
The upcoming German state elections this September are poised to significantly shape the political and economic landscape, potentially delivering both risks and opportunities for the euro. The commentary highlights that while these elections may not directly affect the broader economic outlook, they could critically influence the Merz government's reform agenda and its timing, as emphasized in the note from ing . The elections in Saxony-Anhalt, Mecklenburg-Vorpommern, and Berlin represent political stakes that could alter federal policymaking, especially given the rising influence of the AfD party. Observations include that in Saxony-Anhalt, the AfD's approval ratings now exceed 42%, indicating a precarious position for the CDU and a possible shift in coalition dynamics, thereby increasing the stakes for Merz's policies and his ability to maintain a unified front as coalition politics come under pressure from rising populism.
What the desk is arguing
The forthcoming German state elections stand as a pivotal moment for the current administration, potentially imperiling its reform agenda. Per the full note , the trio of elections—specifically the threat posed by the AfD's rising political capital—could disrupt the CDU's legislative efforts if no majority coalition emerges. Each state’s election result could symbolize broader discontent with existing governance and shift the calculus surrounding critical reforms.
The key metric to watch is the AfD's polling strength, particularly in Saxony-Anhalt, where their support reportedly hovers above 42%. The ramifications of these local elections could manifest as turbulence in federal policy-making, leading to significant delays in economic reforms that have already encountered bureaucratic slowdowns. As the Merz government risks its positioning against the AfD, internal party conflicts are anticipated, especially regarding collaboration with far-right factions, which could further complicate legislative consensus.
Where it sits in our coverage
The consensus target for EUR/USD stands at 1.075 with a range from 1.04 to 1.12. Specific targets from firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns closely with jpmorgan, indicating a slight bullish sentiment, whereas bofa reflects a more bearish outlook at the lower end of the consensus range. The desk’s analysis suggests potential for movement upwards, given the election-induced uncertainty that may influence market sentiment.
How other firms see it
A number of firms, including jpmorgan, are aligned with the sentiment that the elections could prompt a strengthening of the euro, should the Merz government maintain its legislative momentum. Conversely, bofa presents a contrary perspective, predicting potential downside risks if the AfD gains further traction.
Key indicators to monitor alongside this thesis include the trajectory of the EUR/USD paired against broader political sentiment and the response from European Central Bank policies that could react to the evolving situation within Germany.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Upcoming state elections in Germany could influence the Merz government's reform agenda and coalition politics.
- 02The AfD's rising support may complicate existing coalitions and legislative processes.
- 03Watch for EUR/USD movements as these elections unfold against the backdrop of political uncertainty.
Market implications
Monitor EUR/USD levels carefully, particularly the 1.075 consensus target, as outcomes from the elections could prompt volatility. Shifts in polling before and after the elections will be crucial indicators to watch for euro strength or weakness.
Risks to this view
A significant threat comes from the AfD gaining control in key states, potentially forcing the CDU into compromising positions. Such outcomes could disrupt existing coalition dynamics, leading to a reversal of the reform momentum and resulting in a bearish outlook for the euro.
Articles Three German elections, one bill Published 11:38 Germany Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The three state elections in September will not determine Germany’s economic outlook, but they could change the price of everything the Merz government still wants to do, and how much time it has left to do it Carsten Brzeski The clock is ticking on the Merz government's reform plans as key state elections approach Germany votes three times in 15 days: Saxony-Anhalt this Sunday, Mecklenburg-Vorpommern and Berlin on 20 September. Together, these elections cover around 5.4 million voters, roughly 8% of the electorate. That may seem too small to matter nationally, but that would be a mistake.
State elections can influence federal policymaking through two channels: directly via the Bundesrat, which can block legislation affecting state interests, and indirectly through the political signal they send to the governing parties. The second channel is the dangerous one. The direct economic impact will be limited.
New state governments could weaken support for the reform package CDU and SPD agreed before the summer and slow an implementation that is already cumbersome. That is a drag, not a rupture. The indirect impact is where the risk sits, and four triggers are worth watching.
One: the cordon sanitaire gets expensive. In two of the three states the AfD leads, and in none of them does the incumbent coalition still have a majority. In Saxony-Anhalt, where the AfD is polling above 42% and could supply the Federal Republic’s first AfD state premier, exactly one non-AfD majority exists – CDU, Die Linke and SPD, with roughly a seat to spare.
In Mecklenburg-Vorpommern, the arithmetic points the same way. Merz has held the line against cooperating with the AfD. September sends him the bill, in the form of an ugly internal argument about which taboo is load-bearing: the firewall, or the resolution ruling out the Left.
Two: leadership risk turns live. Merz is currently the least popular chancellor on record, and his own party has been queuing up to say so – the debt-brake U-turn, the gap between announcement and delivery, some clumsy personnel management. There was already speculation over the summer of a move against him after September.
Easier said than done. But the debate itself is the signal. Three: the SPD’s slow-motion crisis.
At 12% nationally, the party risks missing the 5% threshold in Saxony-Anhalt entirely. The weaker it gets, the likelier an internal fight over whether to carry the reform agenda or unwind it and adopt a more French approach. Four: could the AfD for the first time lead a regional state government?
In Saxony-Anhalt it possibly could. But what would AfD economics actually be? Still a grab bag.
The Halle Institute costed the party’s Saxony-Anhalt programme in August: roughly €2.5bn annual financing needs against €243m provable savings, less than ten cents of every promised euro. At the same time, the party is still flirting with a euro exit. Not that this would happen via Saxony-Anhalt, but the question is whether international investors are able to make this distinction.
Germany German state elections 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 Carsten Brzeski is the Global Head of Macro for ING Research.
Previously, he worked at ABN Amro, the Dutch Ministry of Finance and the European Commission. He is a 2019 JFK Memorial Policy Fellow…
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