AfD's surge in Sunday's Saxony-Anhalt vote was striking: 44% of ballots in a state of 2.1 million people, more than twice its prior tally. In the 83-seat legislature, 42 seats are needed to govern, and the party ended up three short, according to the state election commissioner. The result echoed well beyond Germany and even drew praise from US President Donald Trump.
Bloomberg Economics notes the state is an AfD stronghold rather than a bellwether for the whole country, but the performance still sharpens a larger European question about how far-right support translates into power under different electoral systems and coalitions.
Chancellor Friedrich Merz's coalition is now debating whether to pare back parts of its growth agenda, a package officials describe as the most ambitious effort in Germany in a generation to revive the economy's potential. Merz says he will keep the program in place, yet conceded that certain elements are open to review. Two more votes on Sept. 20 in Mecklenburg-Western Pomerania and Berlin could shape that conversation.
Economists see risk in losing reform momentum. "The greatest risk is that the government and its coalition partners will stray from the reform path," said Oliver Rakau of Oxford Economics. "Opponents to reform must realize that they are putting growth and prosperity, and thus jobs in our country, at risk in the long term," said Udo Dinglreiter, president of Gesamtmetall.
Germany's ailing economy is at last reacting to Merz's initiative to kick-start growth, backed by hundreds of billions of euros for infrastructure and defense. Even with headlines like Volkswagen's plan for 50,000 job cuts, industrial order books are filling up and confidence indicators are improving. The Ifo institute now projects 1.4% growth this year - its strongest estimate for any year in the past decade apart from the pandemic period - and 1.2% in 2027. The catch, companies and analysts warn, is that any burst will fade without action on high labor costs and heavy bureaucracy.
That is why the current revamp centers on politically tough pension steps to shore up finances. Scrapping early retirement after 45 years of contributions would help stabilize the workforce, though Social Democrats want that element reviewed. "We need to discuss with the chancellor how we can dispel fear among people about reforms," said Labor Minister Baerbel Bas.
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According to a poll conducted this week by public broadcaster ARD, 59% favor modifying the planned reforms, while 22% would rather see them dropped altogether. The agenda also targets cost cuts in healthcare and more flexible labor rules.
Bundesbank President Joachim Nagel voiced unease about the far-right gains. Investors "will be reluctant, they will be shy away from doing business here - so yes, I'm concerned."
Beyond the reform math, the outcome could carry collateral damage. AfD's vehemently anti-immigrant rhetoric risks deterring the foreign talent Germany needs as baby boomers retire. So far this year, net migration has fallen to very low levels. According to Veronika Grimm, who serves on the government's council of economic advisers, "Skilled workers and investors from abroad are likely to take a close look at the situation." She added, "I do think the climate is getting harsher."
There is a Brussels angle too. A home-turf political fight could distract Berlin from EU priorities like handling China's trade practices and negotiating the bloc's budget. Jens Eisenschmidt - Morgan Stanley's chief Europe economist - said, "A Germany that's very focused on itself is diverting resources away from the European process." He continued, "That's probably the bigger problem with this situation, because there are major issues on the horizon."
Bottom line for your money: the near term upswing still looks intact, but if Berlin trims the reform package, companies could rethink investment and hiring and that could reshape the outlook for 2028 and 2029.
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