The far-right Alternative for Germany surged to first place in Sunday's Saxony-Anhalt state election, reopening coalition tensions in Chancellor Friedrich Merz's government. His Social Democrat partners now want changes to planned pension, care and tax reforms, while economists warn the result could deter foreign investment.
The AfD's win in Saxony-Anhalt has reopened divisions inside Chancellor Friedrich Merz's coalition government. His Social Democrat (SPD) partners are now demanding changes to planned pension and care reforms, along with a new discussion of the 2027 budget and inheritance and wealth tax.
Merz, whose personal approval ratings are at a historic low, insisted the reform package, including a higher pension age and a clampdown on sick pay, must go ahead. But he admitted he needed to better explain the reforms to voters. SPD Secretary-General Tim Kluessendorf said on Monday that the party "must make it clear where we are heading" in a TV interview with Phoenix.
Coalition tensions rise
The AfD, which came second in the 2025 federal election, has pushed Germany's mainstream centre-left and centre-right parties into a coalition aimed at excluding the far-right from power. Analysts said the SPD's demands could delay the reforms or derail them altogether if tensions inside the coalition keep rising.
Carsten Brzeski, global head of macro at ING, said the main question is whether the coalition partners move closer together to push reforms through, or whether a survival instinct leads to self-destruction. Commerzbank senior economist Ralph Solveen agreed the election would likely trigger calls for change from politicians, raising tensions within the government. SPD co-leader Baerbel Bas said the government must convey that the reforms will improve people's lives, adding that message is not getting through right now.
Economic package struggles to win over voters
Merz took power in 2025 promising tough reforms to revive the economy, but an initial package of economic measures unveiled in July failed to restore voters' confidence. An investment surge, made possible by a special €500 billion infrastructure fund and an exemption from debt rules for defence spending, is taking longer than expected to feed into the economy. Economic institutes have revised up their forecasts as the economy gains momentum, but the improvement came too late to sway voters in Saxony-Anhalt, Germany's poorest state by GDP per capita.
Saxony-Anhalt represents only 1.8% of German GDP, and levers such as taxes, labour market structure and social security lie beyond a state government's reach, so the AfD win will not materially alter national fiscal or economic policy. However, economists fear it could deter foreign investment and discourage skilled workers, and worry the result reflects a wider waning of public support for European integration, open markets and free movement of workers.
Marcel Fratzscher, president of the Berlin-based DIW research institute, argued that Germany urgently needs reforms that go far beyond the Agenda 2010 changes of 25 years ago, warning that failure to act makes it more likely the AfD wins an absolute majority in 2029.
Source: Investing.com
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