Eurozone political risk premium intensifies! Germany's Alternative for Germany (AfD) wins its first state election with 43.8% of the vote, bringing the far-right close to power for the first time since World War II.

The far-right Alternative for Germany (AfD) party achieved its best-ever result in the Saxony-Anhalt state election, winning 43.8% of the vote and becoming the largest party in the state. This is the first time since World War II that a far-right party in Germany has achieved such a significant lead in a state election.

On September 6, the state parliament elections were held in Saxony-Anhalt, eastern Germany. Preliminary results showed that the AfD won 39 of the 83 seats, more than double its share of the vote in 2021 (around 20%). The Christian Democratic Party (CDU), led by Chancellor Friedrich Merz, won only 17.2% of the vote, securing 15 seats, a significant drop from the previous election and ending its 24-year rule.

According to Xinhua News Agency, analysts believe that although the Alternative for Germany (AfD) has a significant lead over other parties in the vote, it is unlikely to secure an absolute majority in the state parliament. Ulrich Sigmund, the AfD's lead candidate in Saxony-Anhalt, previously stated that he would only run for governor if the party won an absolute majority and could govern alone. Currently, all major German political parties have ruled out forming a coalition government with the AfD.

This election not only reshaped the political landscape of Saxony-Anhalt, but also further highlighted the rising trend of right-wing forces in Germany, leading to increased market attention to political risks in Europe.

Election Results: AfD Achieves Best-Ever Victory, Ends 24-Year Dominance by the CDU

According to preliminary vote counts, the AfD won 39 seats with 43.8% of the vote, just 3 seats short of an absolute majority ; the CDU won 15 seats with 17.2% of the vote. The Social Democratic Party, the Green Party, and the Left Party each received approximately 9% of the vote, securing 8 seats each; the Sarah Wagenknecht coalition (BSW), founded by left-wing politician Sarah Wagenknecht, entered the state parliament for the first time with 5.3% of the vote, winning 5 seats and becoming a key variable in the subsequent formation of a government.

According to the Associated Press, the AfD's vote share jumped significantly from about 20% in 2021, attracting a large number of voters who had not previously participated in the election. Alice Weidel, the AfD's national co-chair, saw the high voter turnout as a "signal of change" and directly criticized Mertz, calling him a "major obstacle to Germany's prosperity."

Ulrich Siegmund, the AfD's lead candidate in Saxony-Anhalt, said in Berlin on Monday that the AfD's goal is to "establish a stable majority in the coming days and weeks," and that it will proactively reach out to all parties and even individual members of parliament.

Government Formation Prospects: BSW Becomes a Key Variable, AfD Still Faces Obstacles to Taking Power

In a report, Mühlberger, a senior economist at Deutsche Bank, pointed out that the five seats held by the BSW will play a "kingmaker" role in the coalition negotiations. Currently, two possible outcomes are possible: first, the BSW may abstain from the gubernatorial elections or provide informal support, thus forming a minority government under the AfD; second, negotiations may reach a stalemate, ultimately leading to early elections, at which point the AfD will have the opportunity to further secure an absolute majority.

According to the Associated Press, Thomas Schulze, the BSW's leading candidate for Saxony-Anhalt, reiterated on Monday his willingness to assist the AfD candidate in becoming governor. BSW's national co-chair, Wagenknecht, had previously called for a "political reset" in Saxony-Anhalt, and the two sides share some policy common ground on issues such as energy policy.

However, Siegmund has previously stated clearly that the AfD is "not prepared to make major compromises to form a coalition government" and has prioritized early elections. Mühlberger points out that if elections are ultimately held again, smaller parties will again face the risk of failing to cross the 5% threshold, which could actually further increase the AfD's chances of winning an absolute majority.

Economic impact: Limited regional impact, but increased policy uncertainty.

Mühlberger's assessment is that even if the AfD forms a minority government with the support of the BSW, it could have a substantial negative impact on the economic prospects of Saxony-Anhalt in the coming years. Direct investment may decline due to policy uncertainty, and the shortage of skilled workers may worsen.

However, she also pointed out that Saxony-Anhalt contributes less than 2% to Germany's GDP, so structural damage at the regional economic level is unlikely to spread nationwide. Furthermore, the AfD state governments have limited influence over federal economic and fiscal policies and cannot exert direct political leverage through the Constitutional Court.

Nomura analyst Andrzej Szczepaniak believes that the market's current concerns about right-wing populism are relatively limited, and what deserves more attention is the fiscal risk that may arise from the expansion of spending that a left-wing populist party may push for after coming to power.

Political aftershocks: Mertz under pressure, September elections become another crucial test

According to the Associated Press, Mertz had promised to weaken the AfD's political influence since taking office, but the election results show that this goal has not been achieved. The CDU's loss of dominance after 24 years in power in Saxony-Anhalt also means that Mertz will face greater internal and political pressure.

Mühlberger believes the Berlin and Mecklenburg-Western Pomeranian state elections on September 20 will be a crucial window for observation in the next phase. Forecasting market data indicates the AfD has an 82% probability of winning the Mecklenburg-Western Pomeranian election, but a relatively lower chance of winning in Berlin, at approximately 18%.

The election results have also drawn international attention. Tesla CEO Elon Musk congratulated the team on social media platform X by posting "Well done." Siegmund subsequently responded, saying that if the AfD comes to power, he would welcome a "strong and constructive collaboration" with Musk, adding that "Germany will once again be a place worth investing in."

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