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      Germany: regional elections raise concerns about sustained political gridlock, economic growth
      WEDNESDAY, 04/09/2024 - Scope Ratings GmbH
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      Germany: regional elections raise concerns about sustained political gridlock, economic growth

      Electoral success of populist far-right and far-left parties in Thuringia and Saxony highlights Germany’s fragmenting political landscape as mainstream parties lose ground. Looming policy uncertainty could delay regional budgets and slow economic growth.

      By Julian Zimmermann and Elena Klare, Sovereign and Public Sector

      The gains by the extreme right AfD (Alternative für Deutschland) and the newly established far-left BSW (Bündnis Sahra Wagenknecht), came at the cost of the parties of the ruling federal-government coalition just a year before general elections are due in autumn 2025.

      While we do not expect the so-called traffic light coalition to collapse, which would trigger early elections, tensions within the federal government are unlikely to abate as was evident in the difficult negotiations for the 2025 draft budget over balancing the fiscal constraints of the debt brake with the country’s large investment needs.

      We also see wider implications at the European level. Germany’s regional elections provided further evidence that Europe’s two largest economies and the main drivers of European integration – France (AA/Negative) and Germany (AAA/Stable) – lack the political capital to drive reform either nationally or at the European level.

      In Germany, the weakened coalition government is unlikely to deliver further economic stimulus and reforms. Economic output will stand only 0.3% above its 2019-level by the end of 2024. Similarly, in France, the centre lost its parliamentary majority and is unlikely to implement much-needed fiscal consolidation, with potential implications for the credibility of the EU’s revised fiscal framework.

      Figure 1: Distribution of seats in regional parliaments points to difficulty in forming new coalitions

      Note: In Saxony, the Freie Wähler also received one seat. Source: Thüringer Landesamt für Statistik, Statistisches Landesamt des Freistaates Sachsen

      Political uncertainty and anti-immigration stance could weigh on regional growth

      The regional election results have made it impossible for incumbent governments to continue in Saxony and Thuringia (both rated on subscription). It will also be very challenging for the more centrist parties to form coalitions. As all other parties rule out a coalition with the AfD, any majority in the regional parliaments will de facto depend on the newly established BSW’s participation. However, the BSW’s anti-NATO stance and its position to end the war in Ukraine, puts it at odds with more mainstream political parties.

      Likely lengthy policy uncertainty until new regional governments are formed combined with the anti-immigration stance of both the AfD and BSW could weigh on medium-term growth and add to budgetary pressures given the demographic context. The nationwide trend in Germany is that of a rapidly ageing society, but it is especially acute in Germany’s eastern states. To maintain labour supply and therefore strengthen potential economic output, Saxony and Thuringia would benefit from continued inflows of qualified foreign workers – a strategy at odds with the political stance of the AfD and BSW.

      We estimate potential growth in Saxony at 0.9% – the highest among eastern states – and in Thuringia at just 0.3%, with the German average at 0.7%. This is mostly driven by an annual decline in the working-age population of -0.5% in Saxony and -1.1% in Thuringia until 2030, against a nationwide trend of -0.4%.

      In a scenario of less dynamic immigration, the annual drop in the working age population will be more severe at an average -0.7% in Saxony and -1.3% in Thuringia until 2030, further weighing down on growth and public finances, highlighting the need for continued and well-managed immigration to support sustainable economic development.

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