German far right in focus

German far-right parties seek gains in regional votes [View in browser]( [Bloomberg]( Welcome to the [Year of the Elections]( Bloomberg’s newsletter on the votes that matter to markets, business, and policy amid the most fragmented geo-economic landscape in decades. German regional elections used to be largely domestic affairs, but that may change on Sunday. In Saxony and Thuringia in the former communist east, the far-right Alternative for Germany could win the most votes in at least one of the nation’s 16 federal states for the first time. Such an outcome could [intensify bickering within]( Olaf Scholz’s deeply unpopular ruling coalition and spur calls for an early election in Europe’s biggest economy. In neighboring France, recent gains by extreme forces and political deadlock [heightened investor concerns](. At the same time, the AfD’s chances of getting into government in either region remain slim even if it becomes the strongest party. The other main parties have ruled out joining it in coalition — a so-called firewall like the one that thwarted Marine Le Pen’s National Rally in France. Whether that fragile pact holds after the ballots — especially in Thuringia, an early stronghold of the Nazis in the 1930s — remains to be seen. A new party of the far left has also surged into contention in eastern Germany — and is likely to play a role in keeping the AfD from power in Saxony and Thuringia. Like its far-right rival, the policies of the Buendnis Sahra Wagenknecht — named for its co-founder — include radically curbing immigration and stopping aid to Ukraine. The BSW is in third place in polls in both Saxony and Thuringia, behind the conservative CDU and the AfD, highlighting the drift to the political extremes. Between them, the AfD and the BSW are on course to take about half the vote but are extremely unlikely to ever join forces in a coalition. Concerns linked to immigration have been one of the top priorities among German voters for some time. A number of attacks could bolster support for the two radical parties — most recently the [fatal stabbing last week of three people]( at a festival near Duesseldorf by a rejected Syrian asylum seeker and suspected Islamist terrorist whom the authorities failed to deport. The success of Wagenknecht, who was born in Thuringia, also underscores a divide that appears to be widening between voters in the former East Germany and those in what was West Germany until the fall of the Berlin Wall in 1989. If things go badly for Scholz’s Social Democrats, the party could fail to reach the 5% hurdle for getting into the two regional parliaments. The Greens are also in danger of missing the threshold, while the chancellor’s other partners in the federal government, the FDP, are almost certain to. At the very least, those are terrible optics ahead of the next national election due in just over a year. — [Christoph Rauwald]( and [Jana Randow]( BSW Co-founder Sahra Wagenknecht. Photographer: Sean Gallup/Getty Images German Economy Q&A [Jana Randow](bbg://people/profile/16263712), Bloomberg’s Senior European Economics Correspondent, explains what’s at stake. Germany’s recent economic performance has been poor. Is that one reason why the AfD has attracted supporters? Partly, yes. But frustrations among those prepared to vote for the AfD run a lot deeper — especially in the former communist east. Many have lost confidence that mainstream politicians can fix the [longer-term ills of the economy](. A lack of investment in basic infrastructure in recent decades has left a legacy that’s increasingly impossible to ignore. The pension and healthcare systems are chronically underfunded, there is a lack of teachers and childcare, and the country is struggling to cope with rising numbers of migrants. Polls suggest people are more likely to vote for the AfD if they live in a region affected by change — sites of car plants that have, or will eventually, transition from combustion to electric engines, or areas that have long depended on the lignite and coal industries. Seeing manufacturers suffer from weak demand at home and abroad is feeding into their worst fears — especially in eastern Germany where people appear more likely to feel ignored by the federal government in Berlin. Bickering within Scholz’s ruling coalition over how to tackle the challenges facing the world’s third-largest economy, apparently without being able to offer effective solutions, prompts many to reject the three governing parties. What does the AfD stand for on economic policy? A lot of the AfD’s platform is built around business-friendly programs: a commitment to a social-market economy, reduced state intervention, fewer benefits, lower taxes and a strengthening of the middle class. But there are also policies that stand in stark contrast to Germany’s business model as an open, export-oriented economy: an aversion to existing free-trade agreements and migrant workers, doubts about widely accepted climate policies, and a flirtation with quitting the euro. The latter would come with a hefty price tag. The Cologne-based German Economic Institute has calculated the cost of a so-called Dexit at €690 billion ($768 billion) for the first five years — on a par with the losses incurred during the Covid and energy crises between 2020 and 2023. What do projections say about the German economy in just over a year’s time when the next national election is due? After a year of contraction in 2023 and one of stagnation in 2024, the economy is forecast to grow again in 2025. Scholz could present that as a win, especially if the labor market holds up, though that’s a big “if” considering the challenges facing German manufacturers. Consumers are a beacon of hope. After robust wage increases, they’re expected to spend more freely, though as yet they haven’t shown up amid uncertainty over politics at home and abroad and the prospect of earning interest after years of negative rates. The Markets Take [Jan-Patrick Barnert](bbg://people/profile/18866258), Bloomberg’s Senior Equity Markets Reporter, writes about what’s in focus for investors. In the very short term, markets might not pay too much attention to regional German elections. International investors are rather focused on broader issues such as the global economy, conflict in the Middle East, the US election and the path of Federal Reserve and European Central Bank interest rates. That’s borne out by the performance of Germany’s DAX Index. The benchmark of leading companies [hit a fresh record]( today as it rebounds from a selloff earlier this month amid optimism about falling borrowing costs. Yet a significant shift toward either side of the political spectrum could fuel concerns ahead of Germany’s national election next year that mirror recent [turmoil in France that spooked investors](. WATCH: Ifo Institute President Clemens Fuest says economic stagnation is continuing in Germany. Source: Bloomberg The AfD and the BSW promote some anti-market policies, which could potentially spark fresh worry about Germany’s role as an anchor of stability in the European Union — and on issues like corporate taxes, immigration or weapons supplies to Ukraine. Corporate Stakes [Wilfried Eckl-Dorna]( Bloomberg’s Automotive and Industrials Reporter, looks at the perspective of companies. Corporate Germany doesn’t tend to get involved in politics directly. US-style endorsements, high-profile donations or campaigning on behalf of individual candidates or parties aren’t common. This time, though, a number of corporate leaders — from small, family-run firms to some of the country’s corporate giants — have [warned publicly of negative effects]( that an anti-immigration and EU-skeptic party like the AfD could have on economic prospects. AfD leader Bjoern Hoecke in Thuringia on Aug. 18. Photographer: Jens Schlueter/AFP/Getty Images In Thuringia, family entrepreneurs and the regional chamber of commerce have flagged the demographic challenge posed by the fact that a quarter of a million workers will retire over the next decade. The region can’t afford to lose more workers because local ones leave or others from within Germany or abroad aren’t willing to come, says Colette Boos-John, who runs Bauer Bauunternehmen, a group of construction companies in Walschleben near the Thuringia capital, Erfurt. She also chairs the regional chapter of the Family Entrepreneurs association. The CEOs of major manufacturers like Siemens, Mercedes-Benz and Deutsche Bank have also stressed publicly that Germany’s economic future depends on attracting skilled workers, improved competitiveness and close collaboration with other countries to foster trade, which could be at risk if the far-right gains in influence. More from Bloomberg - Check out our [Bloomberg Investigates]( film series about untold stories and unraveled mysteries - [Bloomberg Opinion]( for a roundup of our most vital opinions on business, politics, economics, tech and more - [Next Africa]( a twice-weekly newsletter on where the continent stands now — and where it’s headed - [Washington Edition]( for exclusive coverage on how the worlds of money and politics intersect in the US capital - Explore all Bloomberg newsletters at [Bloomberg.com](. 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