The growing support for Germany's populist parties, the AfD and BSW, could exacerbate the country's economic challenges, potentially accelerating the trend of businesses relocating their operations elsewhere.
ADVERTISEMENTThe surging support for Germany's populist parties is casting doubt on the country's political stability just one year ahead of its general election.
According to the latest Politico poll, the far-right party Alternative for Germany (AfD) achieved a historic win in two eastern states, securing over 30% of the vote.
The AfD took first place in Thuringia and came a close second in Saxony, while the newly established far-left party, the Alliance Sahra Wagenknecht (BSW), finished third in both regions.
In stark contrast, Chancellor Olaf Scholz's three-party ruling coalition – the Social Democratic Party (SPD), the Greens, and the Free Democratic Party – collectively garnered less than 15% of the vote.
If this trend continues, Chancellor Scholz may be forced to call a snap election, a political move commonly seen in countries like France and the UK this year.
Political uncertainty undermines business confidence
The growing influence of Germany's far-right and far-left political groups highlights public dissatisfaction amid rising living costs and increased immigration following Russia's invasion of Ukraine.
Despite being on opposite ends of the political spectrum, both the AfD and the BSW share common ground on key issues: they are anti-immigration and pro-Russia, advocating an end to Germany's support for Ukraine and the resumption of Russian gas imports.
The AfD is also sceptical of the euro and climate change, calling for a return to Germany's old currency and an end to the country's green energy transition.
However, neither the far-right nor far-left parties are likely to form a governing majority alone, with the BSW potentially playing a crucial role in balancing political power among parties.
A scenario could arise similar to France's snap elections, where Marine Le Pen's National Rally did not secure an outright win due to opposition from other parties.
For now, Germany's stock markets continue to hover around their all-time highs, despite a sharp fall in car maker shares following Volkswagen's turmoil.
Nevertheless, the country's economic outlook is bleak, with political uncertainty likely raising further concerns about Germany's stability and government policy direction.
The Ifo Business Climate Indicator for Germany declined for the fourth consecutive month in August, reaching its lowest point since February.
Ifo President Clemens Fuest commented: "The German economy is increasingly entering a crisis."
Attention will now turn to the upcoming regional elections, particularly in the eastern state of Brandenburg on 22 September.
ADVERTISEMENTEconomic data for this month will be key in assessing the political impact on business and investment confidence.
Foreign investment in Germany declines
According to a report by the IW Institute, foreign direct investment (FDI) in Germany fell to its lowest level in a decade in 2023.
A separate report by UNCTAD also revealed that FDI inflows into Germany plummeted by 76.2% in 2022 compared with the previous year.
This sharp decline highlights growing concerns over de-industrialisation, high labour costs, and the increasingly uncertain business environment, prompting companies to relocate their operations abroad.
ADVERTISEMENTData from S&P Global also revealed that Germany's Manufacturing Purchasing Manager Index (PMI), a key indicator of business conditions, has contracted for 25 consecutive months, due to steep and accelerating declines in new orders, purchasing activity, and employment.
The ongoing unrest at Volkswagen AG, a symbol of Germany's car manufacturing strength, alongside growing political instability, threatens to further undermine the world's third-largest economy's appeal to foreign investors.
Accelerating capital outflows and shrinking inflows would worsen Germany's business landscape.
The IW study also highlighted that approximately €90bn of foreign investment by German companies has been redirected to other EU member states, particularly France.
ADVERTISEMENTIn light of these challenges, Germany's sluggish economy underscores the urgent need for the government to restore business and investor confidence.
