Europe’s far right: Putin’s best friend?

Germany's AfD is polling 6-7 percentage points ahead of Chancellor Friedrich Merz's CDU and could use its Saxony-Anhalt election success as a pathway toward federal power in 2029. A Russia-friendly AfD-led coalition, potentially supported by the Sahra Wagenknecht Alliance, could push to cut Ukraine aid and lift EU sanctions, undermining European unity. France presents a nearer-term risk, as Marine Le Pen is viewed as potentially capable of winning the 2027 presidential election, which could constrain EU support for Ukraine and enlargement. The article argues that far-right gains reflect domestic economic and cultural grievances amplified by Russian influence operations, creating geopolitical disruption rather than necessarily direct Kremlin control.

Analysis

The investable transmission mechanism is a higher European political-risk premium rather than an immediate change in sanctions or Ukraine funding. German and French assets most exposed to coalition instability—domestic banks, regulated utilities and renewables reliant on subsidy visibility—would reprice first if polling translates into credible governing power. Conversely, the market may be underestimating that fragmentation can sustain defense spending: even a less cohesive EU raises national security uncertainty, favoring procurement incumbents RHM.DE, HAG.DE and LDO.IM over broad European cyclicals over the next 6-18 months.

The key second-order risk is fiscal, not simply foreign policy. A material widening in the French OAT-Bund spread would pressure BNP.PA and GLE.PA through sovereign-mark-to-market effects, funding costs and weaker domestic credit demand; that is a faster 1-3 month market signal than any eventual election outcome. Germany is more nuanced: a softer Ukraine posture could reduce the defense-risk premium, but domestic political fragmentation would also make fiscal-rule reform and industrial-energy policy less predictable, constraining capex-sensitive sectors.

Consensus may be too linear in assuming populist gains automatically mean a rapid Russia normalization and lower energy prices. Governing parties commonly moderate under coalition, NATO and market constraints, while sanctions unwind only through multi-country agreement. The more durable risk for renewable equities is policy volatility and permitting/subsidy revision, not wholesale cancellation; VWS.CO and ORSTED.CO should be treated as policy-beta shorts only if national support mechanisms are explicitly reopened, not on polling alone.

Key Decisions for Investors

• Maintain a 6-12 month long RHM.DE / short SXEP pair: defense order visibility and security uncertainty should outperform Europe’s broad energy complex. Reassess if European defense-budget guidance is cut or RHM.DE order intake misses consensus by more than 10%.
• Use a 1-3 month OAT-Bund spread-widening alert as the actionable political-risk trigger; if the spread widens 20bp from prevailing levels without an ECB offset, initiate a tactical short basket of BNP.PA and GLE.PA versus long DBK.DE. Exit if the spread retraces fully or French fiscal commitments are credibly reaffirmed.
• Avoid adding outright exposure to VWS.CO, ORSTED.CO or ENR.DE solely on a Russia/energy-normalization narrative. Consider a tactical short only following a documented subsidy, auction-design or permitting rollback; absent that catalyst, policy risk is too diffuse for a clean trade.
• For portfolios structurally long European equities, buy 3-6 month downside protection on FEZ or VGK around major polling/election dates rather than reducing defense exposure. This isolates fragmentation risk while preserving participation in fiscal-defense spending.