Why the world should care about the far right’s rise in Germany

Germany’s far-right AfD won 43.8% in Saxony-Anhalt and more than 38% in Mecklenburg-Western Pomerania, increasing pressure on Chancellor Friedrich Merz’s coalition ahead of further regional elections. The AfD advocates ending Germany’s military and financial support for Ukraine, blocking Ukraine’s EU and NATO membership, restoring ties with Russia and reopening Nord Stream, creating material geopolitical and energy-policy risks for Europe. Germany’s 2026 growth forecast was nevertheless raised to 1.3%, double the previous expectation, though analysts warn political fragmentation could weaken Berlin’s leadership and constrain future Ukraine financing, including potential access to more than €200bn of frozen Russian assets.

Analysis

The investable channel is not an immediate policy reversal but a higher German political-risk premium: a weaker governing mandate reduces the probability of difficult fiscal, energy-market and EU-level decisions. That is modestly bearish EUR and German domestic cyclicals over the next 1-3 months, particularly firms whose valuation depends on a recovery in industrial competitiveness or rapid permitting reform. The more material 6-18 month risk is delayed European burden-sharing for Ukraine, which would increase uncertainty around defense procurement timing and potentially widen peripheral European sovereign spreads if EU cohesion weakens.

Consensus may overstate the direct benefit to energy-intensive German industry from any future Russia rapprochement. Physical infrastructure, contractual arrangements, EU policy commitments and corporate reluctance to re-assume Russian supply risk make a return to structurally cheap pipeline gas unlikely even under a more conciliatory political environment. Conversely, defense exposure is not a clean political short: Rheinmetall (RHM.DE), HENSOLDT (HAG.DE) and Leonardo (LDO.IM) retain support from NATO readiness requirements independent of German bilateral aid, although their multiples are vulnerable if procurement budgets or order intake are deferred. The key falsifiers are a credible early federal-election path, coalition agreement shifts on defense funding, and German industrial-production/PMI data showing that political uncertainty is not impairing the recovery.

Key Decisions for Investors

• Initiate a 1-3 month tactical long RHM.DE / short BASF.DE pair, sized modestly: defense backlog and NATO replacement demand are more resilient than BASF's dependence on a clean German industrial-cost recovery. Target 10-15% relative return; exit if German defense-budget commitments are cut or BASF receives evidence of a sustained energy-cost advantage.
• Buy 3-6 month EUR/USD put spreads rather than outright EUR shorts around political-event volatility. The thesis is a widening governance-risk discount, not a near-term euro crisis; cap premium risk and close if an early-election scenario is avoided and German fiscal-policy implementation accelerates.
• Avoid treating prospective Russian gas normalization as a long BASF.DE or German chemicals catalyst until there is verifiable change in EU import rules, pipeline availability and contracted supply economics. Set an alert for policy developments rather than position on political rhetoric.
• For existing European defense longs, hedge event risk with 3-6 month downside puts on the STOXX Europe 600 Aerospace & Defense exposure or reduce tactical overweight after strong rallies. A freeze in incremental Ukraine-related orders can compress elevated multiples even if long-cycle NATO demand remains intact.