UBS economists have mapped three political paths for Germany after regional elections weakened Chancellor Friedrich Merz's coalition and pushed the AfD to the top of national polling. The bank says the outcome will shape how far Berlin can carry planned fiscal stimulus and structural reform, with the most disruptive scenario tied to an early election.
Political risk in Germany has climbed since recent elections in Berlin and two eastern German states delivered substantial losses for governing parties, particularly the CDU/CSU, prompting UBS economists to lay out three scenarios for what comes next. The AfD was the main beneficiary and now leads national polling at 29%, compared with 20% for the CDU/CSU.
Three paths for the coalition
The first scenario keeps Merz in place, backed by the CDU/CSU parliamentary group and the party's regional prime ministers. The second would replace him with another CDU/CSU politician through a constructive vote of no confidence — a move that would not require a national election, but does need the CDU/CSU and the Social Democrats to agree on a replacement chancellor.
The third and most disruptive scenario has Merz calling a confidence vote that could trigger an early election if he loses it. Merz has dismissed that possibility, and the AfD's current strength could itself discourage governing parties from pursuing a national vote.
Stimulus at stake
Germany's economy is expected to emerge from five years of stagnation, with GDP growth projected at 1% in 2026 and 1.5% in 2027, supported by a large fiscal stimulus package expected to add 0.6 percentage points to growth in each year.
Under the first two scenarios, major changes to economic policy would likely be limited, though a government under greater pressure could lean more heavily on fiscal stimulus while scaling back planned reforms to pensions, the labour market and bureaucracy. The early-election scenario carries the bigger risk to that stimulus, since a government that loses its footing could also lose the ability to approve the annual budgets needed to implement it.
Political uncertainty could also delay Germany's role in EU decisions covering the bloc's budget and trade policy toward China.
Source: Investing.com
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