As political polarization escalates in Europe, particularly in Germany, the euro is facing mounting pressure, according to insights from Macquarie on Tuesday.
The recent state elections in Germany have seen far-left and far-right parties capturing nearly half of the votes in Thuringia and Saxony, deepening concerns about the stability of the currency.
Macquarie analysts point out that the rise of extremist parties in Germany mirrors the political upheaval seen in France’s June parliamentary elections, where centrist parties also suffered significant losses.
They highlight that the growing strength of fringe parties on both ends of the spectrum poses a medium-term risk to the euro, especially if they gain further influence in government or if Germany’s current coalition collapses before the 2025 federal elections.
This political uncertainty is not limited to domestic issues but also poses a broader challenge for the euro area. Germany’s manufacturing sector, already facing challenges from various factors, could see added pressure as political instability complicates policy responses, as per Macquarie analysts.
Furthermore, Volkswagen’s consideration of plant closures in Germany underscores the deepening impact of these economic challenges.
The election outcomes in Germany further exacerbate fears of a fragmented political landscape, making it harder for mainstream pro-market parties to govern effectively.
With the upcoming Brandenburg state election on September 22, current opinion polls indicate a continued decline in support for Germany’s mainstream parties, raising concerns about a potential breakup of the federal coalition before the scheduled 2025 elections.
Such a scenario could breach the political “cordon sanitaire” that has traditionally kept extreme parties out of government, leading to increased deficits, rising sovereign risk, and protectionist policies—all of which could weigh heavily on the euro, according to the analysts.
Analysis: The increasing political polarization in Europe, especially in Germany, is putting pressure on the euro’s stability. The rise of extremist parties and the potential collapse of centrist governance pose risks to the currency in the medium term. This uncertainty could impact Germany’s manufacturing sector and lead to economic challenges, as seen with Volkswagen’s considerations. The fragmentation of the political landscape in Germany may hinder effective governance and could result in higher deficits and sovereign risk. Overall, these developments could have significant implications for the euro and individuals’ finances.