By Maria Martinez
BERLIN, Sept 8 (Reuters) - The far-right's historic election victory in a German state election has reopened divisions in Chancellor Friedrich Merz's government, with calls by his Social Democrat coalition partners for planned economic and social reforms to be softened.
The Alternative for Germany (AfD) surged into first place in Saxony-Anhalt on Sunday, reflecting frustration with the federal government over bureaucracy, the rising cost of living, uncertainty over pensions and economic
insecurity.
Merz – whose personal approval ratings are at a historic low – insisted that a package of planned reforms including a raising of the pension age and a clampdown on sick pay must go ahead, while admitting he needed to better explain them to voters.
But his centre-left SPD partners insist he must go further, demanding talks on possible changes to the proposals on pension and care reform, plus a new discussion of the 2027 budget and a reopening of debate over inheritance and wealth tax.
"The SPD ... must make it clear where we are heading,” SPD Secretary-General Tim Kluessendorf said on Monday in a TV interview with Phoenix.
COALITION TENSIONS
The rise of the AfD – which came second in the 2025 federal election - has forced Germany's mainstream parties of the centre-left and centre-right to work together in coalition to exclude the far-right from power.
But analysts said the calls from the SPD could, at the very least, delay the reforms, and might derail them altogether if coalition tensions rose.
"The main question will be whether both coalition partners will move closer together to push through with reforms or whether a survival instinct leads to the coalition’s self-destruction," said Carsten Brzeski, global head of macro at ING.
Commerzbank senior economist Ralph Solveen agreed that the election would likely trigger calls by politicians for change that would inevitably raise tensions within the government.
"As is often the case after defeats, calls for the individual parties to take a stronger stance will surely be heard soon," Solveen said.
SPD sources said the current reform agenda should not be abandoned altogether, but that further measures should be considered, particularly to strengthen its social dimension.
"The government must convey the message that the reforms will improve people's lives," said party co-leader Baerbel Bas. "That message just isn’t getting through right now."
ECONOMIC PACKAGE FAILS TO WIN OVER VOTERS
Merz came to power in 2025 pledging tough reforms to revive the economy but an initial package of economic measures unveiled in July failed to restore voters' confidence.
An investment surge made possible by a special €500 billion ($580 billion) infrastructure fund and an exemption from debt rules for defence spending is taking longer than expected to feed into the economy.
The economy is finally gaining momentum and economic institutes have revised up their economic forecasts, but the improvement came too little, too late to convince voters in the eastern state of Saxony-Anhalt, Germany's poorest by GDP per capita.
The anti-immigrant AfD, which fell just short of an overall majority in the state parliament in Sunday's vote leaving it unclear whether it can form a government, has become the face of opposition to the consensus-based political system that has governed Germany since World War Two.
The coalition parties differ over how to interpret the election defeat. The SPD points to excessive spending cuts, while the CDU blames high taxes and debt, party sources said of internal discussions.
Saxony-Anhalt represents only 1.8% of German GDP, and key levers such as taxes, the structure of the labour market and social security systems are beyond the scope of a state government, so the AfD victory will not materially alter national fiscal or economic policy.
However, economists fear the AfD win could deter foreign investment and discourage skilled workers.
The further concern is that the election result shows a wider waning of public support for European integration, open markets and free movement of workers that once drove Germany's economic success.
Pro-reform voices argue that politicians should, however, pursue the difficult structural changes to an economic model that has been thrown into question by the rise of Chinese manufacturing and the removal of cheap Russian energy sources since the Ukraine war.
"We urgently need change reforms that go far beyond the Agenda 2010 reforms of 25 years ago," said Marcel Fratzscher, president of the Berlin-based DIW research institute.
"Failure to do so will make it more likely that the AfD will win an absolute majority in 2029."
(Reporting by Maria Martinez; Editing by Mark John and Alex Richardson)
