Rise of AfD in Germany raises concerns in economic circles over Eurozone and labor force

Ahead of the state elections to be held in Germany in September, the rise of the far-right Alternative for Germany (AfD) in the polls is creating anxiety in economic circles, in addition to political debates. Economists state that the party's anti-migration stance and rhetoric regarding leaving the European Union and the Eurozone could put pressure on the country's growth potential, labor market, and international investment environment.

Polls will open in Saxony-Anhalt on September 6, and in Berlin and Mecklenburg-Vorpommern on September 20. Recent surveys show that the AfD is in a strong position, particularly in Saxony-Anhalt. It is reported that the party aims for sole power in this state with a polling rate measured at 42 percent, while the CDU is at 22 percent and the Left Party is at 13 percent.

The political landscape also appears fragmented in the capital, Berlin. According to the latest study by the public opinion research company INSA, the AfD ranked third in Berlin with 17 percent of the vote. The party, which links the housing crisis in the city to immigrants, advocates that social housing should only be given to "locals."

FIVE RISK HEADLINES IN THE ECONOMY

In assessments appearing in the German press, the main risks regarding the AfD's economic program are listed as: loss of prosperity, labor shortages that migration policies could cause, the impact of leaving the Eurozone on exports, pressure on the budget balance, and the fact that an anti-renewable energy approach increases energy dependency.

According to the assessments, economic policies pursued by populist governments can shrink production by an average of 10 percent in the long term. It is stated that this scenario could mean a loss of approximately 450 billion euros for Germany. The fact that the vast majority of companies see the rule of law as a fundamental investment criterion also strengthens comments that concerns regarding democratic institutions could be reflected in investment decisions.

It is stated that the AfD's policies of mass deportation and limiting migration could exacerbate problems in the labor market, which is already under pressure due to an aging population. According to experts, if migration stops, a labor shortage of 7 million people could emerge over the next 15 years. It is reported that the contribution of immigrants to GDP across Germany is 14 percent, and 11 percent in East Germany.

The risk is considered more visible in the case of Saxony-Anhalt. Immigrants make up 33 to 40 percent of employees in the food production, construction, gastronomy, and logistics sectors in the state. Furthermore, it is stated that one in every 5 doctors is a foreign national. The expectation that the state will lose 13 percent of its working-age population in the next 10 years makes this picture even more critical.

The AfD's advocacy for leaving the EU and the Eurozone through a Brexit-like process stands out as a separate issue for the export-oriented German economy. It is calculated that a possible exit could lead to an economic loss of 700 billion euros and put 2.5 million jobs at risk within five years. It is projected that household incomes in Saxony-Anhalt could fall by more than 6 percent.

On the fiscal side, the party's tax and pension promises are also being debated. It is stated that the tax system proposed by the AfD would provide advantages to high-income groups rather than low-income segments, and that the promises could create a serious deficit in the budget. According to the IWH's analysis of the Saxony-Anhalt program, against an annual financing need of approximately 2.5 billion euros, verifiable savings promises remain at the level of 243 million euros.

Halle Institute for Economic Research (IWH) President Reint Gropp stated that if the AfD comes to power, state economies could suffer, warning that the economic consequences of xenophobic policies could be severe. According to Gropp, annual growth in a state governed by the AfD could fall by between 0.5 and 1 percent.

ING Global Macro Research Head and Chief Economist for Germany Carsten Brzeski also described the upcoming elections as "Germany's hot political autumn." Brzeski stated that the results in the three states could affect the political climate in Berlin, and that being slow in reforms to revitalize the stagnant economy is paving the way for the rise of the far-right.