Why AfD victory raises fiscal and demographic questions for Germany

The AfD party's recent victory in Saxony-Anhalt has sparked concerns about the state's financial situation and demographic challenges, though near-term market risks are still relatively manageable, according to UBS analysts. In the recent state election, the AfD secured 44% of the vote, which complicates the process of forming a coalition government. Various scenarios, ranging from a coalition with other parties to a governance without a formal coalition, are possible outcomes.

Fiscal policy has become a significant concern for investors. The Halle Institute for Economic Research estimates that implementing key commitments made by the AfD during the campaign, such as increased spending on childcare and school meals, could result in a fiscal deficit of approximately €2.2 billion annually. This represents nearly 3% of Saxony-Anhalt's GDP and could potentially undermine the state's fiscal indicators if all proposed measures were fully implemented.

Additionally, the AfD has signaled its intention to decline participation in Germany's federal infrastructure fund worth €100 billion. This decision could limit the state's access to investment resources as it grapples with persistent demographic pressures. Saxony-Anhalt has a population of around 2.1 million, which has steadily decreased since German reunification due to low birth rates and net migration outflows.

The state's GDP amounts to about €79.4 billion, corresponding to €37,800 per capita, and the unemployment rate is currently at 7.7%, compared to the national average of 6.2%.

From a financing standpoint, Saxony-Anhalt holds a debt stock of €23.1 billion as of the end of 2025, with an annual refinancing rate of about 10% to 15%. The state has allocated €2.1 billion to €3.3 billion for gross borrowing this year and has already raised approximately €1.8 billion in benchmark bonds. Experts predict that the state's annual funding needs will likely exceed €3 billion starting from 2027.

Despite these challenges, Saxony-Anhalt remains a relatively minor borrower within the broader German Länder market, with around €13.2 billion in outstanding benchmark debt compared to the substantial €116 billion held by North Rhine-Westphalia. The state benefits from Germany's fiscal equalization system and intergovernmental support, which help mitigate the risk associated with standalone borrowing.

Consequently, investor focus will likely shift towards assessing the potential consequences of the election result, including the possibility of increased borrowing, slower economic growth, and heightened demographic pressures over time.