With the right-wing Alternative for Germany leading the national polls, the elections could be the opening act of an 18-month period in which Europe "lurches to the right," as Nomura analysts explained last month.

UniCredit's chief German economist, Dr. Andreas Rees, told clients on Friday: "Three state elections in just 14 days will test Germany's government coalition and its reform plans. While political noise is likely to increase, we expect the push for structural reform to remain on track."

The polling chart compiled by Rees' team shows the rising popularity of the AfD and the pressure facing Germany's establishment parties. The AfD leads nationally at roughly 28%, compared with 21% for the CDU/CSU and 12% for the SPD. In Saxony-Anhalt, the gap is far wider, with the AfD polling near 41%, versus 23% for the CDU and just 8% for the SPD. However, CDU/CSU leads over AfD in Berlin. 

Rees touched on this Sunday's big election in Saxony-Anhalt, which could quite possibly usher in AfD leadership:

On Sunday, voters in Saxony-Anhalt will head to the polls; two weeks later, Mecklenburg-Western Pomerania and the city-state of Berlin will follow. Formally, these are state elections with regional specifics and differences. Politically, however, three elections within 14 days will probably be viewed as a report card for Chancellor Friedrich Merz's CDU/CSU-SPD coalition, at a time when the government is trying to move from fiscal firepower towards structural reforms of the pension system, the labour market and bureaucracy.

THE DATA

The starting point is uncomfortable for the conservative CDU/CSU alliance and the Social Democratic Party (SPD). In the latest nationwide opinion polls, the right-wing AfD stood at about 28%, ahead of the CDU/CSU with around 21%, while the SPD came in at just 12%. Recent polls for the state of Saxony-Anhalt, the election federal policymakers may watch most nervously, even put the AfD at around 41%, far ahead of the CDU, which is polling at 23%. The SPD is currently only at around 8%. In Mecklenburg-Western Pomerania, the AfD also leads clearly, while the SPD is holding up considerably better. In Berlin, the race is highly fragmented, according to opinion polls.

OUR VIEW

Sunday's election outcome in Saxony-Anhalt could grab most of the headlines. At current polling levels, the AfD does not have an outright majority. But with several parties, including the SPD, hovering around the 5% threshold, relatively small shifts in votes could translate into larger changes in seats and potentially open the path to an AfD-led government, the first one in a federal state. However, from an investor perspective, there is one question that matters more: what does this all mean for the federal government in Berlin?