LIVE MARKETS-German regional votes may test Berlin, not markets

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GERMAN REGIONAL VOTES MAY TEST BERLIN, NOT MARKETS

Germany's regional elections next month could deliver fresh gains for the AfD and put pressure on Chancellor Merz's coalition, but that looks unlikely to herald any major policy change.

Berenberg notes the far-right party may even win a majority in the Saxony-Anhalt state parliament on Sunday for the first time, potentially sending "shockwaves" through German politics and fuelling debate within both Merz's CDU and the SPD.

For investors, however, the key message is continuity.

"Even in case of a major midterm setback, the CDU/CSU-SPD coalition will likely soldier on until the next regular federal election in early 2029," writes Berenberg chief economist Holger Schmieding.

He notes that neither coalition partner has a credible alternative governing arrangement, while snap elections would risk serious losses for both parties, making them unlikely.

As a result, he expects the government to broadly go ahead with its planned growth-oriented reform agenda, although some adjustments are possible. Deep differences over Europe, the euro and support for Ukraine also mean mainstream parties remain unwilling to cooperate with the AfD at the national level.

"Merz has become unpopular," he concludes. "However, any attempt to replace him would be a high-risk manoeuvre."

(Danilo Masoni)

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