German Far-Right Gains Spark Investor Concerns Over Economic Reforms

European business leaders warn that the rise of Germany's far right is raising doubts about Germany's ability to deliver economic reforms and attract foreign investment. Executives said recent Alternative for Germany (AfD) state election victories and political instability concerns have worried investors about promised bureaucracy, labour-law and pension reforms. Commerzbank chief executive Bettina Orlopp said investors expressed enormous interest in Germany but questioned whether the government would deliver promised reforms. Orlopp recounted conversations at the IMF meeting in Bangkok this week. Orlopp said investors were asking whether recent election results would leave the government stalled or prompt faster action.

An unpublished report by McKinsey and Deutsche Bank economists says Germany needs up to €4.1 trillion in investment by 2035. The report estimates investment needs of up to €1 trillion each for energy systems and infrastructure. The report estimates defence investment needs of €700 billion. The report estimates AI investment needs of €600 billion.

Chancellor Friedrich Merz is preparing to welcome up to 200 investors at the inaugural Invest in Germany conference in Berlin this week. Expected participants include Goldman Sachs chief executive David Solomon and BlackRock boss Larry Fink. Fink once employed Merz as BlackRock's chair for Germany.

Merz faces growing unrest within the Christian Democratic Union (CDU) after electoral losses in the past two months. The AfD emerged as the strongest party in state elections in Saxony-Anhalt and Mecklenburg-Vorpommern. The CDU won no seats in Mecklenburg-Vorpommern, the first such result in a German state election since the party was founded in 1945. Many blamed Merz's unpopularity for the result. The Social Democrats, Merz's coalition partner, are seeking new leadership after steep electoral losses.

Merz said in a recent interview that Merz would not step down and was determined to pursue the government's reform agenda. The agenda includes investing an estimated €1 trillion in infrastructure and defence over the next decade. The agenda also includes introducing a state fund to support Germany's struggling pay-as-you-go pension system.

Axa chief executive Thomas Buberl said Germany had become a leading topic in recent investor meetings because of growing concerns about political stability. Buberl said investors asked whether elections would occur next year, whether the government would remain stable and whether new elections would bring the AfD to power. Buberl warned that a weak Germany would weaken the whole of Europe.

Management consultancy Roland Berger said prospective investors at recent Middle East conferences questioned what the AfD's election results meant for Germany's capacity to implement reforms. Roland Berger leader Stefan Schaible said Schaible feared that willingness to pursue reforms would disappear. Schaible said Germany needed to accelerate reforms or risk becoming a country permanently requiring restructuring.

Thyssenkrupp chief executive Miguel López warned that the AfD's calls for mass deportations and a fundamental overhaul of the EU could undermine Germany's attractiveness to international companies. López said uncertainty was the most costly factor affecting where capital is invested. López said businesses depended on international skilled workers and access to the European single market.

However, those concerns did not stop the United Arab Emirates from pledging €40 billion in investment in Germany last month to bolster industry. State-owned oil company Adnoc acquired Germany's chemical producer Covestro for €14.7 billion last year. The Cologne Institute for Economic Research said foreign investment in Germany increased by 50% to €86 billion last year compared with the previous year.

The Made for Germany business initiative's 147 members, including Siemens and BMW, have pledged to invest €850 billion by 2028. The initiative's new report says a large gap remains for Berlin and foreign investors to fill against investment needs of up to €4.1 trillion over the next decade. International investors want evidence that Germany can address longstanding structural weaknesses, including extensive bureaucracy and high energy costs, before committing billions. DWS chief Stefan Hoops said the question was no longer whether Germany needed reform, but whether Germany could implement reforms at the required speed.