Political Polarization in Europe threatens Euro stability amid rising extremism By Investing.com

Macquarie noted on Tuesday that the euro is facing increasing pressure as political polarization in Europe, particularly in Germany, increases, raising concerns about the currency’s stability.

Recent local elections in Germany, where far-left and right-wing parties won nearly half the votes in the states of Thuringia and Saxony, have deepened concerns about the potential unraveling of centrist rule.

Macquarie analysts point out that the rise of extremist parties in Germany reflects the political turmoil that occurred in the French parliamentary elections in June, where centrist parties also suffered heavy losses.

They noted that the growing strength of fringe parties at both ends of the political spectrum poses a medium-term risk to the euro, especially if these parties manage to gain further ground in government or if the current coalition in Germany collapses before the federal elections in 2025.

This political uncertainty is not just a local issue but a broader challenge for the eurozone. According to Macquarie analysts, Germany’s manufacturing sector, already under pressure from the loss of Russian energy supplies and competition from China in the electric car market, could see further pressure as political instability complicates policy responses.

Volkswagen (ETR:)’s consideration of closing its factories in Germany highlights the growing impact of these economic challenges.

Moreover, the election results in Germany are exacerbating concerns about the fragmentation of the political landscape, making it difficult for mainstream pro-market parties to govern effectively.

This situation is reminiscent of the difficulties facing France, where the National Assembly remains without a stable governing coalition following the rise of far-right and far-left factions.

With the Brandenburg state election approaching on September 22, current opinion polls indicate continued declines in support for Germany’s main parties, raising the specter of a potential breakup of the federal coalition before the next scheduled election in 2025.

Such an outcome would breach the political “sanitary buffer” that has historically kept extremist parties out of government, leading to higher deficits, higher sovereign risks and protectionist policies — all of which would weigh on the euro, analysts say.

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