Left-wing and far-right parties stormed to success in German local elections over the weekend, delivering another hammer blow to the ruling Christian Democratic Union (CDU) and complicating the path for its increasingly unpopular pro-growth agenda.

Chancellor Friedrich Merz accepted a “disaster” for the CDU following the votes in Berlin, where Die Linke (The Left) came first, and in the north-eastern state of Mecklenburg-Vorpommern, where the far-right Alternative for Germany (AfD) topped the vote. The center-right CDU has led a national coalition government under Merz since 2025 and has been Germany’s dominant political force in the postwar era, formerly helmed by longstanding Chancellor Angela Merkel.

The AfD is unlikely to be able to govern in Mecklenburg-Vorpommern due to a boycott by other parties of any collaboration with the far-right. But its success will provide further momentum to a political force that came first in another state election result earlier this month and is pulling ahead in national voting intention, according to a Politico poll of polls.

The rise of far-right populism in Europe’s biggest economy, which has for decades been viewed as a bastion of stability, centrist policymaking and EU leadership, is being closely watched across the continent.

Merz on Sunday said he would stay in power despite the results, vowing to push ahead with various measures aimed at boosting the flagging German economy — including tax, healthcare and pension reforms, a highly anticipated program of defense and infrastructure spending, and easing bureaucracy to boost SMEs.

During a press conference on Monday, he added that he was “grateful” to Germany’s center-left Social Democrats for committing to their position as junior partner in Merz’ governing coalition.

“That applies to us too, and it applies to me as well. Together, we are determined to rise to the historic challenges facing our country,” he added.

Merz’s popularity has dwindled amid public discontent with a host of issues across the political spectrum, including price rises, energy instability, wage stagnation, a collapse in Germany’s traditional manufacturing and industrial sectors, and a lack of leadership in the green transition. The AfD proposes extreme anti-migrant, anti-refugee policies and has also criticized the EU’s provision of aid to Ukraine.

Markets shrugged off the election results on Monday, with German bond yields falling and stock markets gaining in-line with global moves, but Capital Economics’ Chief Europe Economist Andrew Kenningham said the impact would be felt longer term.

Germany’s growth prospects have improved, with economic expansion of around 1% expected, Kenningham said by email. However, that is due to temporary factors including fiscal stimulus and fading impacts from the 2022 energy shock, he said.

“It does not change the fact that Germany faces massive structural challenges due to high energy prices, an over-regulated expensive labour market, heavy exposure to the ‘China shock’ and demographic decline, and is not well placed to benefit from technological change including AI,” Kenningham said.

“The significance of the elections is that it shows there is not enough popular support for the kind of growth-oriented reforms that Merz wants to implement and that it points to further political deadlock and (probably) ineffectual government in future.”

ING’s global head of macro, Carsten Brzeski, said the recent election results showed how years of economic stagnation have strengthened the extreme right and left, and that there is “no majority in favor of reforms.”

The bulk of Merz’s agenda still needs to pass parliament, but with the CDU in an “existential crisis” complicating its ability to work with other parties, Brzeski told CNBC’s “Squawk Box Europe,” noting that even deeper measures will still be needed to really improve Germany’s international competitiveness.

“This really looks like a deadlock. And in all honesty, I would not be surprised; we’re all talking about the super election year next year in Europe, I would not be surprised if we would have to add another German election to this super election year 2027,” Brzeski said.