Week Ahead (7 September)

W/C Monday, 7 September – AfD landslide in Saxony-Anhalt increases pressure on Merz ahead of further eastern state elections

Germany enters the week digesting a historic result in Saxony-Anhalt, where the far right AfD secured 43.8% of the vote, its strongest result in any German state election, while Chancellor Friedrich Merz’s CDU collapsed to 17.2%, from 37.1% in 2021. The scale of the result is particularly striking given exceptionally high turnout of 77.8%, making it harder for mainstream parties to attribute the AfD’s performance simply to differential mobilisation among its supporters.

The AfD nevertheless fell narrowly short of an outright majority in the state parliament, meaning the immediate focus now shifts to whether lead candidate Ulrich Siegmund can translate the party’s electoral breakthrough into government. The traditional ‘’firewall (Brandmauer) against the far right remains formally intact, with the mainstream parties continuing to rule out cooperation, but the arithmetic has become considerably more difficult. The populist left BSW, which cleared the 5% threshold, could become particularly important: it has criticised the firewall and floated a non-partisan government operating through shifting parliamentary majorities. The AfD is also openly encouraging individual lawmakers from other parties to cooperate with it, albeit seeing individual members of the centrist parties providing ad hoc support appears very unlikely.  

For Merz, the political damage is substantial even though the result has no direct effect on his federal majority. Only 9% of Saxony-Anhalt voters approved of his performance in an ARD exit poll, while the CDU lost more than half its 2021 vote share. Merz is expected to address the result publicly this afternoon, with his response likely to be watched for whether he doubles down on the firewall while shifting the CDU further towards the AfD on migration and economic policy, or instead seeks a broader explanation for the defeat. The result has already prompted some speculation in Germany over Merz’s longer term leadership, although talk of a near term change of chancellor appears premature.

The result also reinforces the economic dimension of the AfD’s rise. Saxony-Anhalt has Germany’s lowest average net income, and voter surveys showed particularly acute concern about prices, industrial decline and living standards. This matters for Berlin’s overall policy direction. For example, a CDU increasingly concerned about losing economically anxious voters to the AfD is likely to become still more cautious about policies that can be presented domestically as increasing energy costs, transferring resources to Brussels or mutualising European liabilities.

The implications therefore extend to Merz’s EU agenda. Germany will be central to negotiations over the 2028–34 MFF in the coming months, plans for further common borrowing and the Savings and Investments Union (SIU), while the AfD remains strongly opposed to deeper fiscal integration and considerably more sceptical of support for Ukraine and EU enlargement. The result does not immediately change Berlin’s position on these files, but it could strengthen the domestic political constraint under which Merz will negotiate them at an EU level.

Finally, Saxony-Anhalt is only the first of three important September tests. Mecklenburg-Western Pomerania and Berlin vote on 20 September, with the AfD currently leading in the former and polling strongly in the capital. A repeat of Sunday’s momentum, particularly in Mecklenburg-Western Pomerania, would make it increasingly difficult to treat Saxony-Anhalt as an isolated result and could further constrain Merz’s room for manoeuvre both domestically and in Brussels. 

Wednesday, 9 September – General Court to rule on Booking’s appeal against Commission’s block of eTraveli takeover

On Wednesday, the General Court, the EU’s lower court, will rule on Booking Holdings v Commission (T-1139/23), a landmark challenge to the European Commission’s September 2023 veto of Booking’s €1.63 billion acquisition of Swedish flight booking platform eTraveli. DG COMP’s ruling marked the first time the Commission blocked a merger solely on a “conglomerate” theory of harm: the rationale behind the block was not due to the two companies being direct competitors, but because the acquisition would allow Booking to expand its digital travel ecosystem and further entrench dominance in its core hotel OTA (online travel agency) market.

Brussels concluded that acquiring eTraveli would strengthen Booking’s already dominant position in hotel online travel agencies, where it held around 60% of the EEA market. Integrating flights more closely into Booking’s offering would provide an additional customer-acquisition channel and reinforce network effects around its wider travel ecosystem, making it harder for rival hotel platforms to attract both consumers and accommodation providers.

Booking has challenged both the legal basis and evidence underpinning this theory. During the General Court hearing last July, its lawyers argued that the Commission had departed from its established approach to non horizontal mergers and relied on speculation rather than “clear and compelling evidence”. Booking also argued that Brussels was effectively penalising efficiencies associated with creating a more attractive one-stop travel service rather than demonstrating genuine foreclosure.

Wednesday’s ruling therefore has implications well beyond the transaction. An endorsement of the Commission would strengthen DG COMP’s ability to pursue ecosystem and entrenchment theories where acquisitions reinforce an already dominant digital platform despite limited horizontal overlap. Conversely, an annulment, especially on evidentiary grounds, could constrain the Commission’s ability to pursue similar theories in future digital mergers.

Thursday, 10 September – ECB to resume rate hikes as continued energy shock pushes eurozone inflation to 3.3% in August

The ECB is widely expected to raise interest rates when its Governing Council meets in Berlin on Thursday, resuming the tightening cycle after July's pause. Markets have largely priced in a 25bp increase in the deposit rate from 2.25% to 2.50%, while all 65 economists surveyed by Reuters late last week expect the same move.

The case for a September hike has strengthened considerably since the July meeting. As a reminder, the ECB raised rates for the first time in nearly three years in June but held in July. Minutes from that meeting nevertheless repeatedly characterised the decision as a “pause” rather than the end of the cycle and suggested that “another rate hike would likely be necessary unless the inflation outlook improved significantly.”

That improvement has clearly not materialised. Eurostat’s flash estimate last week showed euro area inflation accelerating from 2.9% in July to 3.3% in August, principally because annual energy inflation jumped from 10.3% to 14.3%. The continued conflict in Iran means the energy outlook remains unusually uncertain, while policymakers will also be watching for signs that higher fuel and food costs are beginning to feed into inflation expectations, wages and underlying price pressures.

The more consequential question on Thursday will therefore be what President Christine Lagarde signals about the remainder of the year. Economists largely expect September to mark the end of what would be an unusually short tightening cycle. Indicatively, around 91% of respondents to the latest Reuters poll expect the deposit rate to finish 2026 at 2.50%, with most arguing that the present inflation shock remains predominantly energy-driven rather than reflecting the broader demand and supply pressures seen in 2021–22. Markets, however, continue to attach some probability to a third increase by year-end.

Thursday's updated ECB staff projections will consequently be particularly important. It is important to note that economists have repeatedly revised their 2026 inflation forecasts higher this year, while the latest survey does not see headline inflation returning to the ECB's 2% target until late 2027. A further deterioration in the energy outlook or evidence of second round effects could therefore reopen the case for another move later this year, even if September currently looks likely to be the final hike.

Friday, 11 September – Rapporteur Liese expected to unveil European Parliament’s opening position on EU ETS Reform

On Friday, European Parliament lead negotiator Peter Liese (Germany, EPP) is expected to publish his draft ENVI report on the Commission’s proposed revision of the EU Emissions Trading System (ETS), providing the first concrete indication of how far Parliament may seek to soften or reshape Brussels’ July proposal.

Per our previous reports, the Commission proposed a more gradual reduction in the supply of allowances during the early 2030s, including a 3.7% linear reduction factor (LRF) between 2031 and 2035 and 1.7% thereafter, alongside changes intended to provide industry with greater flexibility while preserving the EU’s overall decarbonisation trajectory.

Liese has already indicated that he wants to go further on industrial competitiveness. In particular, he has floated reducing the 2031–35 LRF to around 3.4%, potentially compensated by greater ambition after 2036. He also wants to remove the mechanism automatically increasing the post-2036 LRF to 2.7% if insufficient international credits become available, while exploring less burdensome conditionality for free allocation and stronger targeting of ETS revenues towards hard-to-abate industries.

In an interview ahead of the report, Liese further indicated that he wants member states to direct 75% of ETS revenues towards decarbonisation in ETS-covered sectors, up from the 50% proposed by the Commission, with part of this support targeted at industries exposed to carbon leakage. More broadly, he described the Commission proposal as “balanced”, arguing that it gives industry greater breathing space while preserving the EU’s 2040 and 2050 climate objectives.

The draft will only mark the beginning of Parliament’s negotiations. Political groups will subsequently table amendments and negotiate compromises within ENVI before the committee adopts its position, followed by a plenary vote establishing Parliament’s mandate for negotiations with member states. Liese has now explicitly indicated that his preferred route is to build the “broadest” possible centrist majority around the traditional EPP–S&D–Renew coalition, effectively ruling out reliance on far right groups like Patriots for Europe (PfE), which he expects to oppose any eventual ETS compromise.

Council negotiations are advancing in parallel. The Irish Presidency is pursuing an unusually intensive timetable, with eight working party meetings planned during September and a political discussion expected at the 12 October Environment Council, ahead of a targeted General Approach on 11 December. Poland, Italy and several Central and Eastern European countries are pushing for greater flexibility, while Sweden, Denmark and the Netherlands are resisting significant weakening of the system. Germany remains the key swing state, with Berlin yet to settle a unified position.

The emerging Parliament and Council positions over the autumn should therefore determine the parameters for eventual trilogue negotiations.