Merkel seen defying populists to stay on course to 2017 vote

[BERLIN] Angela Merkel's humiliation in her political home state provides further evidence to her opponents that Germany's first female chancellor has had her day. It may instead make her more likely to run for a fourth term.

The Alternative for Germany, or AfD, capitalised on public discontent with Ms Merkel's refugee policy Sunday to overtake her Christian Democrats for the first time in a state election, raising questions over her political standing ahead of the next federal ballot in the fall of 2017.

While the result is an undeniable defeat, especially after she campaigned hard at rallies across the Mecklenburg-Western Pomerania region, Ms Merkel used a series of interviews with German media before the vote to signal that she's holding fast to her open-border policy.

The election outcome, though a major embarrassment, is still unlikely to make Ms Merkel budge, according to Holger Schmieding, chief economist at Berenberg Bank.

"There is no rival, there is no alternative," Mr Schmieding said by phone. As a result, "there isn't all that much they can do. She'll have to sit it out."

A year after her fateful decision to allow refugees passage into Germany from Hungary and one year out from federal elections, Ms Merkel's popularity has plummeted and her Bavarian CSU allies have been lukewarm on supporting her to run again next year.

Yet her Social Democratic coalition partner is plumbing historic lows and the AfD polls higher in state elections than nationally, where all surveys show Ms Merkel's Christian Democratic Union-led bloc ahead.

Going into the election year, "nobody stands a better chance than Merkel," Carsten Nickel, an analyst for Teneo Intelligence in Brussels, said by phone.

She "is the guarantee for the CDU to come in as strongest party and to make use of the coalition options that she has." With her focus on the political center, "what she will do is keep calm and carry on."

In the formerly communist eastern state that's home to her electoral district, Ms Merkel's party slumped on Sunday to 19 per cent, a loss of four percentage points, while the AfD took 20.8 per cent on its first try, according to preliminary official results.

The Social Democrats, who have governed the state since 1998, won with 30.6 per cent, dropping the CDU to third place. A resumption of the coalition between the two parties with the CDU as junior partner still looks like the most viable option.

The defeat underscores the surge in public anxiety in Germany that's put Ms Merkel on the defensive after more than one million asylum seekers arrived last year.

The chancellor's approval rating is at a five-year low and a poll in Bild am Sonntag newspaper in August showed that half those surveyed said they didn't want her to run again.

Ms Merkel has declined to say whether she'll seek a fourth term. Still, she indicated that a decision could come by early December, when her post as CDU leader is up for renewal at a party congress in Essen, the same city where the party first elected her as chief in 2000.

"Merkel's unpopular refugee policy is uppermost in every German voter's mind right now," Nicholas Spiro, a partner at London-based Lauressa Advisory Ltd, which advises asset managers, said by e-mail.

"The inescapable feeling is that even if she decided to run for chancellor again, it will be extremely difficult for her to re-establish her authority and leadership." She's already under pressure from her own bloc to change course.

Wolfgang Bosbach, a CDU lawmaker and former chair of the interior affairs committee, told Monday's Die Welt newspaper that the state election result will go down as a historic defeat and the government's refugee policy was to blame. He still warned against a debate over Ms Merkel's candidacy in 2017 as a result.

Ms Merkel, 62, has displayed staying power more than once during a decade as chancellor, including in Europe's debt crisis.

In an interview with Germany's biggest-selling Bild newspaper published Saturday, she was asked if she regretted any decision that led to the record refugee influx. "No," Merkel said, adding that she'd do the same again.

Germany's refugee influx peaked in November and the number of people seeking asylum is falling from about one million in 2015 to a government forecast of 300,000 this year.

The European Union's refugee deal with Turkey championed by Ms Merkel, though fragile, remains in place.

At home, the chancellor's coalition has stepped up efforts to make refugees fit in and return those migrants whose application to stay is rejected.

Ms Merkel has already made Germany "less welcoming to refugees," Mr Schmieding said.

"That remains the hope for the CDU: because fewer migrants are coming and a lot is being done to integrate those that are there, the issue will lose a bit of its toxicity among parts of the population ahead of the next election" in 2017, he said.

BLOOMBERG