Race for third place in German elections is really the one to watch

(Bloomberg) As Angela Merkel and Martin Schulz slug it out for the chancellery, the race for third place in Sunday’s election may end up having an out-sized influence on the next German government.

That’s not because either the post-communist Left party or anti-immigration Alternative for Germany will gain a foothold on power -- it’s highly unlikely they will. But their respective success in drawing support from the centre to the political fringes suggests that whatever the shape of the coalition after September 24, it won’t easily be able to ignore either party’s appeal to voters fed up with the mainstream.

Polls all suggest Merkel is poised to win a fourth term, yet with support for her Christian Democratic-led bloc down from her last victory in the 2013 election. The Left and the AfD have a combined tally of as much as 22% -- about the same as Schulz’s Social Democratic Party, and almost double their score in 2013.

What’s more, both far-left and far-right parties have momentum going into the election. Late-breaking developments such as the threat to thousands of jobs posed by Thyssenkrupp AG and Tata Steel Ltd.’s plans to merge their European steel-making operations could drive voters further into their arms. That hollowing out of the political middle ground is causing concern in Germany, not least for Merkel, who has urged voters to keep the centre strong.

Signal to mainstream

"A strong performance from AfD and other populist parties would reflect a protest vote from people unhappy with the direction things are going in Germany," said David Zahn, head of European fixed income at Franklin Templeton. "And that, in turn, should serve as a signal to mainstream parties that they need to make adjustment to the economy. Otherwise, the chances are greater that more extremist parties could get a larger vote next time."

Support for the two main parties -- Merkel’s bloc and Schulz’s SPD -- has declined by about a third from a postwar peak of more than 90% in 1976. Apart from a sprinkling of fringe parties that took seats in the post-war decade, the liberal Free Democrats made up the balance until 1983, when they were joined by the Greens. Now others with more radical policies are eating away at the ground once occupied by the centre.

They’re doing that with the help of social media. In the final run-up to election day, the AfD is enlisting a new kind of campaign worker: its 360,000 Facebook fans. It has begun to offer its most popular Internet memes for download, urging its Facebook followers to distribute them by email and on social media. The banners use pictures and short text to criticise Merkel’s social, economic and above all refugee policies. "Let’s paint the web blue," the AfD wrote on its Facebook page at the weekend, referencing its party colours.

The Left has started posting more video statements, memes and sophisticated graphics on its Facebook page, including one that shows "Socialism is sexy" printed over a photo of Karl Marx. The party’s lead candidate, Sarah Wagenknecht, is more popular than Martin Schulz, according to a recent INSA poll cited in Bild newspaper this week.

That deft use of social media is helping to bolster support, which all but ensures there will be six parties elected to the Bundestag for the first time since 1953.

There’s also the outside prospect the polls might be wrong. UK Prime Minister Theresa May called a snap election for June on the back of a 20-point lead over the main opposition Labour party, only to end up losing her majority.

Markets could take fright if the Left or AfD are seen to outperform their projected scores and so break "the post-Trump trend away from protest parties" that was seen in France and the Netherlands, according to Holger Schmieding and Florian Hense at Berenberg in London. All the same, "these worries would be very much overdone," they said.

A surge for the AfD and the Left would limit the number of potential coalition options for the mainstream parties, however, and could make building a government more complicated, said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics.

"Any coalition agreement with the SPD or with the Liberals would reflect this populist rise," Kirkegaard said in an interview. "It would mean a tougher immigration position and rejecting more asylum seekers."

Facebook lead

Smaller than the two "Volksparteien," the AfD and the Left -- which first won Bundestag seats in a prior incarnation in 1990 -- have long focused on growing their following via the internet, where they can send campaign messages to many people at very little cost. The Left has more than 200,000 followers on Twitter, almost as many as Merkel’s CDU, which has 225,000. (Merkel is the only Group of Seven leader without a Twitter account.) On Facebook, both the AfD and the Left have more followers than the CDU, and they post more frequently.

In a bid to make up lost ground, both Merkel and Schulz agreed to YouTube live interviews with German bloggers to reach out to younger, online-savvy voters.

The Left mostly campaigns on social and economic issues, demanding higher wages, an end to global free-trade agreements and higher taxes for the rich in professionally animated video clips, banners and memes posted on Facebook and Twitter several times a day.

The AfD’s loathing for Merkel and anti-foreigner populism clearly shines through in the banners it offers for download, with echoes of the "lock her up" chants directed at Hillary Clinton during the U.S. presidential campaign.

"We believe populism isn’t dead in Europe," said Franklin Templeton’s Zahn. "It’s just taking a back seat."