Battered and unpopular, Germany's coalition is likely to hold on after regional losses to the right By Reuters

By Sarah Marsh and Thomas Escritt

BERLIN (Reuters) – The first victory of a far-right party in Germany's post-war federal election prompted soul-searching in Berlin on Monday, but Chancellor Olaf Scholz's battered and unpopular coalition looked set to hold together.

All three parties in Scholz's left-wing coalition suffered heavy losses while the nationalist Alternative for Germany (AfD) and the new anti-establishment party registered gains in the eastern states of Thuringia and Saxony on Sunday.

Scholz, a Social Democrat, described the results as “bitter” but Finance Minister Christian Lindner rejected suggestions that his neoliberal Free Democrats (FDP), which performed the worst of all its allies, should leave government.

With a year to go before the general election, the results are still likely to cause rifts in the coalition, which is rooted in disagreements and struggles to deal with the fallout from the war in Ukraine, including a cost-of-living crisis.

The AfD became the first far-right party to win a state legislative election in Germany since the Second World War as 32.8% was seen in Thuringia. And it is a close second, at 30.6%, behind the conservative Christian Democrats in neighboring Saxony.

The FDP was crushed, kicked out of the Thuringian parliament and unable to reach the 5% threshold to re-enter the Saxony legislature. In a press conference, Thomas Kemmerich, who represented the defeated FDP in Thuringia, said the result shows that it is time for the FDP to defend its own path.

“No,” said Lindner. “There we disagree. It is very important that we give the economy more impetus,” he added, saying that the pro-business FDP is needed in government to do that.

The last week of the campaign was overshadowed by the killing of three people, allegedly by an illegal immigrant, in a stabbing attack that gave the AfD a boost.

To that end, Lindner said the FDP is willing to deal with changes to Germany's post-war democratic constitution or European legislation that will help curb immigration.

Analysts warn that right-wing growth could damage Europe's largest economy by deterring investors and skilled workers. “It's a bad sign for international investors,” said DekaBank strategist Jochim Schallmayer.

The AfD, which is considered “right-wing extremist” by security officials in Germany's two eastern states, will not govern as long as other parties stick to their promise to join ranks to keep them out of power.

But a jubilant AfD has said it is the government in Berlin that must go and insists it has the right to govern.

“Voters want new national elections,” said coalition leader Alice Weidel. “Scholz and his allies must pack their bags.”

'GET OUT THE GERMAN DIGNITY'

Still, the nationalist, anti-immigration and Russia-friendly party has enough seats in Thuringia to block decisions that require a two-thirds majority, such as the appointment of judges or top security officials. This “sperrminoritaet” – German for preventing the minority – will give it unprecedented power in opposition.

“The results of the AfD in Saxony and Thuringia are worrying,” Scholz said in a statement to Reuters in his capacity as a member of parliament for the Social Democrats (SPD).

“Our country cannot and must not get used to this. The AfD is hurting Germany. It is weakening the economy, dividing society and destroying the image of our country.”

A left-wing populist newcomer, the Sahra Wagenknecht Alliance (BSW), founded by a former member of the old East German Communist Party, fared better than all three of the Berlin coalition's allies in its first state election, coming in third.

That made the ex-Communist a potential king, but Wagenknecht was curious about how he would take the position.

He told a press conference that any coalition partner would have to acknowledge his party's need for more diplomacy to end the war in Ukraine and oppose a US missile freeze on Germany.

“Part of the German people are afraid of getting into a big war,” he said of his call for Ukraine to stop receiving German weapons to protect itself from Russian aggression.

“Two-thirds of the east opposes US missiles,” he added – remarks that seemed to reflect the Kremlin's talking points.