UPDATE 3-Setback for German coalition as far right surges in regional elections

Chancellor Angela Merkel's conservatives and her Social Democrat (SPD) coalition partners bled support to the far right in two state elections in eastern Germany on Sunday, dealing a double blow to her already unstable ruling alliance. Merkel's Christian Democrats (CDU) remained the largest party in Saxony, but saw their share of the vote drop by 7.4 points from the last election in 2014 to 32%, with the far-right Alternative for Germany (AfD) coming second, an exit poll for broadcaster ARD showed.

The AfD harnessed voter anger over refugees and the planned closure of coal mines in the formerly communist eastern states, casting itself as the heir of the demonstrators who brought about the fall of the Berlin Wall three decades ago. In Brandenburg, which surrounds Berlin, the left-leaning Social Democrats (SPD) clung on to first place in a state they have run since German reunification in 1990, winning 27.5% of the vote - ahead of the AfD on 22.5%.

The setbacks for the ruling parties were not as major as feared but could still hasten the break-up of the national coalition led by Merkel, who has loomed large on the European stage since 2005 and whose early departure would further unsettle a European Union already unnerved by Brexit. "Now we need to deliver in the autumn," said Ralph Brinkhaus, leader of the CDU's group in the national parliament.

The next few months will be crucial if the already rocky national coalition is to survive until a federal election due in 2021, with the eastern votes, including a third in Thuringia in October, and the direction of policy both critical. The parties are due to review the coalition, weakened by rows over migrant policy, tax, and pensions, by the year's end. Many SPD members want to quit an alliance that has supported Merkel for 10 of her 14 years in power and rebuild in opposition.

Voters went to the polls in Brandenburg and Saxony against the backdrop of a growing risk of recession in Germany - a threat that is raising tensions between the CDU and SPD as they argue over whether to shift to a more expansive fiscal policy. Social Democrats, who control the Finance Ministry, want to abandon the government's so-called "black zero" balanced budget policy and raise investment but Merkel's conservatives say it is an "indispensable principle" for them.

A coalition collapse could trigger a snap election or result in a minority government - unappealing options for stability-loving Germans. National polls put the conservatives first ahead of the Greens, with the SPD trailing neck and neck with the AfD. Heavy losses in state votes last year led Merkel, brought up in East Germany, to quit as CDU leader and announce this would be her last term as chancellor. 

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