• German Chancellor Angela Merkel's party slumped to record defeats in two key state elections on Sunday, piling more misery on the country's leadership just as Germany is seen to be experiencing a "third wave" of coronavirus infections.
• Germany's ruling Christian Democratic Union (CDU) party saw its worst performance since World War II in state elections this weekend, trailing the center-left Greens in the vote in Baden-Wuerttemberg, and the Social Democrats (SPD) in Rhineland-Palatinate.

German Chancellor Angela Merkel's party slumped to record defeats in two key state elections on Sunday, piling more misery onto the country's leadership as Germany looks to be facing a "third wave" of coronavirus infections.

Germany's ruling Christian Democratic Union (CDU) party experienced its worst performance since World War II in state elections this weekend, trailing the center-left Greens in the vote in Baden-Wuerttemberg, and the Social Democrats (SPD) in Rhineland-Palatinate.

The results broadly confirmed the political status quo in both states, with the incumbent state premiers — Winfried Kretschmann from the Greens in Baden-Wuerttemberg, and Malu Dreyer from the SPD in Rhineland-Palatinate – winning the elections. The CDU finished second in both regional votes, followed by the right-wing Alternative for Germany, although it too saw its support decline.

Paul Ziemiak, the CDU's general secretary, conceded that the results for the center-right were disappointing, stating, "to put it bluntly, this is not a good election evening for the CDU. We would have liked different and better results in the state elections in Baden-Wuerttemberg and Rhineland-Palatinate."

The party's poor showing comes as it prepares for September's national election  — with four other state elections before then — and the post-Merkel era. The chancellor announced in 2018 that she would not be running for a fifth term in office, prompting uncertainty over who would succeed her to take charge of Europe's largest economy.

Arne Jungjohann, a political scientist and member of the Green Academy of the Heinrich Boell Foundation, told CNBC the results signaled that the CDU could be in trouble come September's national vote.

"The CDU party has built up this image, under Angela Merkel, of being indispensable, of being the natural governing party, and since last night (Sunday night) that image is fading away," he told CNBC's "Squawk Box Europe." "We've seen in both states ... that actually the parties can form governments without the CDU and that is the signal from last night."

Bumper election year

For some political parties in Germany, however, the latest results are encouraging, particularly for the environmentalist Greens, which also performed well in municipal elections in Hesse this weekend.

It could herald a shift in the political landscape later this year with the Greens likely to become a coalition partner for the CDU in the next government. Jungjohann told CNBC that the Greens had established themselves as the "hinge party" in Germany, able to govern on both the center-left and center-right. They are already part of coalitions in 11 out of Germany's 16 states. "They've become a federal political force even though on the national level, they're in opposition," he noted.

Robert Habeck, Green party co-leader, said the results were "a great start to the super election year for us and we will then hopefully be able to take the tailwind from Baden-Wuerttemberg and Rhineland-Palatinate with full sails and continue to pick up speed in the months to come."

He added that the results reflected a loss in public trust in the ruling CDU party due to what he called its "mismanagement" of the government during the pandemic, and a corruption scandal that has hit the party in recent weeks concerning allegations that several CDU lawmakers profited from deals to procure facemasks in the early days of the pandemic. The allegations have led to several resignations.

Winds of change?

The CDU is likely to be soul-searching following the weekend's results, as it considers who might fill Merkel's shoes as chancellor following September's election.

Merkel, arguably Europe's strongest and most-respected leader, has broadly been seen as a safe pair of hands during her leadership, helping to steer the euro zone through the financial crisis. She has, however, been criticized in Germany for her decision to allow hundreds of thousands of migrants to enter the country in 2015. This move was seen as boosting support for the right-wing Alternative for Germany party.

The CDU has not yet chosen who it will run in the federal election, although the main contenders are Armin Laschet, leader of the CDU, and Markus Soeder, leader of the CDU's Bavarian sister party, the Christian Social Union.

A decision is expected in April or May, although the CDU's defeats this weekend increase the pressure on party leaders to nominate a candidate quickly, according to Carsten Brzeski, global head of macro at ING.

"With the Sunday results, chances for the Bavarian minister-president, Markus Söder, to be the third Bavarian leading the CDU into national elections have clearly increased," he said in a note Monday.

"In our view, Sunday's state elections have shown … a clear dissatisfaction with the national government," he said, noting that "the most important message for the September elections is that the electorate is looking for continuity, but it's unclear as to which continuity."

Coronavirus woes

Germany was lauded as a poster child for its handling of the coronavirus pandemic last year, receiving praise for its robust contact tracing and quarantining regime that helped to contain the spread of the virus, and modern hospital infrastructure that helped to prevent the high numbers of deaths seen in other European countries, particularly Italy, Spain, the U.K. and France.

In more recent months, however, it has — like other countries — had to contend with the spread of more infectious variants of the virus that have prompted a strong uptick in cases, aided by the winter season and a slow rollout of Covid vaccines across the bloc.

National polls show that support for the CDU rose at the start of the pandemic and has stayed reasonably high over the last 12 months. However, whether this continues could be determined by the government's handling of a third wave of infections, just as citizens are desperate to see their lives return to normal. On Friday, the head of Germany's public health agency warned that a third wave had already begun.

Political scientist Jungjohann noted that support for the CDU was now waning. "Most people now say that the vaccination rollout is not going well and now we've seen the corruption scandal unfolding and it's still ongoing … it's yet unclear who will try to follow Angela Merkel," he said. "It looks like a moment for crisis (against this backdrop) towards the election."