Welcome to the Brussels Edition. I’m Suzanne Lynch, Bloomberg’s Brussels bureau chief, bringing you the latest from the EU each weekday. Make sure you're signed up.

Bad, but it could have been worse. That’s the view in Brussels on the election results in the German industrial state of North Rhine-Westphalia yesterday, which saw the far-right Alternative for Germany triple its support. The AfD increased its share of the vote by 9.4 percentage points to 14.5%, according to official preliminary results.

The municipal contests in Germany’s most populous state were the first electoral test for German leader Friedrich Merz, who has faced headwinds since taking the chancellorship in May. His party held up relatively well. Though the Christian Democratic Union fell 1 point to 33.3%, it remains the dominant political force in the state, once a bastion of the center-left Social Democrats.

The results sealed a long decline for the SPD, which lost another 2.2% to secure 22.1%, while the Greens put in a dismal performance.

Still, while it tripled its vote since the last municipal ballots, the AfD fell short of the 16.4% share it received in the state in the federal election in February. But the results show that the anti-immigration party co-led by Alice Weidel and Tino Chrupalla continues to make political inroads outside its core support base in the east of Germany. 

Germany’s economic health will be in focus this week in Brussels as the European Commission gives its verdict on the country’s mid-term fiscal plan. Berlin broke with decades of policy earlier this year by approving a massive spending surge as it ramps up investment in defense and infrastructure.

The boost in defense outlays will help Germany meet the NATO requirement that allies spend at least 5% of GDP on defense, but has raised questions about whether it could be in breach of the EU’s strict fiscal rules. 

Meanwhile, France’s fiscal and political woes continue after rating agency Fitch cut the country’s credit rating to A+ from AA-  — one notch below the UK and on a par with Belgium. French bonds were lagging today in trading as the downgrade weighed on sentiment, although the market had been prepared for a possible downgrade.

In a sign of the changing fortunes of Europe’s top economies, Spain received a rating upgrade late Friday, the latest sign of recovery in a country that a decade ago was mired in the euro crisis. 

The Latest

• Polish Foreign Minister Radoslaw Sikorski said he’ll press his Chinese counterpart Wang Yi to lean on Russia to cease “a hybrid operation” on its eastern border, which led to a shutdown of Beijing’s key trade route to Europe. 
• Russian prosecutors are targeting billionaire Denis Shtengelov's KDV Group for expropriation, arguing the company supplied Ukrainian forces with food and sent income from Russian operations to "unfriendly jurisdictions" without approval.
• France’s new prime minister, Sebastien Lecornu, dropped an unpopular proposal by his predecessor to cut two public holidays, while warning that the government will need to find other ways to trim its budget deficit.
• Chinese electric vehicle maker Xpeng has launched its first production line in Europe by partnering with Austrian contract manufacturer Magna Steyr.
• A vote on the EU’s 2040 climate goal has been delayed after Germany backed France’s call to elevate the discussion to the level of heads of government.
• Thirty-three Gambians hired to work in Spain on three-month contracts disappeared while in the country, jeopardizing a program designed to provide a legal pathway to work in Europe.

Seen and Heard on Bloomberg

Jeetu Patel. Photographer: Al Drago/Bloomberg

“I'm actually very encouraged” is not an expression we hear often from big American tech companies when talking about EU regulation, but that was the message from Cisco President and Chief Product Officer Jeetu Patel this morning in an interview with Bloomberg Radio's Stephen Carroll. He said there's “great progress being made” on the EU's artificial-intelligence rules, though acknowledged that “more work needs to be done.”

Chart of the Day

Cross-border mergers among large European lenders can help strengthen the Cypriot financial system, according to the country’s central-bank chief. Having banks from abroad come to Cyprus is positive and drives up competition for the local banks, Governor Christodoulos Patsalides told Bloomberg in Frankfurt yesterday.

The comments follow recent acquisitions of Cypriot lenders by Greece’s top banks. Eurobank completed its purchase of Hellenic Bank earlier this year, while Alpha Bank is in the process of taking over Astrobank. 

Coming up

• German Chancellor Friedrich Merz speaks at reopening of Reichenbachstrasse synagogue in Munich later today
• ECB President Christine Lagarde takes part in 'Conversations pour demain' on the occasion of the 25th anniversary of Institut Montaigne in Paris this evening
• Commission President Ursula von der Leyen and former ECB President Mario Draghi speak tomorrow at a conference marking one year from the Draghi report

Final Thought

Beate Meinl-Reisinger, Austria’s foreign minister, during an interview in Vienna. Photographer: Michaela Nagyidaiova/Bloomberg

Austria hopes to become a stronger force in global diplomacy and a hub for conflict resolution, as the country campaigns for a seat on the United Nations Security Council. Key to those efforts is sticking to decades-old military neutrality despite a raging war in the nation’s proximity. Foreign Minister Beate Meinl-Reisinger is offering to host eventual peace talks between Russia and Ukraine, and pushing for a return to the negotiating table on Iran’s nuclear program.

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