Premier of Germany's Lower Saxony walks high wire between VW cuts and AfD

By Rachel More and Andreas Rinke

BERLIN, Sept 11 (Reuters) - Volkswagen's overhaul has put the leader of Lower Saxony in a bind: backing deep job cuts in the carmaker's biggest restructuring in history while trying to fend off the far-right AfD party that is making gains around the country.

The northwestern German state, home to Volkswagen's HQ and six of its plants, is a key shareholder in the embattled company. It is headed for municipal elections this Sunday, with polls showing the Alternative fuer Deutschland has made inroads.

Leading the balancing act is Olaf Lies, premier of Lower Saxony with the state's co-ruling Social Democratic (SPD) party and a member of Volkswagen's supervisory board.

At a board meeting last week, Lies dropped his opposition to a restructuring plan that could see well over 100,000 layoffs at the group as it battles a challenge from China and U.S. tariffs. He argued that a no-deal with management could have imperilled the carmaker even more than painful cuts.

AFD BLAMES POLITICAL MEDDLING

Lower Saxony is one of the few states in Germany where the AfD has not yet overtaken Lies' SPD in the polls, but the gap is closing and Volkswagen's overhaul has heightened fears among traditional parties about voters switching to the AfD.

"We have to convey the certainty that we can solve these problems. Otherwise, extremist forces will get a boost," Lies told Reuters, defending his dual role against critics who say political influence only hinders Volkswagen's ability to act.

The AfD argues that Germany's auto industry woes are largely caused by political meddling, pointing to the European Union's 2035 combustion engine phase-out - something top auto executives and mainstream politicians have also criticised.

With talks over plant closures still looming, the political stakes are rising. After a historic election victory in neighbouring Saxony-Anhalt, the AfD is targeting gains in Lower Saxony this weekend and in next year's state election.

While the AfD's own policies to bolster German industry are yet to be fully fleshed out as it has been in opposition, it is very critical of establishment parties and could be quick to seize on any perceived failings in saving Volkswagen.

"There is concern that this uncertainty among employees will play into the hands of the AfD in the local elections, particularly at Volkswagen locations," Sebastian Lechner, state leader for the opposition conservative CDU party, told Reuters.

SELLING DEAL TO THE VOTERS

Lies faces the daunting task of selling — or at least explaining — job cuts to his voters.

Before eventually bowing to what would be another 50,000 layoffs at Volkswagen under current cost targets, Lies had fiercely opposed the plans.

The leader of the AfD's state faction, Ansgar Schledde, said in a statement to Reuters the plans to cut jobs and review Volkswagen's structure were "a catastrophe for tens of thousands of families".

Targeting Lies, Schledde said: "He didn't fix the problem."

The AfD is also a staunch critic of Germany's main industrial union IG Metall, whose top members sit on the supervisory board alongside the state of Lower Saxony and representatives of Volkswagen's controlling Porsche and Piech families. The union argues that the party and its affiliated labour groups only seek to weaken workers' collective voice.

'THE REAL CONFLICTS ARE JUST BEGINNING'

The restructuring deal at Volkswagen averted a more radical overhaul that could have sidelined the state's influence completely. Lies also said it bought more time to find alternatives for the four Volkswagen plants threatened with closure in the 2030s.

The balancing act in Lower Saxony reflects a wider political challenge in Europe's biggest economy as high costs, tariffs and aggressive Chinese competition squeeze business and consumers, riling up voter anger with the political status quo.

Ingo Speich, of Volkswagen shareholder Deka Investment, said politicians on the board risked conflicts of interest and that they might not be able to dedicate the time and attention needed to steer a major company through a period of crisis.

Lower Saxony, which holds a 20% stake in Volkswagen, appoints two supervisory board members to the 20-member committee, typically the head of government and another minister.

The carmaker's Emden factory is located in the premier's home region on Germany's northwestern coast. Zwickau — another EV-only plant that also risks closure — is almost 500 km (300 miles) southeast in Saxony, whose state government does not enjoy the same shareholder status.

Automotive analyst Stefan Bratzel said he expected at least two of the four plants to close, with tough discussions expected well into next year's election campaign.

"There are conflicting aims here — that's perfectly clear," Bratzel said, commenting on Lies' role as both politician and shareholder. "The real conflicts are just beginning."

However, he also said the AfD did not give a "good impression" regarding the future of the auto industry. "They are a bit stuck in the past and believe that jobs can be saved by combustion engines and the old world of automaking."

(Reporting by Rachel More and Andreas Rinke; Editing by Christoph Steitz, Adam Jourdan and Alison Williams)