The Unhedgeable State: Why Europe’s Risk Management Architecture Has a Political Risk Gap

A wind energy company in Sachsen-Anhalt can hedge against changes in electricity prices on the European Energy Exchange in Leipzig. It can hedge against interest rate movements through standard derivatives. It can insure against weather risk through parametric products. It cannot purchase any instrument that offsets its exposure to the political outcome most likely to determine whether its business model survives: the next state election.

This is not a hypothetical. Sachsen-Anhalt holds parliamentary elections in September 2026. The AfD’s federal energy platform calls for dismantling renewable energy infrastructure—a position shared by the Sachsen-Anhalt state branch, whose 2026 election program, adopted on 12 April 2026, demands ending all renewable energy subsidies and stopping the ‘Energiewende’ (green energy transition). Enercon, one of Germany’s largest wind turbine manufacturers, operates its generator manufacturing centre in Magdeburg—the state capital—with several hundred employees. The firm’s revenue, its asset valuations, and its employment decisions are all contingent on a political outcome. Meanwhile, Polymarket, one of the largest global prediction markets, lists contracts on the Sachsen-Anhalt election with over $650,000 in trading volume at the time of writing. The contracts produce continuously updated probability estimates of each party’s likelihood of winning. German residents cannot lawfully trade them.

European financial regulation strongly emphasises risk management. The Markets in Financial Instruments Directive (MiFID II), the European Market Infrastructure Regulation (EMIR), Solvency II, and the Basel frameworks all assume that economic actors should have access to instruments that allow them to identify, measure, and manage their financial exposures. Banks are required to identify and manage interest rate risk. Insurers are subject to prudent-person principles that presuppose the availability of risk management instruments. Yet political risk—the single category of financial exposure most directly connected to democratic governance—remains structurally excluded from this architecture.

The exclusion is the result of a classification decision. Under the Glücksspielstaatsvertrag (German Interstate Treaty on Gambling), prediction markets are classified as gambling in Germany, as they are under national gambling frameworks across many other EU member states. Some—notably France and the Netherlands—have conducted deliberate assessments and reached the same conclusion. But in Germany, and in the EU’s default regulatory posture, the classification preceded any functional analysis of the instrument’s economic properties. Because the instrument is classified as gambling, the hedging function it could serve is never evaluated.

The prohibition does not eliminate participation. It eliminates regulated participation. VPN circumvention is routine, and prediction market platforms report continued access from restricted jurisdictions. German residents who access these markets do so without consumer protection, without identity verification, without position limits, and without recourse—as demonstrated by Polymarket’s refusal to resolve over $10.5 million in Venezuela-related contracts in traders’ favour. The prohibition has produced the precise outcome gambling regulation is designed to prevent: unprotected consumers on unregulated platforms.

The thin volume on German election contracts—$650,000 for Sachsen-Anhalt, $2.6 million for Berlin—is itself evidence of the gap. The participants with the greatest informational advantage and the strongest hedging need are legally excluded. The market is populated predominantly by international participants with no direct operational exposure to the jurisdiction. Permitting the economically exposed actors to participate would deepen liquidity, improve the price signal, and accelerate the market’s transition from speculative instrument to economic infrastructure.

As Terence Cassar argued on this blog, European regulators need structured guidance for classifying prediction market products. I propose that such guidance should evaluate three independently testable properties: whether the operator’s revenue is independent of contract outcomes (distinguishing exchanges from bookmakers), whether the underlying event creates direct financial exposure for identifiable economic actors (distinguishing hedging instruments from wagers), and whether the contract prices produce information not available from existing sources (establishing a price discovery function). A contract category that satisfies all three is performing the functions of a financial instrument regardless of its surface resemblance to gambling.

The standard objection—that monetising elections corrupts democratic integrity—deserves serious treatment. But market manipulation is a risk in every financial market, addressed by the Market Abuse Regulation (MAR) and national enforcement frameworks. Insider trading by political actors is addressable through participation restrictions—legislation currently before the US Congress would do exactly that. And a firm that hedges its exposure to an election outcome is not ‘betting on democracy’—it is managing a financial risk that the democratic process creates.

The regulatory tools to build a European prediction market framework already exist. The European Securities and Markets Authority’s (ESMA) 2018 product intervention measures on contracts for difference provide a relevant precedent for calibrating retail protections. MiFID II client categorisation and anti-money laundering procedures provide the identity verification framework. What is missing is the analytical step that precedes regulation: evaluating the instrument’s structural properties and economic functions before assigning it to a regulatory category.

A wind energy company in Sachsen-Anhalt can hedge against every financial risk it faces except the one most likely to determine whether it survives. This gap is not a feature of Europe’s risk management architecture. It is a defect.

The author’s working paper is available here. 

Amadeus Brandes is an independent researcher based in Germany. His work focuses on structural classification analysis at the intersection of financial regulation, complexity science, and geopolitical infrastructure.