Paul Krishnamurty previews Sunday's Federal Elections in Germany, including a wide range of side markets available on the exchange...
"If there’s a polling miss, AfD are the likeliest to benefit...As we saw with Donald Trump in 2020, evidently there are some far-right voters who either don’t engage with pollsters, or tell the truth."
Germany goes to the polls on Sunday, for what looks set to be their most dramatic election for 16 years. Why? Simply, the Angela Merkel era is coming to an end after 16 years and, given her popularity, that has meant a re-alignment of voters. See below for Politico's latest poll of polls.
Brits may find this election something of a culture shock on many levels. First, the current administration is a grand coalition between the centre left and right - CDU/CSU are the German Tories, SPD their version of Labour. Imagine that here. I can't.
Trust the polls
Secondly, Germany uses a proportional voting system - explained in detail here. There are two clear effects. Turnout is much higher - 76% last time - and polls more stable. We've seen this trend in other European elections and the logical explanation is that the electorate are generally satisfied with their choice and its comparitively fixed place on the ideological spectrum.
In contrast, UK elections often spring surprises because turnout is more differential. At a given moment, one or more of the main parties may have a platform or leader that drives, or deters turnout. But as this list clearly illustrates, German polls are remarkably stable.
Betfair have four exchange markets on party vote share - covering the CDU/CSU (Union), SPD, Greens and AfD. The first three are split into bands covering 5% or 3% in the AfD case. I do not expect any of these markets to produce shocks, or that any party will over or underperform their projection by more than 2%.
Green share looks predictable
I've already backed the Greens to win 15-19.99% of the vote at 1.910/11, although I'll admit to being slightly worried that three of the last four polls had them down to 15%.
Evidently, Annalena Baerbock's party is slipping from its mid-term peak in the mid-twenties. However the previous election offers a major positive. On polling day, the Greens performed 1.2% higher than the average of their final ten polls, amounting to almost a fifth of the total.
In the wake of horrific floods, climate change has been centre stage during the campaign. Granted, that hasn't translated into extra Green votes amongst an ageing electorate who seem more concerned with finances than more ambitious net zero targets. Nevertheless it has made them more relevant than ever.
It might also help that Baerbock - the victim of sexist abuse during the campaign - is the only woman leader amongst the big mainstream parties. Could she benefit from Merkel standing down?
Far-right liable to overperform
If there's a polling miss, AfD are the likeliest to benefit. In 2017 I backed them to overperform due to the 'Shy Nazi' factor and they duly polled 2% higher than projected - equivalent to 18% of their share.
As we saw with Donald Trump in 2020, evidently there are some far-right voters who either don't engage with pollsters, or tell the truth. That would make more sense in Germany than anywhere, given their history. The country is certainly no longer immune to fascism - Qanon has a huge following.
AfD were on 11% in their last nine polls, and in 20 of their last 25. The band below 11% makes no appeal at around the same 2.47/5 odds. In theory 14-16.99% could be a value poke at around 7.26/1 but that jump is quite an ask so I'll go with the most predictable band which leaves plenty of room for overperformance.
Next government could be a traders' paradise
The most interesting market by far is Government after the 2021 Election. This could takes months to resolve and produce all manner of drama.
A coalition between SPD/Green/FDP is hot favourite at 2.26/5, but that involves a lot of compromise, probably on the side of pro-business, low tax FPD. It may happen because the numbers point that way, and because the Union see no gain in becoming a junior coalition partner, but it isn't an appealing short-term position given the odds and uncertainty.
Next best is a Left coalition between SPD/Green/Linke at 4.84/1. I don't like this at all. SPD leader Olaf Scholz - currently Vice Chancellor, Finance Minister and a 1.321/3 chance to become Chancellor - has progressed by positioning himself as the stable, moderate heir to Merkel. Going in with the controversial far-left Linke would ruin that image.
Famously and historically pro-USSR, this arrangement could cause problems for Germany's international relations. Plus Linke are expected to perform worse than last time and therefore have scant legitimacy. Were they to fall below 5%, they would not gain parliamentary representation.
Likewise, I find it very hard to see an arrangement that discounts the SPD, who seem sure to win. If you fancy that upset, it makes better sense to lay Scholz for Chancellor at 1.331/3.
Liquidity is low and erratic at the moment, so I shall simply lay out a broad trading strategy. My plan here is to lay that Left alliance first then, assuming SPD win, all options that exclude them if and when they are gambled down. Union/FPD/Green is a probable lay but I reckon they'll trader shorter than 9.08/1. More can be added as results emerge and negotiations develop.