Stephen Weatherill, University of Oxford

The question whether UEFA’s Financial Fair Play rules (‘FFP’) are compatible with EU law is of interest on its own terms. But not just that: it also falls within a wider inquiry into the extent to which the autonomy of governance in sport should be respected by EU law. This inquiry has become more sharply focused since the entry into force of the Treaty of Lisbon in 2009, since for the first time it has provided us with guidance in the Treaty as to the nature of EU law’s relationship with (and respect for) sports governance. My basic argument presented here is that FFP is legally fragile – it is certainly vulnerable to attack under EU law. But it is not automatically unlawful – there is room under EU law to defend it. Much will depend on the extent to which the institutions of the EU – the Commission and ultimately the Court of Justice – are prepared to show deference in their interpretation and application of EU law to the claims of sporting autonomy.

FFP: Effects and objects

Under FFP clubs are expected to ‘break even’ – according to a complicated set of criteria, the evasion of which will certainly keep lawyers and accountants in clover for some time to come. So, for example, Annex X seeks to exercise control over transactions above or below ‘fair value’ – but there are obvious objections to such quantification.

But why? What are the objectives of FFP? Article 2(2) FFP states that the Regulations aim to achieve financial fair play in UEFA club competitions and in particular: a) to improve the economic and financial capability of the clubs, increasing their transparency and credibility; b) to place the necessary importance on the protection of creditors and to ensure that clubs settle their liabilities with players, social/tax authorities and other clubs punctually; c) to introduce more discipline and rationality in club football finances; d) to encourage clubs to operate on the basis of their own revenues; e) to encourage responsible spending for the long-term benefit of football; f) to protect the long-term viability and sustainability of European club football.

FFP seems to me to be a horizontal agreement between suppliers (of sports services: clubs) which includes commitments to restrain spending (inter alia on players’ wages). It is also strengthened by vertical restraints (licensing requirements) enforced by UEFA, the governing body. It is a restriction on competition (to acquire players’ services) which has the effect (inter alia) of depressing the levels of remuneration payable to players. That is the province of Article 101 TFEU, which is the EU’s principal Treaty provision designed to control restrictive practices and anti-competitive arrangements.

I am here looking at the effects of FFP, not its objectives. But – rather to my surprise, given the usual agility of sports bodies in presenting their arrangements in the most (improbably) high-minded guise – UEFA’s own website (though not the FFP Regulations themselves) identify as one of the principal objectives to decrease pressure on salaries and transfer fees and limit inflationary effect (http://www.uefa.com/uefa/footballfirst/protectingthegame/financialfairplay/index.html, last accessed 12 May 2013). This seems to be a rather frank admission of anti-competitive intent.

FFP: within the scope of EU law but not necessarily condemned by it

So FFP falls within the scope of Article 101 TFEU. But there is in principle room for finding that it does not violate Article 101 TFEU.

In Case C-67/96 Albany International the Court was asked to consider the application of (what is now) Article 101 TFEU to collective agreements between organisations representing employers and workers. Had the Court opened up such agreements to the full blast of EU competition law, it would have unleashed a troubling dynamic in labour market regulation. But it did not. Instead the Court accepted that restrictions of competition are inherent in such collective agreements, but added that the social policy objectives pursued by such agreements would be seriously undermined if management and labour were subject to Article 101 TFEU when seeking jointly to adopt measures to improve conditions of work and employment. It therefore decided to place such agreements beyond the reach of Article 101 TFEU. So EU competition law is interpreted with contextual nuance. But both key elements – collective action and improvement of conditions of work – are missing from FFP. So the ‘Albany exception’ cannot help UEFA.

Nevertheless, the receptivity of EU competition law to contextual nuance is of broader application. EU competition law accepts that effects that are restrictive of competition may not lead to condemnation pursuant to Article 101 where those effects are inherent in the pursuit of recognised/ justified objectives. The landmark ruling is Case C-309/99 J.C.J. Wouters, J.W. Savelbergh, Price Waterhouse Belastingadviseurs BV v Algemene Raad van de Nederlandse Orde van Advocaten. This has nothing at all to do with sport. Wouters concerned rules prohibiting multi-disciplinary partnerships between members of the Bar and accountants. But, crucially, the Court ruled that not every agreement which restricts the freedom of action of the parties is necessarily condemned by the prohibition laid down in Article 101, because account must be taken of its objectives. And in Wouters the Court allowed assessment of the claimed need to supervise professional ethics and ensure the sound administration of justice in the light of the consequential effects restrictive of competition. This is a rough-edged ‘exception’ and one that has some competition lawyers fearful that the orthodoxy of their craft is thereby opened up to – even subordinated to – wider social/cultural policies that they believe should be excluded from competition law and shaped instead through other routes and instruments. Be that as it may, the ‘Wouters principle’ is now well established in EU competition law, and in the particular case of sport it invites an argument that the overall context in which sports regulation occurs, built around pursuit of a broad objective of fair competition, produces effects which though apparently restrictive of competition are nonetheless inherent in the pursuit of those objectives and therefore permitted. And the Wouters approach has been applied to sporting practices. In Case C-519/04P Meca-Medina & Majcen v Commission the Court took the view that anti-doping rules be so considered, citing Wouters (at para 42). They were not immune from review in the light of EU competition law – but a contextual assessment found that their general objective was to combat doping in order for competitive sport to be conducted fairly and safely and ethically, and sanctions that affected athletes’ freedom of action had to be considered in principle inherent in the anti-doping rules as means of enforcement.

So what was at stake was a restriction of competition but not one incompatible with EU law, because justified by a legitimate objective, inherent in the organisation and proper conduct of competitive sport. This would not apply only if (as was not shown) the rules went beyond what is necessary to ensure the proper conduct of competitive sport (e.g. by imposing excessively severe penalties).

What is at stake here is the intellectual and strategic heart of ‘EU sports law’: the assessment of the strength of claims advanced by governing bodies that ‘sport is special’ to the extent that it deserves an interpretation of legal rules that is different from that applied to ‘normal’ industries. There is no general exclusion of EU law – and in my view, given the vast economic significance of modern professional sport, any such claim advanced by sporting bodies is strategically understandable but intellectually feeble. Instead EU law proceeds on the basis of an interpretation that is respectful of ‘sporting autonomy’, under a case-by-case examination. Sometimes the Court and/or the Commission is persuaded that sport is special and that therefore practices may be pursued which would be unlawful in non-sporting contexts (eg Case 36/74 Walrave and Koch v Union Cycliste Internationale [1974] ECR 1405; COMP 37.806 ENIC/ UEFA, IP/02/942, 27 June 2002). Sometimes not (Case C-103/88 Fratelli Costanzo v Commune di Milano [1989] ECR 1839; Decision 2000/12 1998 Football World Cup OJ 2000 L5/55). Sometimes it is persuaded in principle that sport is special but not when it reviews the detailed arrangements (Case C-415/93 Bosman [1995] ECR I-4921: yes to a transfer system, no to this transfer system).

So can FFP be ‘saved’ through this route?

FFP is not a rule that is necessary for the conduct of sporting activity or of itself an inherent ingredient of sport. That would be to go too far. However, Wouters and Meca-Medina teach us that the argument that UEFA should advance is that FFP’s effects are restrictive of competition (as they surely are), but that these are inherent in the pursuit of legitimate objectives – not just to decrease pressure on salaries and transfer fees and limit inflationary effect (as UEFA’s website rather artlessly confesses) but also (as Article 2(2) FFP claims) to improve the economic and financial capability of the clubs, to introduce more discipline and rationality in club football finances, to encourage clubs to operate on the basis of their own revenues, to encourage responsible spending for the long-term benefit of football, etc.

There is at least soft evidence that the European Commission is receptive to such an argument. In answer to a Parliamentary Question in August 2010 (E-4628/10) M. Barnier declared that ‘The Commission would also like to draw the Honourable Member’s attention to self-regulatory measures taken by the football sector to reduce the overall level of debt of clubs. On 27 May 2010, UEFA’s Executive Committee approved the Financial Fair Play Regulations with the aim of ensuring the long-term financial stability of European football clubs. The Commission considers that the rationale of UEFA’s plan seems to be in accordance with one of the objectives of the EU’s action in the field of sport, namely with the promotion of fairness in sporting competitions (Article 165 TFEU). The Commission also notes that any measure taken in this framework has to respect the EU’s Internal Market and competition rules’.

This, though doubtless welcome to UEFA, is not legally decisive. Only the Court can ultimately provide an authoritative interpretation of EU law. It is, however, interesting to see the Lisbon Treaty’s embrace of sport as an EU competence used to frame the explanation supplied by M. Barnier. Since 2009 relevant documentation on EU sports policy has tended to draw on the Lisbon Treaty (as well as the Commission’s 2007 White Paper and its 2011 Communication). The problem here is that it is, however, vacuous. In what sense is ‘fairness’ really at stake? Presumably this is an allusion to FFP’s suggested aim to rein in clubs that are dependent on ‘sugar daddies’ – to instead protect competition based on the break-even requirement. One might question whose ‘fairness’ is being protected here – it seems to be that of the clubs with access to most resources through their football activities at the expense of those seeking new routes, and it enshrines the advantages of those clubs that have climbed the ladder thanks to sugar daddies in the past while refusing access to the ladder to new entrants. Put another way, FFP does not contribute to competitive balance (and, to be clear, it does not claim to) – it may even turn out to be a mechanism that stabilises competitive imbalance.

Perhaps the best argument in favour of FFP is that it is a response to the over-indebtedness of clubs. In a ‘normal’ industry this would be disciplined by bankruptcy. In football we cannot simply send famous clubs into oblivion. Sport is special – and this, arguably, justifies stronger ex ante controls over financial irresponsibility than would be tolerated in ‘normal’ industries. Perhaps there is enough here to allow UEFA and the clubs to argue that FFP’s effects restrictive of competition (in the market for players) are inherent in the pursuit of legitimate objectives associated with the long-term stabilisation of an overspending industry. It is the self-serving argument that is normally anathema to competition lawyers – but maybe sport is ‘special’. There are, however, several objections. Is FFP really apt to achieve this end? And aren’t there less restrictive means to achieve it, such as allowing ‘new’ clubs to take the place of but share the name and fanbase of bankrupt clubs, subject to penalties such as points deduction and/or relegation?

Whether any party has a sufficient incentive to challenge FFP raises another set of questions again, of course. The Commission is the most appropriate actor – but the clubs and UEFA have shrewdly stayed close to the Commission in the negotiation of FFP. Private challenge is always possible despite informal Commission approval, as Bosman (the case) reminds us, even if the eventual outcome may not be happy, as Bosman (the man) reminds us.

How wide is (should be) the sporting ‘margin of appreciation’?

I don’t really believe on balance that FFP is compatible with Article 101 TFEU. I think it is at heart a horizontal cost-cutting agreement between competitors (in the market for players) and its main purpose is to increase profits for owners. But I do suspect that it is not so outrageous that, if tested, it might survive scrutiny in the light of Article 101 TFEU on the basis that a degree of autonomy should be allowed to sports bodies framing their own peculiar governance arrangements.

If I were asked to advise UEFA – which is hardly likely – I would structure a defence of FFP in the following terms:

EU competition law – Wouters – accepts that effects that are restrictive of competition may not lead to condemnation pursuant to Article 101 where those effects are inherent in the pursuit of recognised/ justified objectives. FFP is designed to introduce more discipline and rationality in club football finances, and in particular to stop clubs spending money they do not have, for the long-term benefit of football. The more concrete the evidence on current financial irrationality and the consequent risk to the integrity of the competition, the better.

Could these objectives be achieved by other methods that are less restrictive of competition? One could envisage other routes to the same destination, but (UEFA should argue) it is not at all demonstrable that they would be as effective as FFP, or effective at all. Sport should be allowed room to make these difficult choices.

This is the core of UEFA’s best approach to achieving autonomy – not by denying the application of EU law in principle, but by urging that its interpretation and application be sensitive to sport’s special characteristics and to the expertise of sports governing bodies in addressing them. This is a question of legal competence – until the entry into force of the Lisbon Treaty nothing in the EU Treaties provided guidance on how sport should be dealt with under EU law (most obviously, free movement and competition law) and even after Lisbon, since 2009, there is no systematic reconciliation of competing interests to be found. It is also a question of basic institutional expertise – what do the officials of the Commission and judges of the Court know of football? So it is right that a high degree of deference be shown to the choices made by governing bodies. Put another way, EU law is readily applicable but finding that it has been violated should be a conclusion reached (by the Court or Commission) only in extreme cases.

In fact, UEFA should be glad that this is largely an accurate description of the case law, as well as a normative claim in favour of restraint by the Court and Commission. Meca-Medina was greeted with outrage by sports governing bodies – but it fits exactly this permissive model, because anti-doping was not treated as anti-competitive and would violate EU law only in extreme circumstances. Bosman did not at all outlaw the transfer system, only the extreme version then in force. A violation of EU law was found in Case C-49/07 v Motosykletistiki Omospondia Ellados NPID (MOTOE) v Elliniko Dimosio but surely, given the conflict of interest between regulatory function and commercial motivation in that case, that was no surprise. UEFA should also argue that the embrace of the ‘specific nature of sport’ by the Lisbon Treaty (now found in Article 165 TFEU) strengthens the respect that should be accorded to sporting practices under EU law (I do not believe this – I think Article 165 simply reflects existing judicial practice – but for UEFA it is an argument worth making).

The best bet for defending FFP lies in acceptance that EU law applies but that it is an attempt to make arrangements that are required in sport to achieve financial stability ex ante where ex post control – bankruptcy of offending clubs – is unacceptable/unworkable. And that argument needs to be supported by the claim that sporting bodies should be allowed space to make these difficult choices.

Stephen F. Ross, Professor of Law, Pennsylvania State University

Recent news of a legal challenge to UEFA’s FFP regulations provides another case study for reviewing the proper application of competition law to sporting rules. The contentious aspects of the regulations require clubs participating in lucrative UEFA-sponsored competitions to match expenses with “football revenues” over a 3-year period of time. A controversial aspect of the rule is its definition of “football revenue” to limit the ability of wealthy “sugar daddies” to subsidize a club’s player-related expenses (interestingly, the rule does not bar subsidization of a club’s investment in stadium infrastructure or youth player academies.)

EU law and US antitrust law are similar in their application to sports. On both sides of the ocean, courts (1) require some showing of an actual distortion of competition in a real market; (2) allow sporting organizations to justify competitive distortions by pointing to legitimate procompetitive benefits that will ensue from the rule; and (3) bar organizations from pursuing legitimate goals by overly restrictive means. In the American context, we assume that the owners, players, sponsors, and other economic actors are profit-maxizers, so measure a distortion of competition on that basis. In Europe, it’s a bit more complex.

The first question requires a prediction (of the sort that Soccernomics readers should enjoy) as to what will actually happen on the field after five years of FFP. There is certainly no evidence that, freed of “unfair financial play,” European football will be more popular as measured by attendance or TV ratings. The English experience (the only clubs to displace Manchester United and Arsenal for the EPL trophy have been “unfairly” subsidized clubs) suggests to the contrary, but it seems difficult to demonstrate a significant “distortion” in the market for European football, asking the question that Americans ask: will football fans face higher prices, lower output, or output unresponsive to their preferences?

One could argue that FFP distorts the market for investment in football franchises, but this claim makes this case unique in the annals of competition law as applied to sports, because it only “distorts” the market by inhibiting someone from investing in a club without economic justification. Plus, there is a Court of Arbitration for Sport (CAS) decision concluding that the number of investors in sports are fairly numerous, suggesting that inhibiting Roman Abramovich and Sheikh Mansur will not have an overall adverse effect on the market.

More significantly, a recent study by economists Stefan Szymanski and Thomas Peeters concluded that FFP would reduce player salaries by around 10% a year. However, this again is a more complicated issue than we have seen in the past. In prior cases, players succeeded in competition challenges based on a claim that their economic value was being artificially suppressed by an agreement among clubs that would otherwise “compete” for their services. The FFP challenge is effectively that players currently enjoy, in the aggregate, compensation that exceeds their economic value (their ability to collectively contribute to on-field success, leading to increased revenues for the club and long-term capital appreciation for their owner), and that FFP will eliminate this. I’m not saying this is a meritless claim, but one that is unusual in the annals of sports law.

Assuming that the challengers succeed in a prima facie case that FFP distorts competition, the question is whether it can be justified. (A similar analysis is applied to the uniquely European challenge to restrictions as impeding the free movement or workers or capital across European borders.) Asking that UEFA develop a coherent justification for their rule should be independently important, because unlike US sports regulators, the European Model of Sport puts sports governing bodies at the top of a pyramid where they are vested with huge powers, which they should exercise in the public interest. This means that, regardless of whether FFP “distorts competition” in the precise sense of Art 101 of the EU Treaty, UEFA rules ought to be reasonably tailored to meet stated and legitimate objectives. This analysis casts in question much of the public rhetoric offered in support of FFP.

Most glaring is the claim that FFP is designed to what is perceived as a serious problem facing European football with regard to the ongoing solvency of many clubs. For FFP to be an appropriate response requires UEFA to explain three things: (1) why club insolvency is a serious problem requiring resolution; (2) why FFP significantly solves the problem; and (3) why FFP details are not overly restrictive. FFP fails, in my view, the first and third claims. As Stefan Szymanski has suggested elsewhere, club insolvency does not really harm those who need UEFA to protect them. Player associations can certainly work out self-insurance or negotiate with clubs and FAs to protect players from insolvent clubs; governments can easily change their own tax laws; private lenders and investors can simply stop making imprudent investment in insolvent clubs. Fans are not directly affected, in that clubs virtually never disappear, and to the extent that a club’s financial mismanagement causes points deductions or even relegation, this is really no different than a club’s similar fate due to player personnel mismanagement. In any event, FFP’s targeting of wealthy sugar daddies is wildly overbroad regarding insolvency; it would be easy enough to ensure that wealthy supporters have enough money pledged to make good on all existing contracts.

We can quickly put aside several other potential drivers for an FFP rule. The rule does not remotely promote competitive balance (there is some evidence that it harms the ability of near-top teams to challenge the traditional power). Holding down player salaries as an end in itself, or because UEFA thinks the money is better spent elsewhere, is not a legitimate goal. And while encouraging infrastructure and player development investment is worthy of UEFA’s attention, FFP is not remotely tailored to achieve that end either.

That leaves us with a general sense of “unfairness” that Chelsea or Man City fans should be able to see more on-field success than Spurs or Liverpool fans simply because of the random willingness of some owners to subsidize club success from their otherwise-gained wealth. In the world of European sports policy, I find this philosophical goal to be a legitimate one, and limiting clubs’ expenditures to “football related income” would seem to significantly solve the problem. (In a related, cross-Atlantic controversy, I have argued that US college football programs should only be able to compete at the top level if they can afford to do so based solely on football-related income, and that universities’ should not be able to transfer money otherwise spent on general education to the football team. See http://law.psu.edu/_file/Ross/Radical_Reform.pdf)

The question remains whether FFP is reasonably tailored to that end. Two issues arise in this regard. First is whether there is a principled difference between cash payments from a wealthy owner or supporter or from a major local corporation who is an official “sponsor.” UEFA claims that it can meaningfully distinguish between the two, because there is an objectively “fair” market value for corporate sponsorships, and only that value would be included in football revenue. It remains to be seen whether this assessment is practical, or fair. The second issue is whether FFP unfairly catches legitimate and prudent financial investment in its net. In the US, I support the LA Dodgers’ baseball team, purchased for over $2 billion and currently sporting the largest payroll in the league. No one seriously suggests that this is a prudent investment within the next 3 years, which is what the FFP rules require. If, according to UEFA’s philosophy, it is manifestly “unfair” for Chelsea to compete with Arsenal by means of Abramovich’s deep pockets, than it must be manifestly “fair” for NFL owner Randy Lerner to seek to turn Aston Villa into a European power by means of prudent commercial investments. To the extent that the very narrow deviations from revenue and relatively short time period (3 years, no more than 5% annual deviation) inhibits this, it is extremely anticompetitive and problematic.

The published regulations specify a number of objectives, which are worth repeating here:

a) to improve the economic and financial capability of the clubs, increasing their transparency and credibility;
b) to place the necessary importance on the protection of creditors by ensuring that clubs settle their liabilities with players, social/tax authorities and other clubs punctually;
c) to introduce more discipline and rationality in club football finances;
d) to encourage clubs to operate on the basis of their own revenues;
e) to encourage responsible spending for the long-term benefit of football;
f) to protect the long-term viability and sustainability of European club football.

Now, I’m not a lawyer, but it has always seemed logical to me that a legal evaluation of FFP would start by considering the stated objectives and arguing about whether the rules are likely to achieve these ends, and whether the objectives are so broad as to permit essentially arbitrary ends. However, off the cuff comments by Michel Platini and others have given the impression that the real aim of FFP is to keep “sugar daddies” out of game, which is neither a stated objective nor one that I think is justifiable as a regulatory objective. So one issue in FFP is what it is really for, and whether the objectives are valid ones.

Whatever the objectives, it seems clear that they represent a restraint of the market in which both the players and the clubs operate. That gives the rule an economic dimension; if FFP concerned a purely sporting rule then the European courts would not interfere, but as long as there is an economic dimension they claim jurisdiction.

I’ve argued in previous blogposts that FFP represents both an excessive restraint on clubs which is unlikely to limit insolvency and significantly enhance the profits of the clubs at the expense of the players without generating any benefits for consumers. Last week Jean-Louis Dupont, one of the lawyers who represented Bosman, lodged a formal complaint against FFP which took a very similar view to the ones I have expressed (although I had not discussed these issues with him, he had read my papers).
Since this is a legal issue and not a debate about economic theory, I have asked two distinguished sports lawyers to write a blog giving their perspective on the legal issues. Economic analysis will play an important role in the case, but the framework within which the economic arguments are played out are determined by the law.

The first blog post is by Professor Steve Ross from Penn State University. Steve and I have been co-authors for a number of years, but he has written very widely on sports and related issues. As an American he brings a powerful appreciation of the jurisdiction in which most sports law case have been litigated. However, he is also an expert on sports law around the world, having worked, for example, on cases in Europe and in Australia.

The second blog is by Professor Stephen Weatherill from Oxford University. He’s an expert on EU law in general, which includes a focus on the application of EU law to sports.

In fact, in the 1990s most German clubs were worried that they were falling behind. At the club level Germany has been somewhat slow to develop. The Bundesliga only became professional in 1963 (although shamateurism was commonplace), the second division was only added in 1974 and the third in 2008. While the national team of West Germany was a spectacular success, with three World Cup and two European Championships in 36 years, in the last 23 years only one European championship is considered a poor show in Germany (eat your heart out England fans). German performance in club competition was even more disappointing- Dortmund’s Champions League win in 1997 was the first time a German team had reached the final in more than a decade.

At the end of the 1990s many German clubs looked to England, and the commercial success of the Premier League, and argued that if German clubs were to be successful they needed to raise more capital through stock market flotation. Hamburg and Werder Bremen tried to do this in the early 90s but were blocked by the German FA. It wasn’t until 1998 that the corporate investment was allowed, and Borussia Dortmund, whose president had been at the forefront on the campaign for more access to finance, floated on the stock exchange in 2000. Fearing that all of the clubs would fall into corporate hands, the FA passed the 50+1 rule requiring club members to retain a controlling interest in the club (with longstanding company owned teams Bayer Leverkusen and Wolfsburg being granted an exemption).

The early 2000s were clouded by the failure of the pay TV broadcaster Kirch, which went bankrupt owing money to the League, and while a new contract was organized broadcast income was flat at a time when it was rising elsewhere. Broadcast rights are still relatively cheap in Germany, with the most recent deal generating just over €600 million a season for domestic and almost nothing for overseas rights, compared to the Premier League’s £1 billion a year from domestic rights, and almost as much again from overseas rights- in total around four times as much as the Bundesliga.

As I pointed out in part I of this blog the performance of German clubs has not been so spectacular over the last decade, so why all the hype? In part it’s just the “availability heuristic” – whoever is successful now is thought to have a monopoly on the right approach – who is talking about La Masia now? But it also reflects political views about the right way to run football clubs. Many people dislike commercialism in sport in general and in football in particular. This reflects

(a) Dislike of the excesses of the capitalist football model- high rates of insolvency, frequent changes of ownership, some dubious owners, commercial (=high) ticket prices

(b) A desire for a more fan-oriented model- fan representation, more consultation, fewer nasty surprises, lower ticket prices

This is fair enough. But it’s also a good idea to balance the good with the bad, and to take a realistic look at how things work. Here are some issues:

1. Ticket prices.

As I explained in a previous blog, these are not as low as the headline figures suggest, although official prices probably are about 50% lower than in England, and much lower than at Barcelona or Real Madrid. However, they have been rising rapidly in recent years and there is also a vibrant secondary market. Unless you have privileged access, you will find it hard to get the cheap tickets, which “fans” can resell at a profit.

2. Higher attendance.

Many people like to point out that attendance per game is the highest in Europe, but that’s because they play fewer games. Total attendance is a better measure of popularity (a point I have also made before- to see why ask yourself who is more popular: a baker who sells 100 loaves of bread per day but is closed on Saturday and Sunday or a baker that sells 80 loaves per day but is open seven days a week? Surely the latter). Total attendance is about the same in the two leagues (around 13 million), and has been for a few years now.

3. Competitive balance.

One problem in Germany is the utter domination of one club. Spain has two giants, Italy three and England four or more, depending on the era, but Hollywood FC have no close rivals with 22 Championships in 50 years. A few years ago it looked like this issue was going away, and I remember a German friend boasting to me that 5 different clubs had won the title 8 years. However, now that Bayern have won 5 of the last 9 that claim is looking a little more shaky. And generally it has only been Bayern that has achieved sustained success in Europe – they have 4 of the six German Champions’ League victories (and another this year?). If anything their dominance seems more complete than ever. Now, for the record, I have long argued that the issue of competitive balance is not such a big deal, but those who espouse the German model tend to think that it is. In that sense, the Bundesliga is not a good model.

4. Insolvency and financial problems.

Judging from some press reports you might imagine no German clubs ever faced financial problems and that insolvency is unknown. But according to a recent article in Der Spiegl 32 German sports clubs filed for bankruptcy last year – and most of them would have had a football team. Currently Alemannia Aachen is facing closure, VfB Lubeck is looking for a bail-out from the league and Kickers Offenbach is looking for a bail-out from the local government (which might be illegal under EU rules). Just as in England, where all the insolvencies other than Portsmouth have been in the lower divisions, the smaller clubs struggle financially. And even the big German clubs have struggled. Mighty Dortmund had to be bailed out, in part by a loan from Bayern (imagine that Chelsea had only been able to play in the final last year because Manchester United had given them a soft loan ten years ago- all hell would have broken loose). Schalke 04 overspent and borrowed against future ticket income ten years ago and were only saved by a very generous sponsorship deal with the Russian sugar daddy energy company Gazprom.

5. Hooliganism.

Arrests at German games are running far higher than in England, and there is a widely acknowledged problem with flares (fireworks, not jeans). When a senior police officer voiced concern last year he was dismissed as a crank who was misrepresenting the situation. Hooliganism is always caused by a small minority but they have a big effect. Signs of denial are not encouraging.

6. Club licensing and management

“There are strong indicators that clubs systematically rely on creative accounting to inflate assets and hide liabilities. Prosecutors are currently investigating whether the representatives of Schalke 04 committed fraud by deliberately misstating the club’s financial situation and failing to enter insolvency proceedings.”

“However, the real situation seems to be even worse than reflected by the official data because the data gathered by the DFL are data ‘‘after’’ systematic financial window dressing. The true financial situation of German football clubs only surfaces when clubs signal that they cannot pay their bills any more.”

“The (partly hidden) financial crisis in German football is caused by substantial governance failures. The peculiar German club governance structure may be well suited to prevent integrity problems resulting from multiple club ownership or from ownership by ‘‘undesired’’ persons or entities. However, this effect comes at a price. It results in a governance vacuum that opens wide discretionary freedoms.”

These comments were written in 2007 by two German economists, Helmut Dietl and Egon Franck and published in the Journal of Sports Economics. In case you are tempted to dismiss these as the comments of irrelevant academics, Egon Franck sits on the UEFA Club financial Control Panel which will vet financial information relating to Financial Fair Play. Neither author is an advocate of the English system, but they are not blind to the failings of the German ownership system.

7. Safe Standing

This is one area where I think the German system genuinely is better, since many fans would prefer to stand and it can be done safely. But this just shows how regulation can create as many problems as it solves. Clubs allowed standing until Lord Taylor recommended that the government ban it. This was duly done, and now regardless of how many reasonable arguments the fan groups advance, none of the regulators that have the power to change things are willing to consider. Not, I think, out of pure cussedness, but because if by some freak chance an accident were to happen the regulator that changed the rules would likely lose their job.

What I conclude from all this is that the German ownership model is not in itself much better at meeting the needs of the fans than the models used in other countries. There are some advantages, but there are drawbacks too. In fact, competition between rival leagues operating under different structures have helped to maintain European football and make it the globally dominant force it remains today. Whenever people start to think that things can be done in one way and one way only, that way madness lies.

However, German football is a waking giant. It already has the largest sponsorship income of any league, thanks to the backing of the large German industrial corporations. If it became internationally popular it could generate a lot more broadcast income, and it has a wealthy population that is experiencing rapidly increasing ticket prices that may rise to levels we see in the EPL in the not too distant future. With large stadiums recently built or refurbished for a World Cup, they have the greatest revenue potential, and as we at Soccernomics can always be relied upon to tell you, in the end it is money that buys success. Financial Fair Play might accelerate that process if it creates a meltdown in the Spanish and Italian leagues, but that might be a sideshow. The interesting part comes when the giant is fully awake.

“Today, 6 May 2013, Mr Daniel Striani, player agent (registered with the Belgian Football Association), represented by lawyer Jean-Louis Dupont, lodged a complaint with the European Commission against UEFA in order to challenge infringements to fundamental principles of EU law caused by some provisions of the UEFA “Financial Fair Play” regulation (FFP).

Specifically, this complaint challenges the restrictions of competition caused by the “Break-even rule” (article 57 of the UEFA FFP regulation).

The rule imposes on clubs that participate in the UEFA Champions League or in the Europa League the obligation “not to overspend” (the expenses of a club cannot exceed income). In effect, a club owner is prohibited from “overspending” even if such overspending aims at growing the club.

The “Break-even” rule (which, according to article 101 of the Treaty on the functioning of the EU, is an “agreement between undertakings”) generates the following restrictions of competition:

- Restriction of investments;
- Fossilization of the existing market structure (i.e. the current top clubs are likely to maintain their leadership, and even to increase it);
- Reduction of the number of transfers, of the transfer amounts and of the number of players under contracts per club;
- Deflatory effect on the level of players’ salaries; and
- Consequently, a deflatory effect on the revenues of players’ agents (depending on the level of transfer amounts and/or of players salaries).

At the same time, because of the aforementioned restraints, the “Break-even” rule also infringes other EU fundamental freedoms: free movement of capital (as far as club owners are concerned), free movement of workers (players) and free movement of services (player agents). Consequently, such restriction of competition and violation of EU fundamental freedoms cannot be justified by the objectives put forward by UEFA (long term financial stability of club football; and integrity of the UEFA interclub competitions).

Moreover, detailed legal and economic analysis shows that, even if the “Break-even” rule may appear initially a plausible concept, the rule is not able to achieve efficiently its objectives as presented by UEFA (whereas other means are available to attain such objectives. For additional information, see The Wall Street Journal op-ed published 25 March 2013 – http://online.wsj.com/article/SB10001424127887324077704578357992271428024.html

As far as the integrity of the UEFA competition is concerned, in order to avoid the risk that club X would jeopardize the smooth running of the competition because its owner stops mid season providing funds (the “overspending”), it is not necessary to prohibit such “overspending” (as implemented by the “Break-even rule”), when it is sufficient to require “overspending” to be fully guaranteed (for instance, by means of bank guarantees) before the start of the competition and for its whole duration.

In short, the current prohibition – even assuming it to be justifiable (quod non) in the light of the pursued objective (i.e. integrity) – is in practice illegal because the rule is not proportionate (since it can be replaced by another measure, equally efficient but less damaging as far as EU freedoms are concerned).

In conformity with article 101.2 of the Treaties of the European Union, the complainant requests the European Commission to declare that the Break-even rule is null.

It is important to note this complaint does not at all question the legality of the UEFA rule (also included in the FFP regulation) that states that any club participating in the UEFA competition must prove – before the start of the competition – that it has no overdue payables towards clubs, players and social/tax authorities. In our view, this rule is justified in principle for the attainment of the integrity of the football competition and proportionate to this objective).

A copy of the complaint has been provided to UEFA.

ENDS”

The argument bears some similarities to the arguments I have advanced against FFP but in case any one is interested, I have not been working with the lawyers, although we have exchanged emails. I’m going to be at a conference in Leuven next week talking about FFP and hope to meet Mr Dupont there.

Of course, it’s only since 1997/98 that more than one clubs per country has been admitted to the Champions League, and only the large countries secure three or four places. In the 16 seasons before 1997/98, teams from England, Germany, Italy and Spain supplied 21 of the 32 finalists (3 from England, 4 from Germany, 11 from Italy and 3 from Spain); since then the big four have supplied 30 out of 32 (9 from England, 7 from Germany, 6 from Italy and 8 from Spain). It’s not surprising that the Champions League has generated same country finalists in one quarter of its contests- teams from other countries barely stand a chance.

Bayern Munich appear to be the greatest beneficiaries of the post 97 Champions League era, having appeared in the finals 5 times, more than any other team. Manchester United is second with four appearances, and Barca, Real Madrid and AC Milan tied on three each). Thus these five teams alone account for more 50% of the 32 finalists since 1997. In the previous 16 seasons Barca also appeared 3 times, AC Milan 5 times, Bayern Munich only once, and Manchester United and Real Madrid not at all. So as well as the rise of Bayern Munich, the current era has seen the rise of English teams, principally Manchester United, and Spanish teams, principally Real Madrid. The casualties have been the Italian teams and the teams from countries outside the big 4.

The explanation for this trend lies in the commercial development of the game, in England and with the big two in Spain. Barca, Real Madrid and Manchester United are now global brands, and have developed commercial income to match. Bayern Munich is also a dominant brand, but it still generates most of its income within Germany, but given the size of the German economy and its dominance of the game in Germany, it can match the other global teams. Some commentators have rightly observed that it is not so much the success of Bayern which is striking, but that of Borussia Dortmund, which is not normally thought of as a big name team. But even that is a rather odd statement for team which regularly sells out its 80,000 capacity, making it the third largest club stadium in Europe after Camp Nou and the Bernabeu. Wouldn’t it be a surprise if it weren’t successful?

The point, of course, is that some people want to say that the model of football in the rest of Europe is broken and the Germans have got it right. UEFA’s Financial Fair Play is largely inspired by the German model. Many critics of football organization, especially in England, would like to copy the German model. This was true even when German teams were not winning, but now that they are, their success is being attributed to their business model. Those people may wind up with egg on their face if German teams don’t continue to win in the future. It’s only last year that we were talking about the unbeatable teams of Spain- Barca and the national team- so was that success attributable to the Spanish business model?

But even if German teams do now enter an era of success, that is still not enough to prove that their business model is the reason for their success, still less that other countries should copy it. I have to make tea now, so I think I’ll write another blog in a day or two explaining my views on the German football business model and what that means for the rest of Europe.

I’ve just carried out a similar exercise at the European level, looking at the 74 clubs that played in the top divisions in England, France. Italy and Spain in 1949/50 (I didn’t include Germany since the league was not officially professional until 1963).The data suggests the same story. Of the 74 clubs, 46 (62%) were competing in their top division in 2012/13, while 13 were playing in the second tier. Of the remaining fifteen, all but three were still competing in professional leagues. The three remaining cases are all French; Stade Francais de Paris returned to amateur status and still competes, while FC Nancy was disbanded in 1965 and Roubaix Tourcoing in 1970.

I don’t know exactly how many of these clubs have undergone a financial crisis at some point since 1950, but my guess would be well over half. As I never tire of telling people, football clubs survive even if the businesses that own them are liquidated.

If you ask people why insolvency in football is such a terrible thing they almost always tell you that it would be a tragedy if the club were shut down. So why are people afraid of something that is almost guaranteed not to happen? Maybe it’s just that they don’t know their football history- after all, in the midst of a crisis it’s often hard to keep a level head. Or maybe even a very tiny amount of risk is too much to bear (a bit like flying – we apparently want it to be far less risky than crossing the road). Journalists don’t help either- naturally their job is to sell papers or advertising space, and so sensationalism generally works better than cold facts. And some people have an agenda- they want to use a financial crisis as soap-box to agitate for tighter regulation.

There are other reasons for saying insolvency is a bad thing:

1. creditors often lose money – sure, but that has always been an accepted part of the capitalist system, and the football losses are usually small. If you want to advance this argument you really have to engage in a more detailed debate about alternatives- regulation has a downside too- corruption and nepotism tend to increase. I don’t see subtle debates like this taking place very often.

2. it poses a systemic risk to football system – in theory this is right. football is like banking in the sense that debts are often interdependent. But in reality no significant football league that I know of has been brought down by this (I’d welcome examples, I’m sure there must be some at the very lowest levels)

If anyone out there has some spare time or knows where the data is hidden, I’d be interested to see a list of defunct professional football clubs across Europe for, say, the last 50 years. There was a great series of books published on English football a few years ago with titles like “Denied FC” and “Rejected FC” telling the history of the small number of cases of clubs that vanished. But something more up to date and international would be very useful- especially for journalists

“When the Houston Astros take the baseball field for Jackie Robinson day on April 16, a former NASA engineer will be paying close attention. Sig Mejdal, the Astros’ Director of Decision Sciences, is the embodiment of a ten-year revolution sparked by Michael Lewis’s bestseller Moneyball. The Astros, the team with the lowest payroll in baseball, rely on Mejdal’s statistics to help them find undervalued players.

But while people analytics has been embraced by sport, as Soccernomics fans are surely aware, it has largely been ignored by business. Seventy per cent of NBA teams employ data-savvy analysts to advise on recruiting decisions but only ten per cent of HR professionals in FTSE 100 companies have a numerate degree.

The fact is that as the Houston Astros make player selections this year, they are unlikely to be making them solely, as Jack Welch once said, from the gut.

Now the Commission is looking at Dutch football, and re-opening the case of Real Madrid’s sale of its training ground to the city government, something which it investigated in 2004 and dropped.
This issue is complex, so first it might be helpful to repeat the Commission’s definition of an (illegal) state aid. It has four characteristics:

1. It involves the transfer of state resources
2. It confers a selective advantage that could not be obtained in the market
3. There is potential for the distortion of competition
4. There is an effect on inter-state trade

Now, government involvement in sport is widespread in Europe. For example, according to the recent UEFA club licensing report, 53% of stadiums and 50% of training facilities of the 235 largest European clubs are government owned (municipal, regional or federal). Five of the clubs are state owned. Governments also subsidise sports in lots of different ways, e.g. subsidies from lotteries for national federations or paying for construction of new facilities to host competitions like the World Cup or Euros. In many cases these subsidies are hard to trace through, and the ultimate beneficiaries not always clear (although if you consider the deal with West Ham to occupy London’s Olympic stadium, the benefits are often pretty clear).

So how is the Commission to untangle all of this and separate legal assistance from illegal state aid? I think the real problem is the criterion of “selective advantage”. Since sporting competition is always about winners and losers, unless there is a uniform subsidy across Europe, then pretty much any government involvement involves a selective advantage. And as for the market test- well, if there was proper market in Europe then we would not see the structure of competition we observe, as I have long argued.

In reality, I think this is a political game (duh, we economists can be pretty sharp sometimes), the object of which seems to be make examples of some high profile cases, and Real Madrid seems like a good target. They seem to be the Yankees of Europe- hated as much as they are loved. Spanish football in general seems under threat- with widespread insolvency and questions about whether social obligations can be paid, many clubs seem to risk the double whammy of failing to meet the Financial Fair Play requirements while benefiting from illegal state aid.

What is the endgame for all this? Spanish football has often been deemed the odd man out in Europe because there is no collective broadcasting deal, and is often criticised for this by other associations. While Spanish clubs and the national team have dominated world football for much of the last decade, it’s hard to see them avoiding a restructuring that will put their continued success jeopardy.

Pressure for the big two to compete on a more equal basis with the smaller clubs will grow. So what will Barca and Real do? Along with Manchester United they are the only truly global clubs at the moment. They are just too big for their own league, and I doubt they have much interest in downsizing to the level of the other Spanish clubs. So the only logical conclusion is that they seek competitors outside Spain of a more comparable size. This could be in the form of more international friendlies, or small scale competitions. But it also seems inevitable that they will try again to broach the concept of a European Superleague.

In the end, the real problem with FFP and the Commission’s state aid investigations is that market competition in Europe is heavily distorted, not by subsidies and state aids, but by a commitment to equality among 300 or so European clubs who are patently not equal. Anyone who thinks Real’s dominance is a product purely of a property deal which maybe gave them a €20 million advantage at best clearly isn’t thinking about the numbers. With or without state aid they are a global power, one of the world’s pre-eminent football clubs. A system which treats them as if they are genuinely in competition with, say, Nordsjaelland or CFR Cluj (no disrespect) will never be stable.

Bayern Munich, set to be the first team in a major European league to win their league this season, usually start with six Germans in their line-up.

Does it help to have more local players in your team, or does diversity lead to greater chances of success? Researchers at the Research Institute for International Management at the University of St.Gallen (Switzerland) have spent three years pondering this question. They have analysed the performance effects of team composition and diversity in top-level teams, and produced some interesting results, which you can see here.

They studied seven seasons of Bundelisga football (from 2005-2012) and concluded that if the players on the field during a Bundesliga season have more diverse international career backgrounds, then the team is more likely to win games and ultimately finish in a higher position. Their prime example was Borussia Moenchengladbach finishing fourth in 2011-12, with a starting eleven that had among the most diverse international career backgrounds in the league.

By diversity, the researchers don’t just mean non-local; they mean with international experience of other leagues, and ideally from Europe’s top leagues – though they point out that is more likely for the teams that have the financial resources to recruit players from top leagues, as they should be in a strong position to take advantage anyway. Moenchengladbach, for example, started with five Germans, three South Americans, full-backs from Austria and Holland and one Norwegian midfielder: between them, they had played in leagues in 12 different countries (see flags next to players in the research document).

They also found that coaches who have been at a club for longer periods are are better able to create performance advantages from diverse international player backgrounds. “This finding,” their study goes, “indicates the importance of leadership continuity to make the most out of a complex resource. Recruiting new players with diverse international backgrounds is not a quick-fix solution after a run of poor results. It needs to be part of a long-term strategy that emphasises perseverance and continuity in order to make diversity work.” That said, Lucien Favre, the 55-year-old in charge of Moenchengladbach, was in his first season at the club when they came fourth. (This season they are eighth, and four points from fourth.)

There is also the argument that long-tenured coaches want players with new experiences to bring in some freshness to the team; or that because the coach has more stability in his position, he is able to pick and choose the players that he wants to boost the team.

The report suggests that teams who chop and change their coach a lot might be better off with players with less diverse international backgrounds, as it is harder for a new boss to come in and work with them. In today’s modern game, though, that just comes with the territory.