The Guardian newspaper published this blog post by me today. Worth looking at some of the comments made there too.
The Champions League quarter final between Borussia Dortmund and Malaga is a metaphor for the economic and political fault lines of Europe. Dortmund represents solid German values, a profitable club from the tightly regulated Bundesliga. Malaga, by contrast, has been in dispute with Uefa for some time and had until midnight on 31 March to prove to Uefa that they have paid up all overdue debts or they will be excluded from Uefa competition for the next four years.
It’s true that a few years ago Dortmund had financial troubles, but they were forced to sell players and accept a loan from Bayern Munich to balance the books. Equivalent regulation and control is unknown in Spain. Last week a report suggested that Spanish clubs as a whole may come under investigation by the European commission for receiving illegal state aid, and by most accounts the majority of Spanish clubs are not commercially viable. Even Spanish MEPs have called for football clubs to live within their means.
Just as the Spanish economy is mired in recession because of a catastrophic backlog of bad debts and the German economic juggernaut continues to prosper, so German football seems ready to carry all before it while southern Europe’s traditional strength seeps away. Indeed, there is a very close similarity between football and the wider economy of Europe, in terms of the causes of crisis, the solutions, and ultimately the winners and losers.
First, the problem. Contrary to appearance, there is little difference between a football manager and a bank manager. Both are gamblers who use other people’s money to bet on the next big thing. Both work hard to present an aura of invulnerability and inevitability, when in reality both are exposed to the fickle laws of chance.
The principle of banking is to borrow short and lend long, giving rise to two sorts of risk – liquidity risk (depositors want their money back) and solvency risk (the long-term investment you lent to went belly up). Usually it is insolvency that leads to a liquidity crisis and general failure.
The principle of football is to buy players today in the expectation of future success and income, which also gives rise to liquidity risk (the future revenues are slow to arrive) and insolvency risk (the future revenues never arrive).
Given that we cannot live without banking or football, both sorts of manager are prone to moral hazard – taking excessive risk today in the knowledge that if things don’t work out tomorrow then the organisation is too big to fail. Banks and football clubs almost never disappear, but they often have to be propped up when they fail.
Historically the propping up has been carried out by local and national governments. In the case of banks, it has been the national central bank that has provided liquidity as the lender of last resort, and the central government that has bailed out losses by using the largesse of the taxpayers. In the case of football, typically local governments have provided subsidies and the national tax authorities have written off overdue payments to keep the clubs afloat.
Now Europe has a new regime, the eurozone for banking and Uefa financial fair play for football. For those nations signed up to the euro, the European Central Bank provides liquidity for the banks and if the bad debts are too large for the national government to cover – as has been the case in recent years for Ireland, Portugal, Greece, Spain and now Cyprus – then bailout has to come from the combined eurozone, whose decision-making is currently dominated by Angela Merkel and the German government.
In the past many governments were prepared to write off bad debts by printing more money and inflating the problem away, reducing the value of their currencies and thus stimulating an economic revival following a short-term crisis. Austerity will not allow this to happen, so exposed countries are forced to live with seemingly permanent recession. So long as the eurozone crisis keeps the euro exchange rate competitive, German exporters benefit and the German economy continues to grow.
This is not, as some would like to suggest, a German conspiracy. To the Germans it just seems like common sense, but it is also true that everyone goes into these things with their own interests at heart while convincing themselves they are acting in the best interests of everyone.
So too with the financial fair play regulations. Under Uefa’s rules, clubs are penalised if they lack liquidity, while EU rules against state aid prohibit a government bailout for insolvent clubs. Traditionally strong clubs from southern Europe are now being forced to live within their ever decreasing means, and this football austerity is also likely to benefit Germany.
German clubs were at the forefront of pushing for financial regulation at the European level to match their own regulation at home. Thanks to public investment in new stadiums for the 2006 World Cup, generous sponsorship from Germany’s industrial giants and a wealthy population of 80 million, German clubs are set to outspend their southern neighbours in the years to come, reversing a decade or more of weakness.
Many people argue that Europe’s austerity policy is not tenable in the long run if it impoverishes the poorer nations, and much the same can be said of the financial fair play regulations. Sound finance is a worthy goal, but not if it guarantees German and English dominance (in the latter case funded by international broadcast income) at the expense of the game’s traditional southern powers.