Financial foul play? An analysis of UEFA’s attempts to restore financial discipline in European football

Rob Simmons, 3 September 2012

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As the 2012/13 football season kicks off, many fans, journalists, and social commentators will be heard saying that: a) the gap in financial resources between large and small clubs is greater than ever, b) star players at big clubs such as Barcelona, Chelsea, Real Madrid, Manchester City and Manchester United earn exorbitant salaries, and c) the finances of several clubs are out of control, as clubs that are hungry for success generate large financial losses as their spending levels on transfer fees and player salaries are driven up.

This is how Karl-Heinz Rummenigge, a former German international player and currently a top executive at Bayern Munich and also acting chairman of the European Club Association, an ad hoc group of leading European clubs, sees the problem:

"If we carried on in the way we are, with several clubs in Europe losing more than €100 million each year, then it is only a question of time before we have a big, big problem ... There is more money than ever coming into the game but it seems to me we are spending more and more. This is a good moment to bring the game back to a more rational way."

This perceived lack of financial discipline has led to UEFA’s new Financial Fair Play initiative. As a condition of entry into UEFA's Champions League and Europa League tournaments, clubs that are eligible for these competitions have to demonstrate to UEFA that their finances are in good order. This means:

  • No negative equity.
  • Clubs should break even so revenues cannot be less than defined costs.
  • No overdues payable, so clubs should not be overdue on, for example, transfer fee payments or salary payments.
  • Clubs’ financial statements will be assessed on averages of audited data supplied for the previous three seasons.
  • Transitional rules apply until 2017/18, so for example in 2012/13 the acceptable deficit (gap between ‘relevant expenses’ and ‘relevant income’) is set at between €5m and €45m (see Müller et al. 2012 for further details).

But will it work?

To understand how the UEFA Financial Fair Play initiative might or might not work it is important to consider the structure of European football leagues. In European football, not-for-profit owners compete in an 'open league' system. All national leagues have a pyramid structure, so top divisions are open to entry by clubs from below (promotion and relegation). European football leagues are open to local competition (so no exclusive territories as in North America). There is limited agreement among owners on collective restraints to preserve competitive balance. For player labour markets, the EU principle of freedom of movement applies across countries that are part of the EU. Labour market restrictions apply to some roster limits so the English Premier League (and UEFA for eligible clubs) insists that eight out of 25 nominated players over 21 must be either British or have trained with a British club for three years before the age of 21. There is no salary cap as applies in American Football (NFL). For the product market there is limited gate sharing (confined to cup competitions), unequal sharing of broadcast income and no sharing of merchandising income. Hence, football clubs generate and keep most of their incomes. So at domestic League level, this is a competitive and laissez-faire system with few interventions.

The UEFA Financial Fair Play Rules were published in 2010 and are intended to be enforced in the 2013/14 season. The rules are based on financial data from the 2011/12 season onwards. Clubs must meet designated criteria in order to participate in UEFA. Competitions and licences will be issued by national football associations, on behalf of UEFA, to member clubs if the financial criteria are met. A UEFA panel will oversee the process. It is important to stress that UEFA is an umbrella organisation comprising representatives of national football associations. As such, UEFA has no jurisdiction or control over the structure or conduct of national football leagues. What UEFA does have control over is its own brand, encapsulated in its two club competitions, the Champions League and the Europa League, which run concurrently with most domestic league competitions. This brand is remarkably successful. Lucrative broadcast and sponsorship deals meant that the total prize fund for the Champions League was £595m in 2011/12. The winners, Chelsea, received £47m of this, while beaten finalists Bayern Munich received £33m (figures from www.uefa.com). These sums, together with additional merchandise and gate revenues to participating clubs, offer powerful incentives to qualify for and succeed in UEFA’s premier competition.

Table 1 below gives financial indicators for five English clubs taken from the 2010/11 season, the most recent figures available from Deloitte.

Table 1. Football club finances

Club Profit before tax (£m) Debt (£m) Wage bill/turnover ratio
Arsenal 15 98 48
Chelsea -68 92 86
Manchester City -197 43 114
Manchester United 12 308 46
Liverpool -49 65 73

 

Table 1 reveals a remarkable lack of uniformity and each of the five clubs has its own story behind the figures. But Manchester City and Chelsea stand out as the kind of cases that UEFA wants to eradicate. Manchester City’s deficit for 2010/11 was the largest ever recorded for an English football club and the last column shows that the club wage bill exceeded turnover (the team finished third in the Premier League and was knocked out of the Europa League relatively early). Chelsea also reported high deficit and debt levels. Both clubs are owned by wealthy backers, and the 2012 Community Shield game between the two was termed the 'Oil Firm Derby'. It is clear that all these English clubs have work to do to fulfil the Financial Fair Play criteria, although Arsenal and Manchester United have less distance to travel.

The success of UEFA’s Financial Fair Play initiative depends on whether the financial guidelines are a credible threat. UEFA’s case is that refusal of membership of European competition is sufficient disincentive for clubs to post large deficits and mount increasing debts. But there are several problems with UEFA’s principles.

  • UEFA’s definition of deficit relates to 'football-relevant' income streams, and that would appear to exclude sale of naming rights as practised by Arsenal, Bayern Munich, and Manchester City – particularly in City’s case as the sale of rights is to Etihad Airlines, arguably a related partner to the club owners. The general exclusion of naming rights sales would appear to be subject to legal challenge, and in any case is rather like foreign direct investment – an injection of much-needed capital that can help stimulate growth.
  • Problems of financial insolvency are much greater for lower divisions than for top divisions in European football. The top divisions, which provide the entry pool for UEFA competitions, are less affected by insolvency problems (Buraimo et al. 2006).
  • The player labour market is broadly competitive, and players will migrate to where expected returns are highest (subject to locational preferences and cultural and linguistic constraints). Expected returns are partly monetary (high salaries and opportunities for endorsements) and partly non-monetary (the value of winning trophies – which in turn helps raise salaries and endorsement potential). Empirical research shows how high spending on players relative to rivals translates into higher team positions across several European leagues (Forrest and Simmons 2002). Restrictions on player budgets will translate into reduced potential to hire star players. This has two implications – it becomes harder for new teams to challenge established clubs in the Champions League. And empirical research from England shows that gate attendances and broadcast audiences are influenced by the total quality of two teams in a given league match as proxied by total wage bill (Buraimo 2008; Forrest et al. 2005). Restrictions on player budgets could well imply reduced quality of league competition – and reduced values of broadcast rights sales.
  • UEFA needs successful and glamorous players and teams in order to promote its Champions League brand. The Champions League would be far less attractive to viewers, sponsors, and advertisers without Barcelona and Lionel Messi, or Real Madrid and Cristiano Ronaldo. But Barcelona runs large deficits, underwritten by club members and local government. While Real Madrid posted healthy profits in 2009/10 and 2010/11 (£38m and £40m respectively), Barcelona posted a €69m loss on its 2009/10 balance sheet. In the end, a threat by UEFA to exclude Barcelona from the Champions League cannot be credible. These clubs could join with others to threaten formation of a rival league similar in format to the Champions League. Broadcasters, sponsors and fans would surely prefer a competition with deficit-ridden Barcelona and Manchester City to a competition without these big-spending teams but with a group of financially disciplined yet mediocre second-string teams from around Europe. Threats to UEFA have risen before, with the G14 (which became 18 clubs) suggesting the formation of a breakaway European League. That threat was forestalled by UEFA concessions on the distribution of Champions League prize money.

In conclusion, it is sensible for UEFA to agree rules on solvency for European football clubs. But UEFA needs to tread carefully. In particular, it is important to distinguish between balance sheet and cash-flow solvency. The exclusion of non-football income may be unsustainable and subject to legal challenge. Overzealous application of the Fair Play rules generates a significant risk that the dominance of the strong clubs will be enhanced, while the financial instability of lower-division teams in national associations is not addressed. Finally, UEFA may face a challenge under EU competition law if competition in player markets is reduced.

References

Buraimo B (2008), “Stadium attendance and television audience demand in English football”, Managerial and Decision Economics, 29:513-523.

Buraimo B, R Simmons, and S Szymanski (2006), “English football”, Journal of Sports Economics, 7:29-46.

Forrest D and R Simmons (2002), “Team salaries and playing success in sports: a comparative perspective”, Zeitschrift für Betriebswirtschaft, 72:221-237.

Forrest D, R Simmons, and B Buraimo (2005), “Outcome uncertainty and the couch potato audience”, Scottish Journal of Political Economy, 52:641-661.

Müller, JC, J Lammert, and G Hovemann (2012), “The Financial Fair Play regulations of UEFA: An adequate concept to ensure the long-term viability and sustainability of European club football?”, International Journal of Sport Finance, 7:117-140.

Topics: Competition policy, Frontiers of economic research
Tags: competition, Financial Fair Play, Football, sport

Senior Lecturer in Economics, Lancaster University Management School