Financial Fair Play: What is the Problem?

Before this afternoon's panel at PTG on Financial Fair Play in UEFA, I thought I had a pretty good sense of the issue. I'm not so sure after hearing from Sefton Perry (UEFA Club Licensing), Christian Müller (former CFO of the German Football League), John Beech (Coventry University) and Stephan Szymanski (University of Michigan).

Szymanski (right) opened the discussion by reminding the audience of the simple economics of football, which are:

• Spending on salaries leads to winning
• Winning leads to revenues

He showed a version of this figure (Figure 3.1 from Soccernomics with Simon Kuper) which illustrates the relationship of wages and performance in the English Premier League:

UEFA has also published similar data for the top leagues across Europe.

Szymanski also showed data relating winning to revenues. With this as background he pointed to the fact that despite the reality that clubs often have financial troubles, they rarely disappear.  In fact, he said, in England's top four divisions since 1982 68 teams have gone into receivership but only 2 folded -- only to be reincorporated again.

So what problem is it that UEFA's Financial Fair Play regulations are trying to solve?

To answer this question, Szymanski points us toward Article 2(2) of the UEFA FFP regulations which outline the financial goals as follows (p. 2 here in PDF):

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.

Obviously, the goals of FFP are not to address the financial status of the vast majority of teams in the lower portion of league tables (those most at risk of going bankrupt) -- UEFA's Perry pointed out that the FFP regulations apply only to the top 233 teams that participate in UEFA club competitions out of the 700 some odd top level European football clubs.

During the panel the frequent use of term "financial doping" and frequent references to Roman Abramovitch, Manchester City and "sugar daddies" made it seem that the problem is one of perceived unfair economic competition off the pitch, which is both an ethical issue and one that poses real risks to clubs and their supporters, especially if owners finance spending sprees via debt rather than equity, and then leave long-term supporters to deal with the consequences.

But if this is the problem, then the solution would seem to be straightforward -- implement a salary cap, rather than the arcane, complex and eminently game-able FFP regulations that UEFA is now putting into place. I say straightforward not as a matter of economic theory, which seems sound enough, but due to the fact that numerous sports leagues around the world have chosen to implement salary caps of one sort or another --including those in North America, Australia and even in Russian hockey and English rugby.

Note that some European football connoisseurs are dismissive of the salary cap as being too "American." The regulation-promotion system, they argue, does not require the parity in outcomes that is desired of the American franchise system. This is well and good (I too am a fan of relegation-promotion), however insofar as FFP is concerned relegation-promotion is obviously an issue for the bottom dwellers in league tables, not for the top flight --certainly not those in the Champions and Europa leagues that is the focus of UEFA's FFP. Consider as well that English rugby has both a salary cap and promotion-relegation, with academic research suggestive of its effectiveness.

A salary cap in European football would limit the ability to buy wins (remember, salary is the main determinant of success, see the figures above) and thus revenue. So a salary-capped team would automatically put a lid on "financial doping." The obvious question is that if it makes so much sense in both theory and practice, then why is UEFA adopting FFP regulations instead?

I'd hypothesize that the answer to this question lies in the messy politics of Europe, where national associations still hold on tightly to their turf (one speaker at PTG this week characterized the national associations as still having a WWI mindset with respect to nationalism) despite appeals to a continental identity. Thus far, UEFA's efforts at consolidation/integration have been rebuffed.

Given the money at stake in pan-European competitions (e.g., in the Champions and Europa leagues) and for players (post-Bosman) no national association will implement a salary cap unilaterally, as that would simply create an incentive for its best players to move to a non-capped league. Securing agreement on a salary cap among UEFA's 53 football associations must have seemed more daunting to UEFA than the indirect approach of a more arcane regulatory system.  This may sound familiar to those familiar to European politics beyond football.

The deeper problem here of course -- and one that Szymanski hinted at -- is that there is a chance (a good one in my opinion) that UEFA's FFP regulations won't work as designed or will be deemed illegal. One need not look far to find other efforts at European integration that have papered over the actual challenges to such ties, with unfortunate consequences.

The panelists collective confusion was apparent as they ended the discussion by disagreeing as to whether Roman Abramovich's injection of funds into Chelsea was qualitatively different than Gazprom's injection of funds into Schalke. Someone broght up the notion of "true market" value of such investments as a test of their appropriateness. However, after seeing Tom Markham's presentation earlier today on football club valuation, I suspect that placing a requirement for "true market valuation" on anything related to football clubs would probably doom the enterprise forever.