The Ephemeric

European football is facing the very real prospect of financial crisis. In recent years the transfer market has been riddled with inflation and an explosion of unregulated deficit spending as the top football clubs compete with one another for dominance with little incentive for fiscal responsibility.

Clearly this system is unsustainable, and on the surface FIFA's decision to implement the so called "Financial Fair Play Rules" seems necessary and has garnered a great deal of support. But through presumably unintended bias, loopholes and a simple lack of foresight, this policy looks set to drastically change the landscape of European football, and further weaken the competitiveness of the domestic leagues.




Background:

The new set of rules are based around three main objectives, all with the goal of protecting the long-term viability of European club football:

• To introduce more discipline and rationality in club football finances, combatting inflation
• To limit the influence of private owners' wealth on club competitiveness, narrowing the artificial and "unfair" divide between top and bottom
• To encourage long-term investments in the youth sector and infrastructure, as opposed to transfer fees

In short, the idea is that over a rolling three year period, clubs must keep their operating losses below a certain limit, or face penalties which potentially include expulsion from European competition like the Champions League. Even though these rules take effect next year, it won't be until 2014/15 that FIFA is able to start punishing those who don't keep within the rules, and FIFA is still not expected to take serious action until 2018 so long as clubs are able to show that their finances are moving in the right direction before then.

In addition, spending on stadium construction and youth development will be waived from the final "expenses" total as defined under the ruling, the intention being to incentivise football clubs to pursue youth and infrastructure development as a means to progression as opposed to transfer spending and wages. Ultimately it is considered that such investments would increase revenue at the club and promote self sufficiency in the long term.

The push to draw up these rules had come about as a result of the influx of private owners into club football in recent years, which has seen clubs like Chelsea, Manchester City, Manchester United and others flourish an increasingly large amount of personal wealth on transfer fees, wages and other club expenditure. The effects of this were twofold: other big clubs like Real Madrid, Barcelona and Inter Milan had to step up their own expenditure in order to keep pace, and other less wealthy clubs simply have not been able to match up. After all, how could a small club dependent on basic sponsorship and TV money possibly hope to catch bigger teams like Chelsea, whose owner can simply afford to throw another hundred million on squad building at the end of the year?

FIFA deemed this new financial advantage to be an "unfair" abuse of the system, allowing the super-rich to buy their way to glory rather than earning it. Of course this has always been a problem with football going back a hundred years, but it seems as though the authorities have finally decided the scale of the matter is urgent enough to merit action.

The situation now sees players being transferred for fees approaching £100 million, wages exceeding £200,000 per week, and the majority of "elite" football clubs, if not all of them, operating deeply in debt. There is no doubt that action was necessary, but the reality is that such issues are inherent in any free-market system, and slippery enough that these new rules are unlikely to have any tangible effect in the long run, and in fact will probably only make matters worse. Here is why.


TV Money:

English club football has seen something of a renaissance over the past decade. Following heavy investment from the likes of Chelsea and Manchester City, other clubs have been forced to step up their own efforts and the overall quality of the league reached a higher level. Success in European competition has followed with no fewer than three English clubs (Chelsea, Liverpool and Manchester United) reaching the top spot in the European club rankings, two teams have won the Champions League, we've had an all English final, and perhaps most impressively of all, the 2008 competition featured three English clubs in the semi finals.

Champions League success is the holy grail of the football industry. It provides a windfall of cash from the big three of TV, gambling and sponsorship, both to the individual clubs and more pertinently to the domestic league as a whole. As a result, the English Premier League now enjoys roughly £800 million in TV money, more than any other league.

Recognising that the healthiest plan for longterm growth of the league is strong competition, the Premier League distributes all this TV money relatively evenly from top to bottom. At the top, a team like Manchester United will receive around £50 million, whereas a newly promoted club at the foot of the table will receive a healthy £30 million.

This gives the small clubs in the league a significant boost in their push for significance and is just one in a number of factors that has contributed to the overall strength of the Premier League today; now a far less predictable league than any other in Europe, in which quality is more evenly distributed. Indeed it is probably these massive strides that the English clubs have taken in the past decade that first prompted FIFA to map out these new rules in order to limit the influence of these wealthy private owners on European competition and prevent the dominance of any one nation's clubs.

The likes of Real Madrid and Barcelona, for their part, responded by stepping up their own spending to even greater levels than we have seen in England, including one world record breaking £80 million signing and a propensity for splashing upwards of £50 million on a single player with alarming regularity. Thus started a transfer market arms race which has directly led to the current unsustainable situation. The problem, as is becoming apparent, is that these Spanish giants have no intention of curbing their spending in spite of the new rules.

You see, the Spanish league has opted for a very different model of distributing TV money, one which allows clubs to negotiate their own deals. Naturally, the outcome is that the big clubs receive considerably more broadcasting revenue than those at the foot of the table. Barcelona and Real Madrid each receive £150 million, together more than half of the league's total TV fund, more than ten times what the team at the bottom of the table receives, and three times what the top clubs in England get.

Think about this for a moment. Under these new Fair Play restrictions, a club will have one of two options: reduce spending, or increase revenue. FIFA's intention is that spending should be cut, but Spain's decision to pour more than half of its TV money into the top two clubs means that they simply don't have to. This £150 million is more than enough to cover even the most exorbitant of transfer spending, and confers a quite ridiculous advantage on those two clubs.

Consider the massive advantage the top Spanish teams would have over their European rivals under this system. Barcelona will receive three times as much TV money as Manchester United, an extra £100 million which can be spent on signing players while United are forced to tighten their belts. Consider that Chelsea FC suffered £50 million (by the definition of "expenses" in this ruling) in operating losses this season, an amount which would disqualify them from the Champions League in seven years time; that extra £100 million would mean the difference between European contention and exclusion from the world's biggest club football competition. Again, the advantage that this system would give the Spanish teams simply can not be overstated. As the rules stand, Spain will be in prime position to dominate club football for years to come.

The English Premier League would then be faced with a choice: lose all that juicy European money, or modify their own TV money distribution to favour the big teams. Sadly I fear it won't be a very hard decision for them to make, and one that will bring competitive imbalance on the pitch and financial tension off the pitch.

And here we have the ultimate failure of the Financial Fair Play rules. They won't curb wreckless spending by the elite clubs, they will simply provide incentives for the football leagues to compensate by distributing funds away from elsewhere and into the coffers of the bigger clubs, so that they can continue to compete on the lucrative world stage. The real losers of this debacle are the teams at the foot of the Premier League, who in a few years time may be earning less through TV money than teams in the Championship.


Deficit Cap:

Possibly the most bewildering of all the loop-holes in this new set of rules regards the deficit limit. The rule states that clubs may not exceed a deficit of £5 million over three years (exempting, as stated before, investment in infrastructure and youth), but the same rule also states that clubs are allowed to extend the deficit to a substantial £45 million in operating losses, so long as those additional losses can be paid for as equity by the club's shareholders. Yes, you read that correctly, clubs can exceed the deficit cap by an additional £40 million, so long as their owners are rich enough to pay for it out of their own pocket.

This after all is policy which ostensibly is based around the idea of reducing the "unfair" advantage that having a billionaire owner brings to a football club, and yet such clubs are allowed an additional £40 million in transfer spending over their less wealthy rivals. That's two Didier Drogbas worth.

There is no way to consider this anything other than an utter absurdity; rather than limiting the advantage that a wealthy club has over a smaller one, this rule formalises the dynamic, mandates it even! Far from discouraging clubs from selling out to rich, big spending private investors, this would seem to give them an even bigger incentive to do just that.


Legacy:

So what effect is this new set of rules likely to have on European football going forward? Let's make a few predictions. To begin with, focusing such tight regulation on one single financial aspect is clearly going to throw the football economy out of balance for a while.

There are three main sources for a club's income: broadcasting revenue, commercial revenue and matchday revenue. This new rule conspicuously focuses almost entirely on reducing transfer and wage expenditure, key avenues by which a club can make investments under the intention of increasing commercial revenue. Invariably the result of this is that clubs will need to turn to the other two areas in order to increase revenues.

As I've already discussed, the increasing dependence on TV revenue is the biggest issue. Either FIFA is going to have to come back and issue new rules addressing the disparity in TV revenue, or the Premier League is going to have little choice but to redistribute the bulk of its money to the big clubs in order to maintain competitiveness in Europe.

The effect this might have on European football is minimal, maintaining the status quo and making it even harder for smaller clubs to break into the elite. The ultimate outcome can only be a widening of the already detrimental gulf between top and bottom in the domestic leagues. A big victory for the most powerful football clubs, a big defeat for football in general.

In addition this result would confer a big advantage on clubs which already have a successful commercial operation, especially since investment in infrastructure and stadium building (the main contributors to matchday income) are exempt from the new restrictions.

This is great news for a team like Chelsea which from a financial perspective doesn't really need to invest anymore in players judging by their already reasonable commercial revenue, so long as their rivals are not able to either, while allowing them to invest in matchday revenue sources (currently their weakest area) without restraint. Conversely it's a massive blow to a team like Arsenal which is already earning as much as it possibly can be on matchday courtesy of their new stadium (indeed they are completely dependent on this income at the moment), while their commercial revenue frankly pales in comparison to the other big clubs, barely ranking in the top 20 in Europe. These new rules would leave them at a distinct disadvantage, with few options for increasing revenue in the short term.

More interesting though is the example of the German league. While not typically considered at the same level as the domestic leagues in Spain and England, the Germans are definitely on the rise in a big way, particularly recently following the continental success of Bayern Munich.

It will no doubt surprise most people to learn that Bayern Munich generate the most commercial revenue of any club in Europe, more than Real Madrid and Barcelona, more than Manchester United and Chelsea. This is a common theme in the German league in general, where teams on average have a considerably stronger stream of commercial revenue than their counterparts in England and Spain. The fact, then, that German clubs are not the richest in the world owes itself to weak matchday income. Clearly there is a lot of room for growth there, and now with these new rules, German clubs have effectively been given carte blanche to invest accordingly in this area. Don't be surprised if you see a new era of German club football over the next decade.

Ultimately, restricting the abuse of personal wealth is a difficult issue, one which far more competent governing bodies than FIFA have tried and failed to implement. Meddling of this nature was always going to have unexpected consequences, and unfortunately the Financial Fair Play Rules, as they currently stand, seem only to succeed in exacerbating the issue, shifting the burden onto the smaller clubs who can least afford it.