UEFA Regulations of Competitive Balance

The UEFA Financial Fair Play proposal due to be implemented in 2012 will have far-reaching effects on European sports. The Proposal itself completely retools the financial restrictions and obligations of soccer teams across Europe in hopes of creating a more balanced and equally competitive league. The debt burdens borne by many of the league’s most successful teams will be eliminated, yet the argument for increased competitive balance will likely go unrealized and perhaps even greater imbalances between teams will be created. There have been many different opinions regarding this move by the UEFA, some coming from fans others coming from sports economists. Certainly there will be both negative and positive effects stemming from this policy action, but what kinds of bi-products it will likely produce is still open for discussion.

Essentially, the new UEFA Financial Fair Play rules would help to keep European soccer clubs out of debt, forcing them to stop spending more than they have to transfer players in hopes of reaching some of the more prestigious and often ultra-lucrative Champions League games. The competitive balance of the league’s teams, according to the President of the UEFA, will be improved, allowing for a much more exciting, fair playing field for teams large and small. Interestingly enough however, much of the European public and many of the players are against these coming regulations which promise to take the UEFA soccer league to the next level of play after the 2012 season, at least in terms of fiscal responsibility.

The New UEFA regulation would require teams to be deficit free by 2017 (Conte, 2010). To achieve this goal, several benchmarks have been set for teams to begin reducing their debts starting in 2012. The first of the two, three-year periods of debt reduction would actually come during the 2011 season and last until 2014. In this period, clubs will only be allowed to have a maximum deficit of 45 million Euros. This is achieved through a series of strict audits as teams will likely need to begin budgeting for this period as soon as practical. Teams will have a bit of leeway during each of the two periods, since they will be able to flex their deficits within each period. For example, if a team is 100 million Euros in debt during the first year and earns 65 million Euros during the second and third years of the first period, they will have effectively met the cut off of 45 million Euros by 2014. These periods are inclusive and allow for cumulative debt to be erased through cumulative gains.

The second of the three-year transitionary periods will occur from 2014 to 2017 (Conte, 2010). In this period, teams will be required to have a deficit of no greater than 30 million Euros. This period, like the first, will also allow for cumulative debt and revenue flexibility, which shows that while the UEFA is trying hard to eliminate teams’ debt by 2017, they are allowing for some leniency in the specific path toward fiscal responsibility that each team chooses to take. However, teams will need to be extremely careful about how they handle their finances during each of the two periods since mismanagement at the beginning of either period could spell disaster as teams try to play fiscal “catch-up” during the next two years within each debt reduction period.

For over a half century, sports commentators, enthusiasts, and even economists have argued that competitive disadvantages occur at every level of sports and that the many, often conflicting interests and incentives that each committed party within the league has for themselves tends to destroy any sort of comprehensive, cohesive, one-size-fits-all sort of competitive balance regulation. But certain regulations, according to authors Sanderson and Siegfried (2003), tend to take hat very same incentivized system and distort or dilute it. Players, like in any other labor market, are a commodity. Once the money supply is tightened and players are no longer being paid what they’re often worth, their incentive to continue playing within that league or on a specific team is diminished. Sanderson and Siegfried (2003) argue that this in turn negates the potential positive results associated with more stringent competitive advantage regulation. They feel that talent will not be valued at the same degree as it once was, since teams can no longer pay the same exorbitant amounts of money for the star players. This form of sports “socialism” hurts league revenues in the long run according to these same authors. Many of the UEFA teams’ debts are hidden away from the official balance sheets, which represents a real problem for this sort of regulation (Conte, 2010). The new UEFA regulations state that a team cannot spend more than they earn in that particular season, but when many of the teams’ financial resources are undisclosed or shrouded by book keeping tricks and personal bribes or donations, this sort of regulation is likely to have a very negative impact on league play. These authors also argue that reducing certain competitive imbalances hurts fan sentiment.

Fans in the U.S. are famous for wanting to support the “underdog” in a sports contest. This feeling of enthusiasm for the “little guy” is not unique to the U.S., and the Europeans will have to rid themselves of this sort of sentimental sport reaction after the 2017 season if each UEFA team is going to operate under the same rules (Sanderson, 2002). League talent will have no place to move upward, and as each team begins to rebalance its books financially, their rosters will begin to look more and more alike in terms of sheer talent for the money. Extremely talented and therefore valuable players may even opt to play in different leagues or even on different continents, where their skills can be properly compensated.

The draining of talent from the pool of UEFA players could also be a significant negative side effect of the new regulations that will come into effect in 2012. As players see that teams will likely be cutting back in order to get their books straight, few will be able to realize the same compensation as before, especially with teams that do not have the same resource pools to draw from financially (Conte, 2010). This brings up yet another enormous potential problem with the new UEFA regulations- the fact that the restrictions are based on revenue, and that a debt free team does not equal a competitively balanced team by any means. Certainly competitive balance will be affected by the new regulations, but possibly for worse.

The largest teams in the UEFA league often spend hundreds of millions of Euros for the best players and operate in the best facilities where fans pay hundreds or even thousands of Euros for tickets. In fact, during League of Champions play, some clubs see revenues soar well into the hundreds of millions of Euros. But even if each team achieves debt-free status by 2017, in no way is each team equal in their ability to generate revenue through their fan base. Just as Rottenberg (1956) argued, the teams that have the largest fan and media bases will likely do better than those hailing from smaller cities and towns. This applies to the UEFA without question. The most successful and popular teams in the league currently are generating revenues many times greater than the smallest and least successful (Ducrey et. al., 2003). Certainly some of this has to do with revenues as a product of debt leverage, but once the debts are erased, the larger more popular teams will still have the ability to generate huge revenues due to their consistent popularity. In turn, they will be able to attract the most talented players as long as they are able to properly balance their books. But not all competitive balances and imbalances are created by revenues and money (Sanderson, 2002). Much of the imbalance comes from access to resources and revenues as well as the facilities that already exist in many of the most popular teams’ hometown. Some of these imbalances will likely hurt teams outside of the UEFA as well.

The report entitled “UEFA and Football: A New Governance” (2003) points out yet another interesting potential bi-product of the new UEFA regulations that will come into effect in 2012. The report recognized that allowing teams to share revenues and spend their own proportion of the revenue pool on talent may hurt other soccer leagues, not just the UEFA. Other European and international leagues could be devastated by teams such as Manchester United, on of the UEFA’s most popular and most successful, as they build teams to compete in both the UEFA and the League of Champions. Authors of the report use the example of automobile racing, where star driver Michael Schumacher is allowed to race in multiple different leagues at once, both the F1 and the F3 leagues (Ducrey, et. al., 2003). This actually creates a further imbalance of talent and potential revenue growth and sharing both within the league and outside of it, further threatening other leagues in different continents. The impact of the UEFA implementation of the Fair Play Financial Regulations could have a ripple effect that hurts soccer teams around the globe.

The Zimbalist article entitled, “Sport as Business” (2003) also brings up a good point about the socialization of sports leagues. Before the UEFA regulations take effect, the league operates in a relatively capitalist manner. Certainly many of the monetary imbalances that exist are not readily apparent when officials audit the books of the different teams, but as a business model, the new UEFA regulations may very well hurt the revenues of the entire league, not just certain teams specifically (Zimbalist, 2003). This would occur as club owners looking to turn a profit would be severely limited by financial restrictions put in place that force owners to stay debt-free. Owners will have less opportunity to attract talented players, especially owners of teams whose revenue is rather small. And as the gap between the richest and poorest teams widen, this problem will become exacerbated with time. But at the same time, the owners themselves will be pleased that they will no longer be legitimately able to offer their most talented and most expensive players the same exorbitant salaries afforded to them before. The owners will undoubtedly be happy that less of their revenue will go to salaries and more of the profit will be returned to the club as a business. This very same result occurred in the MLB leagues in the United States after salary caps were introduced to try to create a more balanced league relative to competitive advantage.

Certainly the current UEFA teams are by no means operating on equal footing. Many of the most popular and most profitable teams have a distinct advantage over smaller teams, yet the larger teams’ deficits continue to soar as more and more money is demanded by top players. The new UEFA regulations will help to reduce the direct debt obligations of the league’s teams, but in fact, the regulations will hurt the league in many ways, and these effects will likely not be limited to European soccer alone.

References

Conte, Niccolo. 2010. “UEFA’s Financial Fair-play and why we should care.” Soccer Lens

Homepage. Found Online August 15, 2010 at < http://soccerlens.com/uefas-financial-fair-play-and-why-we-should-care/52314/>.

Ducrey, Pierre; Ferriera, Carlos Edward; Huerta, Gabriel; and Kevin Tallec Marston. 2003.

“UEFA and Football Governance: A New Model.” Centre International D’Etude Du Sport.

Rottenberg, Simon. 1956. “The Baseball Players Labor Market.” Journal of Political Economy,

Vol. 6, No. 2. Pp. 242-58.

Sanderson, Allen R. 2002. “The Many Dimensions of Competitive Balance.” Journal of Sports

Economics. Vol. 3, No. 2. Pp. 204-228.

Sanderson, Allen R. And Siegfried, John J. 2003. “Thinking about competitive balance.” Journal

of Sports Economics. Vol. 4, No. 4. Pp. 255-279.