European soccer authority’s economic regulations create unintended losses for clubs.
Although European soccer regulators intended to ensure the financial health of professional soccer clubs, according to a recent paper their rules may have instead aggravated existing problems.
In 2010 the Union of European Football Associations (UEFA) introduced the Financial Fair Play (FFP) regulations, which limit how much debt soccer clubs can acquire. Ronan Gallagher and Barry Quinn, economists at the University of Edinburgh Business School and Queens University Management School respectively, assess the impact of FFP regulations on clubs’ financial and sporting outcomes. They review 60 clubs in the English Premier League and UEFA Champions League from 2003 to 2017, finding that FFP regulations create unintended consequences. For example, their research shows that the FFP regulations motivate clubs to prioritize financial goals over winning matches and that different clubs bear the costs of these regulations unequally.
FFP regulations create a financial breakeven constraint that requires clubs not to exceed financial losses over a specific limit for any three-year period. If a club surpasses the limit, UEFA may impose disciplinary measures that can include both financial penalties and exclusion from competitions. An exception does exist for owners to provide additional capital but is subject to its own cap.
UEFA felt that the FFP regulations were necessary for several reasons. As European soccer grew to a tens of billions of dollars industry, club spending and debt skyrocketed. This rapid growth raised concerns for UEFA about the long-term sustainability of the clubs that drive its lucrative viewership. UEFA also believes FFP regulations ensure creditors receive timely payments from clubs, boosting clubs’ financial health by making them more attractive as investments.
Gallagher and Quinn studied UEFA’s FFP regulations to determine whether the regulations effectively addressed UEFA’s concerns. They conclude, however, that club efficiency, which measures a club’s revenues against its salary costs and the share of talent available, actually fell under FFP regulations.
In addition, Gallagher and Quinn found that clubs do not bear these efficiency decreases equally. Instead, they find that the more restrictive the limit for financial losses is, the worse the average club performs financially and in league results relative to the top clubs.
Furthermore, Gallagher and Quinn argue that when loss limits are reduced, clubs do not try to win games as much as win profits. These rules could undermine the competitive quality of a league. Although the financial health of some clubs may be improved by the rules, the fan experience may suffer so much as to conflict with another goal of FFP regulations, which is reportedly “to further promote and continuously improve the standard of all aspects of” soccer. A better fan experience drives viewership, motivating UEFA to adopt regulations that promote competitive balance.
Although efficiency drops for both elite and non-elite clubs with more restrictive budgetary constraints, Gallagher and Quinn say that non-elite clubs suffer more than elite clubs do. The elite clubs are a group of five teams that routinely top the Premier League over the duration of the study. The fact that they benefit disproportionately from stricter FFP rules suggests these elite clubs may exert an outsized influence on UEFA regulations.
UEFA regulates domestic soccer leagues across Europe but remains vulnerable to pressure from top clubs. Through their successes and the viewership they generate, the elite clubs acquire political power, which they can leverage to influence UEFA. These clubs may sway UEFA to promote regulations like FFP that help maintain their dominance in both financial performance and competitive outcomes. The financial constraints FFP rules introduce may hinder entry by non-elite teams, advantaging clubs established before these regulations began. This type of favorable treatment toward elite clubs under FFP regulations reflects their treatment as “too-prominent-to-fail.”
Proponents of FFP regulations argue such rules promote desirable stability given “widespread financial instability in professional” soccer, Gallagher and Quinn note. Many clubs overinvest hoping to secure top rankings in their leagues and depend on substantial monetary contributions from interested outsiders to maintain financial solvency. Gallagher and Quinn say that clubs that rely on such “cash injections” suffer from greater instability and worse management. FFP regulation advocates claim these measures constrain clubs’ budgets in a way that decreases overinvestment and safeguards against insolvency.
Supporters of FFP rules also assert that regulatory frameworks such as FFP inspire greater competitive balance. By preventing wealthy benefactors from donating large sums that result in imbalances in clubs’ funds, FFP regulations may produce clubs that compete on more even grounds. Likewise, FFP budgetary constraints could improve management quality by encouraging efficient management behaviors.
Opponents of FFP frameworks, however, claim that the regulations encourage several dismal outcomes, Gallagher and Quinn say. Opponents assert that FFP rules do not moderate expenditures well. Furthermore, critics argue FFP constraints decrease investment in soccer and that the fan experience suffers as a result. Although in recent years clubs have grown increasingly unequal in both their financial and competitive abilities, during this period match attendance rose and European soccer attracted greater international attention, Gallagher and Quinn say.
Detractors of FFP regulations also claim such rules may violate European laws. FFP’s budgetary constraints reduce the total amount of money available for players’ salaries, leading clubs to pay players less than their talents may have otherwise commanded without FFP rules in place. These critics assert FFP rules enrich club owners at the players’ expense and question if these rules comply with labor law. The unequal burden of efficiency losses for elite and non-elite clubs under FFP regulations may also create problems under competition law, Gallagher and Quinn say.
Many clubs relish the opportunity for “promotion to the Premier League or Champions League qualification.” The benefits accompanying such a move, however, may ultimately be outweighed by the costs of membership in a league with FFP rules.