Has Financial Fair Play Changed the European Soccer Industry?

Last summer, the president of the FIGC, Gabriele Gravina, spoke to Sky Sport to present the twelfth edition of the Soccer Report, developed by the FIGC Study Center, in collaboration with AREL and PwC Italia. The report had good and bad parts, we could say, even though there was a lot more bad than good. 

“The data in our Soccer Report is ruthless as always […] in 12 years we have accumulated aggregate losses of 4.1 billion euros; we have lost one million euros a day […] 79% of our clubs have closed their accounts with losses. In the last 12 years our world has practically doubled its debts, going from 2.4 to 4.7 billion, but what is really striking is this: despite the growing losses in the world of soccer, the cost of labor has increased exorbitantly compared to revenues, and today has an impact on revenues of 66% in normal conditions, which unfortunately becomes 92% net of capital gains […] There is a sort of short-sightedness in not wanting to recognize the need for a series of actions that need to be implemented to revolutionize the management policies of our clubs […] We are trying to adopt the new rules in line with FFP: solvency, the policy of financial sustainability, and the policy of cost containment […] A system like soccer has a significant impact on our country’s economy […] the world of healthy soccer also becomes a credible economic world and becomes competitive in regard to other areas. We must gradually develop awareness, also applying the indicators that must be identical elements for the entire professional world, and put an end to differentiations. They must be the same for Serie A, Serie B, and Lega Pro; this is a historic step we are working on.”

The FFP which Gravina referred to is “financial fair play,” known internationally as the Financial Fair Play Regulation (FFPR). What is this? Why should the indicators be identical for everyone? Let us proceed step by step.

In 2009, The Union of European Football Associations (UEFA), the governing body of European soccer, passed a series of rules, known as FFPR, that had the aim of introducing financial rules and responsibility into the decision-making processes of European soccer teams, eliminating “financial doping,” and ultimately, protecting the long-term profitability of the European soccer industry. This important regulatory intervention was finally approved in 2010, and the first evaluation of the soccer companies was carried out in 2011. Since then, the fateful 12 years that the president of the FIGC spoke of have passed.

At the time of the initial discussion of the FFPR, throughout Europe soccer was for the most part a sector which did not produce income and had an unsustainable level of debt. Half of the clubs were losing money and the combined net annual losses for all of the main European leagues had gone from .6 billion euros in 2007 to 1.5 billion euros in 2010. Limiting the ability of the clubs to rely on success on the field by buying big-name players was considered fundamental to guarantee the stability of the entire system. The introduction of the FFPR thus aimed to encourage responsible spending by soccer executives and to increase both the credibility and transparency of clubs, in favor of the long-term health of the soccer industry. To that end, a key measure of performance of club results was introduced, the Break-Even Requirement (BER): over a period of three consecutive years (starting with the 2011-2012 fiscal year) and within an acceptable range of deviation, club performance would be measured in terms of balance between relevant expenses and relevant income.

Since then the BER has become the cornerstone of the FFPR, essentially requiring clubs to act as self-sufficient enterprises. As asserted by Michel Platini, president of the UEFA when the BER was introduced, “living within one’s means” is the basis of accounting, but it has not been the basis of soccer for years.

With the BER, the UEFA attempted to translate into action a line of reasoning in the public interest: clubs would no longer have to spend too much for big names in order to preserve the long-term credibility of competitions, the good of soccer, and given the social importance of soccer, the community in general. Violation of the BER could entail the exclusion of a club from the lucrative international competitions organized by the UEFA. Respect for the new accounting goals would thus become a requirement to access additional economic resources. It would also offer clubs the opportunity to be seen as more legitimate in the eyes of stakeholders. Not only executives and players, but sponsors and fans as well, would worry about the possible exclusion from UEFA competitions, given that such an exclusion would have negative effects both financially and in terms of image.

Despite the stated goals, from the time of its introduction the FFPR has raised various doubts on its probable effects and possible undesired consequences. The most critical points can be summarized starting from a complaint presented by the Belgian Attorney Jean-Louis Dupont to the European Commission in 2014. According to Dupont, the BER would limit investments, fossilize the existing market structure (since it is highly likely that the top clubs would maintain, or even increase, their leadership), reduce the number and amount of trips, cut the number of players under contract in clubs and reduce the revenues of player agents. In short, the BER would increase the profits of clubs, but mostly by reducing salary expenses and consolidating the competitive advantage of the top clubs at the time. On both aspects, according to Dupont, the FFPR would violate EU laws on competition. Dupont’s initiative was not successful.

A decade later, a research group at the Bocconi and the École normale supérieure Paris-Saclay, coordinated by the BAFFI CAREFIN center, attempted to determine if the FFPR changed the European soccer industry in the stated direction or if its critics were right.[1] Years after its launch, despite the heated public debate that echoed also in Gravina’s words, concrete evidence of the actual consequences of the FFPR on the profitability of the European soccer industry is, in fact, still rather scarce. From that standpoint, what the researchers provide is the first detailed causal assessment of the joint effects of the FFPR on European soccer teams’ income statements and balance sheets, on the one hand, and on the competitive balance of European leagues, on the other.

To that end, the research group exploited an original dataset on 186 clubs that have played in the five most important European leagues (Bundesliga in Germany, Liga in Spain, Ligue 1 in France, Premier League in England, and Serie A in Italy) from the 2007-2008 season to the 2019-2020 season, corresponding to the club’s accounts from 2008 to 2020. The sample includes all of the clubs that competed in the top leagues in their countries at least once in the period observed. The financial data were extracted from Orbis (Bureau van Dijk) and refer to the financial reports and income statements of the soccer teams. The clubs’ competitive performance, on the other hand, was measured in terms of ELO ranking according to the classification of the clubelo.com website created by Lars Schiefler.[2] The ELO ranking measures the competitiveness of a club based on the results achieved against their adversaries, but taking into account their competitiveness in recent years. This makes it different from the standard rankings based on points collected and allows for a reasonable comparison between clubs that don’t play in the same league. The ELO ranking is used, for example, by the International Chess Federation to rank chess players and also by the FIFA Women’s World Ranking.

To study the response of European clubs to the introduction of the FFPR, the research group followed a strategy that imitates the design of an experimental study through the analysis of the differential effect of the introduction of the FFPR (“treatment”) of the clubs not exposed to them (“control group”). Exploiting the fact that the sanctions for violation of the FFPR are essentially irrelevant for clubs that do not aspire to participate in UEFA competitions, the researchers compared the clubs treated, that tend to participate, with the control clubs, that tend not to participate, and thus have little incentive to respect the FFPR, to the extent that doing so entails additional costs. Since the logic of sanctions for the violation of the FFPR de facto implies that clubs which aspire to participate in UEFA competitions worry much more than other clubs about respecting the FFPR, the likelihood of participating in those competitions is taken as an indicator of the intensity of the treatment.

The results are very interesting. From a financial point of view, the introduction of the FFPR led to an improvement of financial results, consistent with the efficacy of the BER (especially for clubs with foreign investors), but this positive development in the clubs’ income statements has not translated into greater overall sustainability of debt. In other words, only the financial results subject to the reform have reacted decisively to the accounting reform.

From a sports competition standpoint, we observe a positive impact on the reform of the ELO rankings of the companies examined. The effect is broader and more significant six years after the reform, along with the behavior of the financial variables. Comparing a club in the control group on the margin of the top 20% of the ELO ranking with a club in the treatment group on the margin of the lower 20%, the latter had a likelihood of victory of 53.9% in 2011, that increased to 61.6% six years after the reform. In other words, the introduction of the FFPR reduced the competitive balance between the treatment and control clubs. The BER increased the profitability of clubs mostly by increasing income relating to salary expenses, rather than reducing the latter.

To summarize, the results of the ex post analysis confirm some of the critical ex ante predictions, from two points of view: the BER was not sufficient to promote the financial sustainability of clubs in the long term and strengthened the dominance of the top clubs. This took place because only clubs with European ambitions had an incentive to adapt to the FFPR, but these clubs also had no incentive to go beyond the BER. This is why in the spring of this year, the UEFA introduced the new rules on financial sustainability, to substitute the old financial fair play regulation, having the goal of solvency, stability, and greater control of clubs’ costs and expenses. This is the same reason the president of the FIGC calls for its application to all professional clubs.

Donato Masciandaro is a Professor of Political Economy at the Bocconi University, where he holds the Intesa Sanpaolo Chair in Economics of Financial Regulation. Since 1989 he has written for the newspaper il Sole 24 Ore. Since 2005, he has contributed to Economia & Management drawing on and developing his comments and analysis published in that economic-financial daily.

Gianmarco Ottaviano is a Professor of Political Economy at the Bocconi University, where he holds the Achille and Giulia Boroli Chair in European Studies. He writes for il Sole 24 Ore and lavoce.info. For Economia&Management, he draws on and develops his comments and analysis published in those two newspapers.