Soccernomics

SOCCERNOMICS

An article that I read, talks about how soccer and that country’s economy is related. The article claim that the country that wins the soccer world cup experiences a tremendous increase in its economy, thus affecting the global economy. This study has been conducted by the Department of Economics in ABN AMRO bank. The department has studied the effect on the global economy after the country win’s the world-cup. They claim that a European country should win the world cup so the global economy is affected and the country which looses, its economy falls subsequently but my claim goes beyond their claim. I claim that any other sport and other events in the year also creates an impact on the global economy and even if a European country wins there are other factors also which contribute to the economy.

“Soccer and the economy” It has become a tradition that the ABN AMRO Economics Department considers the relationship between the two in the run-up to major international soccer tournaments. So for this summer’s World Cup in Germany. For education, but certainly also for entertainment, examine in this and forthcoming issues the macro-economic impact of soccer, the economics of the soccer industry and movements on the stock markets. Here, in the first installment of Soccernomics 2006, we decide which team is our вЂ?economic favorite’, that is, the country which should become world champion in order to maximize the impact on the world economy. In this and subsequent issues we will also consider the markets’ favorites and we will use our own model based on the ongoing domestic league competitions to predict which country will lift the World Cup in July.

Leaving aside the fact that many economists who are also soccer fans will use any excuse to bring soccer into their work, we are convinced that soccer has an impact on the economy and therefore justifies some research effort. The effects at macro-economic level and on the financial markets are not so great that they can turn a recession into a boom, but they should not be underestimated. Past figures show, for instance, that economic growth among world champions tends to outstrip that in the losing finalist countries during a World Cup year. With a few exceptions, it is a case of winner takes all. A World Cup winner enjoys an average economic bonus of 0.7% additional growth, while the losing finalist suffers an average loss of 0.3% compared to the previous year. Since 1970 there have been two major exceptions to the winner-takes-all rule. In 1974 and 1978 the German economy and Argentine economy respectively experienced a sharp downturn (in the latter case even a deep recession) after the national teams became world champions. The economy of the losing finalist вЂ" the Netherlands in both cases вЂ" also suffered, but far less so than the victor’s. So if the Dutch team reaches the final this year, its opponent should be warned that a victory on the pitch may well have some unpleasant economic consequences.

When the Netherlands became European champion in 1988, the correlation noted above was again confirmed: economic growth that year was sharply up on the previous years. And the stock market also performed very well, with the Amsterdam stock exchange gaining no less than 29% over the year. Is this stock market correlation also evident in the context of the World Cup? Unfortunately the available data are patchy, but it is clear that during the last three World Cups the winning country’s stock market performed much better in relative terms than the losing finalist’s. On average there was a positive return of 10% for the world champion and a negative return of 25% for the losing finalist.

The economic effects of performances on the pitch are ultimately psychological, the feel-good factor in other words. Happier consumers are more inclined to spend more. Leaving aside the fact that the parties in the winning country will last longer (which means higher turnovers at bars and supermarkets) and that there will be a market for souvenirs of the sweet victory (DVDs, shirts and other merchandising), it is undeniable that confident consumers spend more. That consumer confidence can be boosted by soccer results is illustrated by developments in the Netherlands at the time of the 1988 European Championship. Over the first half year of 1988 most Dutch consumers were still pessimistic, but after the victory in June the index turned positive and was 7 points higher on average during the second half year. Consumers were also much more upbeat about both the past and the future. Like consumers, businesses can also be affected by soccer-related developments. A country which attracts attention will find it easier to establish trade and investment relations with other counties. After all, economic relations start with contact between real people, and soccer may well help to facilitate such contacts.

In the past years the imbalances in the world economy have become more accentuated. Most striking is the gaping and widening current account deficit of the United States (by now equivalent to 7% of GDP), which is largely financed by Asian countries. What this boils down to is that US consumption is being financed by an ever larger debt mountain.

The danger is that the inevitable correction of this imbalance will take place not gradually but suddenly. This could mean the dollar depreciating sharply, US interest rates shooting upwards and the US economy heading for a painful recession. When the world’s largest economy has to take such blows, the news is bad for the rest of the world as well. Not a scenario that will be welcomed by any of us, then. Gradually eliminating the deficit is a much more desirable scenario, and this is certainly within the realm of possibilities. How is this to be achieved? The key lies with Europe. This because the current situation is due to the imbalance in economic growth rates across the world. While growth in the United States, as well as in Asia and Latin America, has been high in recent years, Europe has lagged behind. Stronger domestic demand in Europe would be good for the exports of the other regions. The United States could then reduce its current account deficit without too much economic damage, because higher demand from Europe would compensate for lower demand at home. And the Asians would be able to switch their exports from the United States to Europe. European growth acceleration would also offer an attractive alternative investment opportunity to Asian investors, who are putting most of their money into dollars at the moment. So from the perspective of the need for balanced world economic growth, a European country should win the