Soft budget constraints in professional football

Abstract

Professional football in Europe is characterized by persistent deficits and growing debts among the majority of the top league clubs. Despite these problems, the clubs have an abnormally high survival rate. This paper focuses on this apparent paradox and poses the question: Why do only very few European professional football clubs go out of business even though they operate chronically on the edge of financial collapse? The paper argues that the paradox can be explained by the fact that professional football clubs operate within soft budget constraints in a way which is similar to the role of large companies in socialist economies – a phenomenon which was first identified by the Hungarian Economist János Kornai.

Keywords:

• soft budget constraints
• European professional football
• economics of sport

Notes

1. FC Barcelona and Real Madrid have income streams of more than €400 million each in 2010.

2. Another team in Ancona, however, has taken over their logo, identity and plays under the name US Ancona.

3. Clubs that have been relegated due to financial collapse are: Fiorentina (2002), Allessandria (2003), Como (2005), Perugia (2010), Venezia (2005 & 2009), Pisa (1994, 2009), FC Pro Vercelli (2010), Pescara (2003, 2008), Legano (2010), Ancona (2010), and Aurora Pro Patria (2009).

4. The following Spanish clubs have been relegated due to financial trouble: CF Extremadura (2008), Real Oviedo 2003/2004,Granada CF (2002/2003), SD Compostela (2002/2003, 2003/2004), CP Merida (2000) were reconstructed as Merida UD (still operating), Real Burgos CF (folded in 1983 but was replaced by its reserve team; now operating under the name Burgos Club de Fútbol), CD Logrones (2000, 2004, and folded in 2009, but reconstructed as SD Logrones).

5. Today the Spanish first tier consists of 20 teams.

6. On the contrast between the American profit maximization approach versus the European winning optimization please refer to: (Ascari & Gagnepain, 2006, p. 77; Barajas, Fernández-Jardón, & Crolley, 2010; Barros et al., 2002, p. 2ff; Cairns, Jennett, & Sloane, 1986, p. 10; Downward & Dawson, 2000, p. 27f; Downward, Dawson, & Dejonghe, 2009, p. 196; Hamil et al., 2010, p. 401; Kesenne, 2007, p. 4; Lago et al., 2006, p. 5; Sandy, Sloane, & Rosentraub, 2004, p. 11; Sloane, 2006; Solberg & Haugen, 2010, p. 331; Szymanski, 2009a, p. 70f; Szymanski, 2010, p. 32; Szymanski & Zimbalist, 2006, p. 132; Zimbalist, 2003, p. 504).

7. One can also point to the bailouts of the Finnish and Swedish banking system in the early 1990s (Kornai et al., 2003, p. 1123).

8. Kornai treats the terms “support”, “rescue” and “bailout” as synonymous actions to avert financial failure (Kornai et al., 2003, p. 1097).

9. It should be pointed out here that one instance of bailout alone does not make the SBC phenomenon appear. According to Kornai (1979, p. 807, 1980b, p. 568, 1998, p. 14), only if successive instances of support happens – for instance, if other organizations are being bailed out in the same sector or previous examples of support exists – expectations of future bailouts or support can grow.

10. See Hamil et al. (2010, pp. 360–361) for a similar argument.

11. http://www.uefa.com/uefa/footballfirst/protectingthegame/financialfairplay/index.html