Red Ink in Madrid

The monopoly power in North American professional sports leagues, combined with their static composition, creates conditions ideal for profits, even if the teams perform poorly.  In European professional sports leagues, the promotion and relegation system, combined with the lucrative prospect of pan-European competitions like the Champions League, creates a different set of incentives, and vastly different financial outcomes.Top level European football clubs, even successful ones, often run large operating deficits and finance them with loans.

According to a recent BBC report, La Liga powerhouse Real Madrid currently has 327 million Euros of outstanding debt.  Real Madrid spent lavishly in the off season, acquiring Cristiano Ronaldo, Kaka, Karim Benzema and Raul Albiol for transfer fees totaling 219 million Euros.  Real Madrid appears to be engaged in a spending “arms race” with La Liga rival Barcelona, who also have a large operating budget.

This problem is not confined to Madrid and Barcelona.  I saw a paper presented at a conference in Paderborn, Germany last April with evidence that almost every club in the top two football leagues in Spain were losing money (unfortunately, no public version of this paper exists).

UEFA claims that it will soon be putting rules in place to curb excessive spending by European football clubs.  I doubt that UEFA can solve this problem on its own.   European football clubs operate under different financial regulations and in different economic environments.  A single UEFA policy seems unlikely to cure all the financial problems in European football.   Worse, the UEFA sponsored Champions League contributes to the problem, by providing football clubs near the top of every domestic league with an incentive to acquire better players through transfer fees.

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