Is Wenger Right About The Impact Of The Financial Regulations?

Ever since the vote on the UEFA Financial Fair Play Regulations there has been an ongoing debate about the impact they’ll have on clubs. There seem to be three broad opinions; the new regulations will change the world of football, the new regulations will have some impact, and there will be no impact whatsoever.

Arsene seems to be in the first category,

It will be a massive advantage to Arsenal Football Club as soon as it’s applied if it’s well introduced.

I guess most of you will have noticed the “if it’s well introduced” bit at the end. That is where the debate is. Many believe UEFA cannot be strict with the rules simply because they cannot afford to leave out the marquee names. Others feel that clubs will find a way around these rules through creative accounting and via some loopholes that seem to exist in these regulations.

Broadly speaking I tend to agree with these arguments. If the clubs want to find a way around it, I’m convinced they can. But to me the biggest question is, do clubs want to find a way around the regulations?

Platini claims that the owners themselves came to UEFA seeking regulations. They don’t want to continue this indiscriminate spending.

It’s mainly the owners that asked us to do something. Roman Abramovich, Silvio Berlusconi at AC Milan and Massimo Moratti at Inter, they do not want to fork out any more.

I believe that makes the more sense than any other argument. You have to wonder how long can the owners absorb losses. We’ve already seen a shift in the transfer policies at Chelsea, United, and to some extent at Milan. While Manchester United don’t have a problem of making losses, their debts are clearly affecting their transfer business.

Chelsea have let experienced players (high wage earners?) like Ballack, Carvalho, Joe Cole, Deco, and Belletti leave while bringing in only a couple of players like Benayoun and Ramirez (significantly lower wages?). They’ve also been looking at the youth market over the last few years, without the kind of success that Arsene has had, if I may add.

United have signed the likes of Smalling, Hernandez, Bebe, Obertan, Biram Diouf, and Pogba in the last two years. All of whom are young, relatively unproven players most probably on relatively low wages. By their standards, replacing Ronaldo with Valencia was a big step down and signing Owen on a free was wheeling and dealing at a Redknappesque level. And all this when they don’t even have a problem with the break even rules. Surely, this is planning for the future with an eye on the new regulations?

Similarly, AC Milan have been shopping for second hand has-beens and bargain buys. While they do have a decent squad, we can see they are no longer spending at the highest levels.

The case of Inter Milan is the most staggering. The excellent Swiss Rambler points out that the club have made cumulative losses of € 509 Million in the last three years (07-09). Overall, in the Moratti era the club lost €1.15 billion with about €730 coming from the pockets of the president.

How long do you think even the richest can sustain such losses?

This does explain why Wenger specifically pointed this out while talking about the financial fair play rules,

I don’t want to go into excuses but you want a business to be run properly and I believe that to lose £150 million a year you don’t deserve a lot of credit to win a competition.

[Meanwhile] we have balanced our books.

Maybe some people think it’s right because they don’t care but if they had to run a business I don’t think it’s right.

For some it’s a force of habit to dismiss everything that Arsene says about the financial issues. But those who do think about it wonder what’s going on. In effect, it’s like saying we have a hundreds of millions to blow, let’s see how you compete with us.

Is it at all surprising that other clubs are forced to spend beyond their means? Ultimately, many end up in the red and flirt with extinction.

This problem is even more pronounced in La Liga. Barca and Madrid have massive incomes. The other clubs have been forced to compete with them by splashing more than they are earning. It has reached such a stage that the Spanish government has been forced into taking some action.

In an effort to tackle reckless spending and rising debts among the 20 La Liga clubs, the country’s top teams will be subjected to financial regulation by a new independent body established by the Spanish government to ensure that teams are living within their means.

Clubs won’t be allowed to spend more than 70% or 75% of their income on player wages or transfer fees under new proposals from Jaime Lissavetzky, the country’s secretary of state for sport, which are expected to come into force for the 2011-12 season and will include powers to exclude offenders from competition.

One might argue that since Madrid and Barca report profits they will not be affected by these rules. To an extent that is correct but we must not forget that these clubs thrive because of La Liga. If the other clubs cannot compete the league itself will be threatened and that will have a direct impact on the big two. I won’t be surprised if they move to some sort of a revenue sharing model for the television rights.

There is a good chance that such a change will adversely impact the revenues of La Liga giants. We’ve already seen that everything is not right at Barca as they had to take out a loan to pay the players’ wages. Any impact on their revenues will directly affect their transfer decisions and wages.

In the short-term Madrid and Barca might be able to spend more than Arsenal, Chelsea, United, Inter, or Milan; but in the long run I see it evening out.

The final case is that of Man City. I think they are planning to spend big right now and will convert most of the debt into equity before the monitoring period begins. After that they will have to find a way of covering the amortization costs and wages by making a significant jump in revenues. I have a feeling if anyone does try to circumvent the regulations, it will be City.

To conclude, the intent of owners and the impact of local regulations will decide the future economy of football. UEFA have come up with a decent set of rules. If the owners decide to abide by these rules, which is in their best interests as well, the football world might see a rapid return to sanity.

If however, there are some who want success at any cost, we will continue to see an inflated market. I have a strong feeling UEFA will take strict action if an odd club like City, who don’t have any European pedigree, try to circumvent the rules. But the governing body will be helpless if all the big clubs continue to break the rules. Given the evidence we have seen I believe the market is already changing, and thanks to our prudence and foresight we are likely to be amongst the best placed clubs.