Euro 2004 special

Soccernomics 2004

Which economy would benefit most from a European Championship's win ? It is becoming something of a tradition. Whenever a major international football tournament is approaching, ABN AMROs Economics Department considers which country stands to gain the most economically. In the two previous editions of Soccernomics, one of the aspects we looked at was the direct link between retail sales in a country and participation in the tournament. For example, new TV sales typically soar in the run up to and during the tournament, while supermarkets experience a surge in demand for beer and crisps. Turnover also goes up in the catering trade (which includes bars) and souvenir manufacturers enjoy a boom in business. The disadvantages associated with people stopping work to watch games will not be serious on this occasion, since the games all kick off at 6pm and 8.45pm. Although some businesses will do well out of the latest outbreak of orange fever, the direct macroeconomic effect of participation in Euro 2004 is minimal. Only in the host nation Portugal on this occasion is the tournaments impact likely to be discernible in the official statistics. For the hosts, the effect of the tournament derives from the construction of new stadiums and the influx of supporters from other countries. In the two previous editions of Soccernomics, we paid quite a lot of attention to this effect. From a variety of studies carried out during the tournaments in England (Euro 96), France (World Cup 98) and the Netherlands and Belgium (Euro 2000), it appears that organising a major international football tournament boosts a countrys economic growth by between 0.02 and 0.1 percentage points. However, this figure does not take account of indirect effects. Winning a tournament can provide an increased 'feel good factor' in the population of the victorious country, thus stimulating consumption and investment, which in turn push up GDP. Unfortunately, it is not possible to establish the extent to which previous winning countries have benefited in this way, so the existence of such an effect remains unproven. Nevertheless, this article has been written on the assumption that this indirect effect does occur. On the following pages, we consider which of the participating countries could do with such a boost in confidence most. When possible we try to relate soccer and the economy, but please don't take these comparisons to seriously. Our analysis of the various countries reflects the structure of the tournament. In the group stages, the forecast GDP growth for this year and next is used as the starting point. Countries with rapidly growing economies stand to benefit less from the confidence boost a win would bring than countries with stagnant economies. The four pairs of quarter-finalists who emerge from the group stages are then compared on the basis of consumer and producer confidence. The lower the current confidence levels, the more desirable it is for a country to take the European crown. For the semi-finals, we add a further criterion: the size of the economy is taken into account. This is because if growth goes up by one percentage point in a large country, the effect on the European economy is greater than if a mini-state receives a similar boost. When considering which of the two finalists most deserves to win, we look not only at cyclical factors, but also at the countries economic structure. This then leads to the identification of a (surprising) winner the country we want to see lift the trophy in Lisbon on 4 July.

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Group A: Southern Europe versus Russia Hosts Portugal play against Greece, Russia and neighbours Spain, who they will be Group A
Area ('000 km) Greece Portugal Russia Spain 131.9 92.3 17,075.2 504.7 Population (mln) 10.7 10.1 144.5 40.2 GDP* (bln) 153.5 130.4 489.8 743.0 GDP* growth 4.4 -1.3 7.3 2.3

particularly keen to beat. The rivalry between the two Iberian nations isnt confined to the football field; in economic, geographic and demographic terms, their relationship bears a lot of similarities to that between the Netherlands and Germany. There are differences, too, however. With regard to the Dutch economys dependence on its neighbour, it is often said that if Germany sneezes, the Netherlands catches cold. Portugals reliance on Spain cant be described in such dramatic terms, since the Portuguese economy has been ailing while the Spanish has thrived. For the Greeks, Euro 2004 is merely an appetiser for the Athens Olympics, which start

* GDP is expressed in billions of euros; GDP and GDP growth figures relate to 2003. Sources: EIU, Eurostat, www.euro2000.com

two months later. In recent years, partly as a result of the preparations for the games, the Greek economy has been growing strongly, and we anticipate substantial further growth this year and next. The down side of the intensive building programme is a rising government deficit. Along with several other countries, including the Netherlands, Greece has now gone over the notorious 3 per cent limit set under the Growth and Stability Pact. Like Greece, Portugal has been investing heavily in construction. No less than seven brand new stadiums have been built for Euro 2004, and a further three have been completely modernised. The Portuguese government deficit was also more than 3 per cent last year. Yet the country has nevertheless been struggling through a serious recession. At 1.3 per cent, the level of economic contraction was greater than anywhere else in Europe. Exports have been rising, but not sufficiently to compensate for falling domestic demand. We do, however, anticipate a slight improvement this year and next. High oil prices and the strong domestic demand mean that the Russian economy is growing at a tremendous pace. The transition to a more market-based economy has not been without its benefits for Russia. However, many Russians are unhappy that so much of the new wealth has been accumulated by a small number of oil magnates and company directors, while so little has filtered through to the community as a whole. Roman Abramovich, for example, has invested a cool 200 million euros in London football club Chelsea. A booming housing market has helped the Spanish economy to keep pace with trend growth levels in recent years. Greatly increased employment levels have boosted consumption significantly, but also fanned inflation. There is a danger that Spain is in the process of pricing itself out of the market, just as the Netherlands did a few years ago. Nevertheless, we remain reasonably optimistic about the short-term growth prospects. Domestic demand continues to surge upward, while trade should benefit from recovery in the EU as a whole.

Forecast GDP growth

ABN AMRO estimates

8 6 4 2 0 2004 Greece Portugal Russia 2005 Spain

Economically preferred outcome

On the basis of forecast GDP growth in 2004 and 2005

1. Portugal* 2. Spain* 3. Greece 4. Russia * Through to quarter-finals

For us, host-nation Portugal is the clear economic favourite in group A. The contest for second place is close, with little to choose between Spain and Greece. However, it seems likely that Greece will continue to grow faster than Spain. Besides which, Greek consumers are already being spoilt, with the Olympic games starting at the end of August. So we go for Spain to get the runners-up spot in group A and proceed to the quarter-finals.

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Group B: Continuation of the Hundred-Year War? After a turbulent history in which the two superpowers of the late Middle Ages have frequently been at war, England and France lock horns once more in Lisbon. With stars
GDP (bln) 283.0 31.5 1589.1 1551.5 GDP growt h -1.5 4.3 2.3 0.2

Group B
Area Population ('000 km) (mln) Switzerland Croatia England France 41.3 56.5 132.6 547.0 7.3 4.4 49.5 60.2

such as Zidane and Henry in their side, the French look slight favourites. Economically speaking, however, England currently has the edge. In both economic and footballing terms, the other two countries in the group Switzerland and Croatia lag some way behind. Like the Netherlands, Switzerland saw its economy contract last year. The particularly large fall in GDP during the first quarter was attributable to lower exports. This in turn was due to the strength of the Swiss franc. Major uncertainties in the financial markets have led investors to move their capital to safer places Switzerland being one of the most obvious. Demand for the Swiss franc has consequently risen, pushing up the price of the currency and thus the price of Swiss products. The exchange rate has recently fallen back a little, but economic growth remains modest. For this year and next, our forecasts therefore remain cautious. Although many of the countrys well-paid professional footballers earn their money

* GDP is expressed in billions of euros; GDP and GDP growth figures relate to 2003. Sources: EIU, Eurostat, www.euro2000.com

Forecast GDP growth

ABN AMRO estimates

abroad, Croatias GDP per capita is at about the same level as the Czech Republic, Hungary and Poland. Most of the countrys GDP is generated by the service sector, in particular the tourist industry. Croatia is working flat out to win entry to the European Union; the hope is that the country will be admitted along with Romania and Bulgaria, which are expected to become EU members in 2007. The Croatian economy is small, but presently growing pretty strongly. Growth is likely to continue for some while, certainly in the event of EU admission. Bolstered by a very strong housing market, the UK economy has not been affected the

5 4 3 2 1 0 2004 Switzerland Croatia 2005 England France

economic malaise that has gripped the European mainland. Families, businesses and the government have all been spending heavily. As at clubs such as Leeds United and Manchester City, the greatly increased debt burden has become a problem. To buy a house, an English consumer has to take on a sizeable debt. What is more, mortgages interest rates are variable in many cases, making economic growth particularly vulnerable to rate hikes. Reigning European Champions France did particularly well in the first quarter. While the football team was securing a two-nil win over Belgium and drawing with the Netherlands, the economy grew significantly more than expected. Our growth estimates for the year have consequently been adjusted upwards. However, in the euphoria of the moment, the French are ignoring one important factor: everyone grows old eventually. Most of the nations football stars have a few years left in them yet, but the French population as a whole is ageing rapidly. In both economic and footballing terms, not enough is being done to address this problem.

Economically preferred outcome

On the basis of forecast GDP growth in 2004 and 2005

1. Switzerland* 2. France* 3. England 4. Croatia * Through to quarter-finals

Our economic favourites for this group are clearly Switzerland, followed at some distance by France. For the English, therefore, a quick return to their expensive homes is in the offing. As for the Croatians, we hope that they soon get the green light for entry to the EU, but theres no passage to the quarter-finals on offer from us!

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Group C: Hot and cold together Scandinavias two representatives at Euro 2004 will go head to head in round 1. The draw has also pitted the cool-headed Nordic men against the more temperamental Italians and Bulgarian. Every taste in Europe is catered for in Group C. Italy is within the
Area Population ('000 km) (mln) Bulgaria Denmark Italy Sweden 110.9 43.1 301.2 450.0 7.5 5.4 58.0 8.9 GDP (bln) 22.4 187.8 1302.0 267.5 GDP growth 4.3 0.3 0.4 1.5

Group C

eurozone and, of course, a member of the EU. Sweden and Denmark are member states as well, but have retained their own currency. Bulgaria is in neither the EU nor the eurozone, but would like to join both. Following the break-up of the Soviet Union in 1989, the Bulgarian economy suffered a major collapse. No signs of recovery were seen until 1994, the year that Hristo Stoitchkov led the nations footballers to fourth place in the World Cup. Not much later, after a disappointing Euro 96, the Bulgarian economy was back in recession. Now, however, the country is once more experiencing very rapid growth, partly on the back of a series of important reforms. Economic revival has been mirrored by a rejuvenation of the national football team, which qualified automatically for Portugal. Denmark are making their fifth consecutive appearance in the final stages of an

* GDP is expressed in billions of euros; GDP and GDP growth figures relate to 2003. Sources: EIU, Eurostat, www.euro2000.com

Forecast GDP growth

ABN AMRO estimates

international tournament: an impressive record for a country with a population of just over five million. The Danish economy couldnt match the team last year, however, barely avoiding recession. For this year and next, we foresee consumption and investment picking up, leading to better GDP growth. As usual, the Italian team is one of the bookmakers favourites for Euro 2004. The Squadra Azzuri, beaten finalists at Euro 2000, will be looking for its first big prize since clinching a third world title in 1982. And it may be a case of now or never, because Italy has the lowest birth rate in Europe and will therefore find it increasingly hard to come up with worthy successors to Inzaghi and Vieri. In economic terms, too, the next few years are the time to reap the harvest. The reason being that, before long, population ageing will begin to have a major impact on the Italian economy. Unfortunately, signs of an economic recovery remain hard to discern. Sweden recently said 'Nej' to the euro. So, if they want to do any spending back home, stars such as Zlatan Ibrahimovic and Henrik Larsson will have to keep changing their healthy euro earnings into kronor at least until 2010. We believe that the Swedes would have been better advised to vote 'Ja'; if they had, the country would probably now be enjoying lower interest rates than it actually has. This would have benefited consumption and investment. Nevertheless, the short-term effects of remaining outside the euro zone should not be unduly great, so we expect reasonable growth in the

5 4 3 2 1 0 2004 Bulgaria Denmark Italy 2005 Sweden

Economically preferred outcome

On the basis of forecast GDP growth in 2004 and 2005

Swedish economy this year and next. Italys economic performance this year looks set to be the worst of the four by some

1. Italy* 2. Denmark* 3. Sweden 4. Bulgaria * Through to quarter-finals

way, even without taking the population aging problem into account. Giovanni Trappatonis team therefore tops our group table. The tussle for second looks like going to the wire. Denmark and Sweden are very well matched, but the Danes start from a weaker position, with virtually no growth last year. So we feel that Denmark needs a push that little bit more. The Bulgarians trail in last, because their economy is doing fine without a victory boost.

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Group D: The new Europe against the old! Of the ten countries that joined the European Union on 1 May, only two have made it to Group D the finals of Euro 2004: the Czech Republic and Latvia. And fate has placed them both in the same first-round group, where they will be up against two countries who have been part of the European experiment since the outset in 1957: the Netherlands and
Area ('000 km) Latvia Czech Republic Netherlands Germany 64.6 78.9 41.5 357.0 Population (mln) 2.3 10.2 16.3 82.4 GDP (bln) 11.6 75.7 453.8 2132.1 GDP growth 4.3 2.9

Germany. Germany is easily the biggest of the four countries, in terms of GDP, population and area. The Netherlands is ahead of the two newcomers in population and GDP, but geographically smaller than either. Despite the backdrop of global stagnation, the Latvian economy has been growing at an

-0.7 -0.1

annual rate of more than 4 per cent in recent years. Little Latvia and its neighbour Lithuania share the distinction of being the fastest growing new EU member state. Growth is driven to a significant extent by the service sector, which benefits from the volume of goods passing through the port of Riga. We expect Latvia to maintain its strong growth this year and next. Wages in the country are very low and the open economy looks set to benefit from the new trade opportunities created by EU membership.

* GDP is expressed in billions of euros; GDP and GDP growth figures relate to 2003. Sources: EIU, Eurostat, www.euro2000.com

Forecast GDP growth

ABN AMRO estimates
5 4 3 2 1 0 2004 Latvia The Netherlands 2005 Czech Republic Germany

The second new EU state in group D, the Czech Republic, has had the lowest economic growth of all ten accession countries in recent years. In the late 1990s, Czech growth was even below the average for the old European Union. Nevertheless, we believe that the largest of the former Eastern Bloc EU-member states can now look forward to several good years. The low pay and price levels and the countrys central location within Europe have already attracted various foreign companies, including Volkswagen and Philips, to open plants in the Czech Republic, and we expect this trend to continue. Germany, the country that lost in the final of the last World Cup, has been the biggest and most serious cause for concern on the economic map of Europe for several years. The country accounts for more than a quarter of the EUs GDP, and is the Netherlands main trading partner. Very weak domestic demand in the German economy over the last two years has resulted in negligible growth. For this year and next, we are forecasting that investment and consumption will start to rise again, resulting in a return of GDP growth to in excess of 1 per cent. Between failing to qualify for the 2002 World Cup in Japan and South Korea1 and booking a place at Euro 2004, the Netherlands did not witness any economic growth whatsoever. Only since the last quarter of 2003, after the Scots had been sent home on the back of a six-nil mauling, has there been any growth worth speaking of. Yet it seems that problems remain. The government is cutting back on expenditure, consumers are reluctant to part with their cash, the businesses community has a cautious approach to new investment and exports are hampered by the countrys impaired competitiveness.

Economically preferred outcome

On the basis of forecast GDP growth in 2004 and 2005

1. The Netherlands* 2. Germany* 3. Czech Republic 4. Latvia * Through to quarter-finals

The economic growth differential between the top and bottom nations is bigger in group D than in any other first-round group. While the Czech Republic and Latvia are expected to put on a major growth spurt, Germany and the Netherlands will need to work hard to increase GDP at all. Prospects are slightly gloomier for the Netherlands than for Germany. Which is why we want to see the orange army top group D.

Despite the presence of several ABN AMRO economists, the boys in orange lost the decisive game in Dublin.

June 2004

Euro 2004 special

Consumer confidence
10 0 -10 -20 -30 -40 -50 2000 2001 Portugal 2002 2003 2004 France

Confidence during and following the quarter-finals So far, we have assessed the various countries on the basis of forecast economic growth. Winning Euro 2004 could have a positive influence on GDP growth, but only if confidence actually rises in the victorious nation as a result. For the quarter-finals, we look at the trends in consumer and producer confidence in the recent past. Countries affected by crises in confidence stand to gain more from a quarter-final success than countries where people foresee a bright future. If everything goes according to our economic wishes, Portugal and France will contest the first quarter-final in Lisbon on 24 June. The top graph on this page shows that the Portuguese are in more need of a confidence-booster than their French opponents. This remains the case despite FC Portos Champions League semi-final win over Olympique Lyon and their final win over AS Monaco. Producer confidence is also higher in France than in Portugal, so we are hoping to see the host country go through2.
1 2 6 0 -6 -12 -18

Producer confidence indicator (March 2004): Portugal - 10 France -5

Consumer confidence
30 15 0 -15 -30 -45 2000 2001 Spain (r.s.)
Producer confidence indicator: Spain -3 Switzerland + 12

Picking a favourite for the second match, Spain against Switzerland, is less straightforward, because there are no directly comparable figures on confidence in the two countries. Whats more, if a comparison is made by plotting the data that is available on a graph, it turns out that there is little to choose between the two countries. Both consumer and producer confidence in Spain and Switzerland have followed a similar pattern for quite some time. Only in recent months has the Swiss business community begun to recover its confidence to a significant extent. Nevertheless, we expect stronger growth in Spain than in Switzerland, continuing the trend seen in recent years. We are therefore shouting for the Alpine country to win through to the semis. Germanys clash with Italy has the makings of a classic. A year ago, the Italians were

2002

2003

2004

Switserland (l.s.)

Consumer confidence
10 0 -10 -20 -30 2000 2001 Italy 2002 2003 2004 Germany

the more positive, but the Parmalat crisis and the early exit of the nations club sides from European competition have dampened the mood. Meanwhile, things are starting to look up in Germany. Since Roy Makaay moved to the Bundesliga and keeper Rein van Duijnhoven began breaking one record after another at VFL Bochum, prospects for the Germans have been improving. Nevertheless, it is Germany we want to see progress, because producer confidence there is currently much lower than in Italy. Our fourth quarter-final pairs the Netherlands with Denmark. And we are rooting for the Dutch not because of any national bias, of course, but as economists. Despite a slight improvement in confidence over recent months, Dutch families remain less positive than their Danish counterparts. One of the main reasons for the low levels of consumer confidence is rapidly rising unemployment among footballers and other groups. Producers are also more pessimistic in the Netherlands than in Denmark. Following the example set by nearly every Dutch football star since Cruijff, more and more of the countrys entrepreneurs are looking to ply their trade abroad. A semi-final berth would therefore provide a very welcome uplift for the Netherlands.

Producer confidence indicator: Italy -4 Germany - 11

Consumer confidence
40 20 0 -20 2000 2001 Denmark
Producer confidence indicator: Netherlands -4 Denmark +1

2002

2003

2004
2 For

The Netherlands

gauging both consumer and producer confidence, we use Eurostat indicators wherever possible, because they are more readily comparable with one another than national data. Where Switzerland is concerned, however, no Eurostat confidence figures were available. We have therefore worked on the basis of twice the national figure.

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The semi-finals, 'mass equals cash' The excitement mounts. Just four eurozone countries are left to fight for the ultimate prize, with Germany and Portugal the first semi-final pairing. As previously indicated, Portugal has been the weakest economy in recent years. Furthermore, consumer confidence there is lower than in Germany. On the other hand, the economic growth prospects for the next few years look better for Portugal than for the triple world champions. Ultimately, however, the size of its economy has persuaded us to give Germany a place in the final. The German economy is more than sixteen times the size of Portugals. So, if reaching the final brings a slight economic benefit in percentage terms, a German win is worth significantly more in absolute cash terms than a Portuguese win. The eurozone as a whole therefore stands to gain more from the Germans progressing. The second semi matches the Netherlands against Switzerland: the two slowestgrowing economies of all sixteen competing nations. In fact, both countries experienced significant GDP contraction last year. Both could therefore really do with making it to the final. Choosing between them on the basis of forecast growth and/or consumer confidence is not easy, so again the size of the two economies has been decisive in our choice. Dutch GDP is more than one and a half times Swiss GDP, so Dick Advocaats men get our vote ahead of the team led by Swiss manager Jakob Kuhn. The Final: Munich revisited or Gelsenkirchen? Our special reports for both Euro 2000 and the 2002 World Cup came down in favour of Germany taking the title. And, once again, the great but ailing economic and footballing power is through to the last two, emphasising what outstanding tournament players the Germans are. This years opponents are the Netherlands, never previously among our economic favourites. Which is easily explained by the fact that we didnt take part in the last World Cup, and four year ago the nation was still in the latter stages of the last economic growth cycle. If we focus exclusively on the economic cycle in the eurozone during the years ahead, a German triumph again appears the most favourable outcome. The German economy is the largest in the eurozone, and a positive impulse would be very welcome. In this sense, the Netherlands would actually benefit from losing in the final. Increased economic growth in Germany would result in a greater flow of goods and services from the Netherlands, pushing up Dutch GDP. But, if the cyclical position is important, the structural situation is critical. The inflexibility of the German economy and the need for reform are widely recognised. Just a few weeks ago president Horst Khler once more made clear that he was worried about the German economy, because reforms in for example the labour market and social security had still not taken place. In that respect, there is a clear parallel between football and business. Dutch football is renowned for skilful attacking play and a high level of goal-scoring productivity. Furthermore, great emphasis is placed on coaching young players3. In Germany, by contrast, football has traditionally been all about hard work. For many years, the work ethic of successive German teams has brought success, but globalisation of the game means that the modern player needs a wider

A relatively large proportion of the Dutch population is educated to a high level and productivity is significantly higher than in Germany.
3

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range of abilities. A left back has to be able to attack as well as defend with Brazils Roberto Carlos the perfect example. This implies a difficult process of change, especially for Germanys hardworking professionals if the nation is to retain its dominant position in the long term. The question is whether the Germans are able to respond to the new circumstances. If Germany were to win Euro 2004, this could give the impression that all was well, that reform wasnt actually needed. A national triumph and a boost for German GDP might therefore have the effect of postponing economic reform, certainly when taking into account the resistance to it by many Germans. At the end of three weeks of soccer we end up with only one country which we feel should win the European title and that's the Netherlands!!!

ABN AMRO Economics Department Tel. +31 20 628 04 91 harrie.dielen@nl.abnamro.com

June 2004