Soccernomics

With regards to the World Cup, the Dutch Bank ABN AMRO has asked the question, "which team is our 'economic favourite', that is, the country which should become world champion in order to maximise the impact on the world economy."

Say what?

Yes they released a report on this very important issue.

So why do we do this?

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.

So ... the goal is to help the world economy. And what does the World cup have to do with global markets? Well it turns out that World Cup winners enjoy an increase in economic growth. From the report:

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.

OK so the data is kinda strange. World Cup winners experience expanding economies, World Cup runner-ups have a temporary drop in economic growth ... which then massively rebounds the following year. Hmm.

But there's more. Again, from the report:

Good performances on the soccer field often go hand in hand with performances on the stock market and in the economy. If we put aside any soccer chauvinism for the moment, and look purely at the economic boost it will generate, then which country should win the World Cup? By using several objective criteria, we will try to block out, however briefly, our support for a particular team.

I like that. This is "objective" ... we only want what's best for everyone's best interests. So what is the first conclusion that this Dutch banks makes?

Criterion 1: It has to be a European country

.... yes that was very "objective". So why? What good will this bring? Well ... you see ... it's a complicated argument.

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.

...

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.

...

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.

I get it. The US spends too much. In fact they spend money they borrowed from Asian countries. To mitigate a weak US economy we need to bolster .... Europe's economy. But why Europe? Let's examine all possible victors.

A US victory would further skew the imbalance, and an Asian victory could lead to an overheating of the region's already booming economies.

OK something is massively wrong with this analysis. If the US won, no one here would care. This would result in a zero additional increase in America's GNP. Why waste a victory on a country that just doesn't care? In addition everyone else around the world would be depressed. This would lead to a world wide recession. As for Asian teams winning it, who are you kidding (... famous last words as the South Korean team hoists the trophy ...)

But how about those South American teams?

Success for a Latin American country would not inflict much damage on the world economy, but it would not help matters much either. Only a European victory would help to mitigate a serious economic problem, namely the global imbalances.

A European team must win or we are all in big trouble. South America is just too insignificant! (Too bad Brazil). OK now we need to figure out what type of European team should win.

Criterion 2: It has to be a European country that matters

In other words a Portuguese win wouldn't make much difference. (Sorry Edgar.)

Criterion 3: It must be an economy which needs a growth impulse

We need to increase growth, boost sagging economies. In other words we should employ the "biggest bang for the buck" approach. So right now what big countries could do much better economically, but just aren't carrying their weight?

The economic final: Germany v. Italy

Ah, they didn't choose Holland after all. I guess they are trying to tell the Germans and Italians that Holland does not need petty trophies, they're economy is doing just fine thank you.

And the winner? Italy.

Yes the world is counting on Italy to win the World Cup! Did you hear that Bil?

An Italian victory in the World Cup final would make consumers and producers more confident, which would translate into higher consumption and investment. It would also help Italy to improve its image, which is good for exports. The economic impulse would make it easier for the new government - left or right, the voters will decide in April - to take decisive steps towards the necessary reforms. It would also make it easier to stay within the terms of the stability pact.

Now the only question left is who will win. Not to worry, the folks at ABN AMRO Economics Department used sophisticated models to predict the likely outcomes (i.e. they checked some online gambling parlous.) And here is what they came up with:

Click here to view a larger version.

And the winner, of course is Brazil. Now usually people are happy about Brazil winning. I mean they're just very good, and they deserve it. However, the long-term economic consequences would be devastating. But not to worry ...

The model does not take into account the home advantage enjoyed by the European teams. Since 1958 no Latin American country has been able to win the World Cup on European soil. So the clear favourite, Brazil, has not won yet, and our 'economic favourite' Italy may yet spring a surprise. An Italian World Cup victory would make a contribution to an economic upswing in Europe which would help to reduce the imbalances in the world economy. Still, as the legendary German manager Sepp Herberger was fond of saying, 'the ball is round'. Which is just as well, because if the outcome of the World Cup tournament could be determined in advance, it would not be much fun.