It’s a story of tax evasion, disappointing Spanish investments and successful German austerity. Yes, we’re talking about soccer. In case you missed it, it’s going to be an all German final in the Champions league!
Germany’s top soccer team, Bayern Munich, finished off the Spanish champions Barcelona in the semi finals. After two games, the score was 7-0. Two days before, Dortmund scraped by to send Real Madrid home too.
In ten days’ time the two German teams are off to Wembley stadium in London to show the English how to play Fussball. The winner will be crowned king of Europe’s club level football.
Meanwhile, Bayern Munich president Uli Hoeness was arrested for tax evasion. Dortmund’s Chief Executive went missing in the final minutes of his team’s semi final. Apparently he had to lock himself in the toilet to avoid a heart attack.
In the end, going to the finals is a lose/lose proposition for both German teams. They’ll have to leave England with the crowd singing ‘two world wars and one world cup‘ no matter who wins on the 26th of May.
But at least the teams have saved the world a symbolic battle between Spain and Germany in the final. In fact, you could say the German soccer dominance in Europe has settled the austerity debate once and for all.
Undeniable Proof Austerity Works
You see, Real Madrid and Barcelona might not be the number 1 and 2 teams in Europe in terms of skill. But they are number 1 and 2 globally in terms of pay per player. Average pay at Barcelona is US$8.68 million, and it’s $7.8 million at Real Madrid.
The German teams in the final spend far less. Bayern Munich has the 9th highest average pay per player at $5.9m. Dortmund, the major German team closest to your editor’s birthplace, spends ‘just’ $3.1m on average.
And yet the thrifty Germans beat the lavish Spaniards. In other words, this is conclusive evidence that austerity works.
You might find that analysis a little simplistic. But it’s actually more rigorous than what the economic academics can come up with these days.
The key academic study often touted by austerity advocates was recently exposed as faulty. A postgraduate student was told to replicate the results of Reinhart and Rogoff’s key study using their data. After a semester of failing to do so, his supervisors got exasperated and tried to find his mistake. Instead, they found an excel error in the original study.
Reinhart and Rogoff missed Belgium in one of their ‘average’ calculations, along with some other minor errors. (You’re only allowed to ignore Belgium if you’re European, and the academics aren’t.)
A new paper was published by the smug academics who found the error. They claimed that, adjusted for this error, the conclusion was the opposite of the original Reinhart and Rogoff paper. Stimulus advocates rejoiced. The case for austerity was severely weakened. And the whole scandal went global.
But since then, it’s emerged that the second study, disproving the first, is also flawed. Rather than just fixing the mistake made, the new paper changed some of the other assumptions.
In other words, football has a lot more credibility than academia in proving economic concepts these days. And its proven austerity works because the Germans beat the Spaniards.
In fact, all this explains Australia’s comparatively good economic position. The highest paying Australian team on the list is the poorly performing Gold Coast Suns at $225,565 on average per player. Talk about austerity!
All this assumes ESPN figures are correct, of course.
In A League of Their Own
Back to the centre of attention – Europe and soccer. It turns out that Real Madrid and a bunch of other clubs around Europe are under investigation for having benefitted from state aid. That’s banned under EU rules, but typical behaviour in Spain.
But how will Spain’s pride and joy perform without state aid, now that the age of austerity is upon them? The stock market shows that without government money, the French, Spanish and Dutch just can’t keep up with the Germans (blue) and British (red).
But on a more serious note, given that most people are pretty ignorant about the economy and finance, does soccer matter more than the unemployment rate and the stock market? If you just lost your government job in Spain and the papers are blaming the Germans for it, isn’t the defeat of your soccer team the last straw?
At some point, politics is going to overtake economics as Europe’s big problem. Youth unemployment rates are reaching dangerous levels. There will be political unrest. Soccer games will become (more) violent.
Australia’s Melting Pot of Fiscal Insanity
All of this leads us to Australia’s budget. The dramatic ‘drop’ in government revenue this year…
…and the responsible and necessary ‘reductions’ in spending by the Labor government…
…beg the question: Are we like the thrifty Germans or the lavish Spaniards?
The answer is that we’ve got the best of all of Europe:
- A Greek style budget delusion
- A Spanish style housing bubble
- An Irish style oversized banking industry
- A Cypriot style reliance on foreign capital
- Italian style politics
- A former socialist administrator in charge
If only we could play soccer.
The Daily Reckoning Weekend Edition
ALSO THIS WEEK in The Daily Reckoning Australia…
If you can’t remember the definition of stupidity, events this week will refresh your memory. One popular definition of stupidity is repeating the same behaviour but expecting a different result, like pushing on a door that opens by pulling. A more current and topical one would be cutting interest rates 511 times in six years.
How to Preserve ‘Family Wealth’ in a Secular Bear Market
By Vern Gowdie
The demands and stresses of your daily life allow precious little time for contemplation. Especially for such dry topics as economics and investment markets. This is a big risk. If you don’t understand where you are in market history, you’ll never see the big risks or opportunities coming.
The Federal Reserve Will Panic and Climb Even Higher
By Bill Bonner
If the Federal Reserve continues goosing up stock prices for another five years, isn’t that going to put stocks in ‘irrational exuberance’ territory? Won’t artificially low interest rates – over such a long period – create the same sort of distortions and bubbles that led to the crisis of ’08-’09 in the first place? Well…yes…of course.
One Way to Protect Yourself from a Falling Australian Dollar
By Dan Denning
A Friday article by Fed mouthpiece John Hilsenrath in the Wall Street Journal floated the idea that the Fed is looking for ways to wind down its $85 billion per month in QE in a way that doesn’t crash stocks or disrupt order in the financial markets. Financial markets were promptly disrupted.