By Raphael Honigstein
July 07, 2011

This summer is quickly turning into one of the most frenzied transfer periods in recent years. In the Premier League alone, Manchester United, Manchester City and Liverpool have already spent a combined £77 million ($122.9M) on new players, a figure that could easily double before the end of August, as even bigger moves (Samir Nasri to Man Utd, Wesley Sneijder to Man Utd, Ezequiel Lavezzi to City, Stewart Downing to Liverpool) potentially come to fruition. Then there's Chelsea, yet to sign a new high-profile recruit, and Arsenal, who'll be eager to add to the £9 million ($14.3M) outlay for Gervinho in the wake of some high-profile departures. It's feasible that total spending among the 20 first division English teams will top £400 million ($638.8M) this year.

Over in Spain, Barcelona is busy putting together financial packages for Alexis Sanchez (Udinese) and Cesc Fábregas (Arsenal) with a combined worth of at least €70 million ($100.4M), while Real Madrid has kicked off its annual shopping-spree with the capture of Nuri Sahin (€12M/$17.2M) and Fábio Coentrão (€30M/$43M). Italian giants Internazionale and AC Milan have kept their powder dry so far but there are signs that Juventus is about to spend big on rebuilding its team. Argentina's Sergio Aguero is a mooted Bianconeri addition for €45 million ($64.5M).

Even in relatively frugal Germany, prizes have gone through the roof. Bayern Munich have invested north of €40 million ($57.4M) on new employees and are reportedly looking to add at least another €30 million ($43.1M) for Manchester City's Jérôme Boateng and Arturo Vidal (Leverkusen), who is also wanted by a number of other European super-clubs.

But why is the transfer market so hot this summer? In an interview with the Guardian, Simon Chadwick, a professor of sports business strategy and marketing at Coventry University, blames inflationary pressures resulting from global liquidity. Clubs based in emerging markets like the BRIC states, who have traditionally been net sellers, can now join the chase for quality, hold on to their own best players and thus affect the overall level of opportunity costs, he argued. "There's a limited talent pool and an increasing demand for it," Chadwick said. Furthermore, the backdrop of regulation, namely limits on squad size and on the number of not locally-trained players on the roster have increased prizes for indigenous players -- think the likes of Jordan Henderson and Phil Jones -- to all-time highs.

It's also possible to argue that what we're seeing now, especially in the Premier League, is partly a coincidence, with Man United, Chelsea, Liverpool and Chelsea all engaged in costly rebuilding exercises at the end of their particular cycles. The same holds true for Juventus and Bayern, to a certain extent, and as ever, the money spent at the very top of the market in each territory shapes prizes further down the pecking order. One or two selling clubs might make a killing, but on a whole, inflationary pressure within the leagues outweighs any fiscal stimulus. Liverpool's signing of Andy Carroll last January was a perfect example of that domino effect: the £35 million ($55.8M) asking prize for the Newcastle forward was a direct function of Chelsea's £50 million ($80M) outlay for Fernando Torres. Without the Torres deal, Liverpool would have expected to pay a slightly more reasonable fee in the region of £20-25 million ($31-39M).

It's far more difficult to square the "crazy market" (in the words of Inter sporting director Marco Branca) with new UEFA regulations designed to cap expenditure and to pressurize clubs into adopting sustainable business models, however. Experts thought that the so-called Financial Fair Play (FFP) rules that have come into force this summer -- clubs must adhere to scaled budgetary constraints that will bring them to break-even point by 2017/18 -- would lead to a tightening of belts across the continent, but the opposite seems to have happened. The public cost-cutting announcements of Barcelona president Sandro Rosell ("we will stop using ink color cartridges and save €30,000 in the process") smack of hypocrisy in light of the Spanish champions' transfer activities.

Some commentators have suggested that spending big this year was effectively a way to circumvent the regulations, since UEFA is still two years away from enforcing the regulations. By 2013/14, clubs who wish to participate in European competitions must not have run up a deficit of more than €45 million ("acceptable deviation") over the two seasons prior. "But buying players now doesn't mean they won't show up on the balance sheet two years later," explained London-based sports lawyer Daniel Geey. Transfer fees are typically written down over the length of a contract, so Jones, bought for £20 million in June, will continue to "cost" Man United £4 million ($6.4M) each season for accounting purposes -- in addition to his wages.

Geey, who has been advising clubs on the new regime, dismissed the idea that the authorities will turn a blind eye to clubs falling foul of the rules; "UEFA are determined to play hard ball if necessary," he told If that's true then the clubs must believe they can meet the requirements despite this year's splurge. "I don't believe they are willing to take a punt in this respect," said Geey. He pointed to a last-minute addition to the regulations that amounts to a get-out-clause, namely the right to exclude spending on players' wages that were signed before June 2010. Even at loss-making Manchester City and Chelsea, that rather large loophole will probably allow both clubs to come within the acceptable deviation parameters, especially if they manage to grow existing revenue streams in the interim.

In the mid- to long-term, however, when losses must become ever smaller, part of the inflationary pressure on wages and transfer fees should ease. "There will be comfort in the fact that everyone will be playing by the same rules," said Geey, "keeping up with the Jones' will be a lot easier."

Spending money on players that should be a lot cheaper in three to four years time thus seems counterintuitive. But psychology often trumps rationality in markets and the transfer market is a good case in point. Europe's leading clubs are clearly wary of their growing budgetary constraints and have decided to strike now while they still can rather than seek out cheaper, fiscally more viable targets down the line. A classic asset bubble is created in the process. But it won't last.

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