Between June 8 and July 1, Poland and Ukraine will co-host the European football championship. In this report, we focus on the economic champions of this tournament. What kind of benefits will the hosting countries reap?
On June 8, the opening match will start in Warsaw, Poland. The three-week tournament will end on July 1 with a final game in Kyiv, Ukraine.
At least 150mn TV viewers around the globe will join each of the 32 matches. The main sports drama is whether the Spanish team, which currently has the European title, along with the World Cup, can become the first to win two consecutive European titles. The bookkeepers' odds favor the Spanish winning the championship. The biggest threat to them is seen from Germany and the Netherlands. The lineups of other teams are very strong, with the chances of any other team taking the title (besides the top three favorites) seen at 40%.
There will be a clear winner of the championship, but who will be the economic winner? Looking at the EURO 2012 from the perspectives of Poland and Ukraine, do the benefits outweigh the costs? Generally speaking, the economic effects of such events can be divided into two categories, direct and indirect ones. The most visible direct effects are investments and a short-term increase in inbound tourism revenues. Indirect effects include an increase of the country's tourist attractiveness, growth in economic productivity resulting from the infrastructure improvement and an increase of investment attractiveness. In particular, infrastructure investments are seen as those that will pay off the most via direct and indirect effects.
For EURO 2012 roughly a million tourists will come to watch matches in person, each staying for an average 3-4 nights and spending around EUR 800. Thus tourists will bring at least EUR 800mn to both countries. In addition people will be left with improved infrastructure which they can later utilize for their own benefit.
Poland and Ukraine have together spent EUR 30.2 bn in total on infrastructure and sports venues for the best experience of football fans. As a consequence in 2011 both countries showed high growth rates for fixed capital formation (9% for Ukraine and 8.5% for Poland) which boosted growth. In the case of Poland, GDP is increased by about 2%, which is spread over a time period of 12 years. In both countries the decrease of the level of investment activities after the financial crisis was softened by EURO 2012 investments, as seen in the below graph. As for the indirect impact, we see possible positive and negative image effects ranging from a boost to local sentiment from a football success to a political boycott of the football matches in Ukraine.
Total investments related to the preparation of the UEFA EURO 2012 championship amount to PLN 85.4bn (EUR 19.8bn), or 5.2% of GDP. According to the 'Master Plan' of Polish Ministry of Sport and Tourism the vast majority, nearly 86%, is related to the development and modernization of existing transport infrastructure (roads, urban transport, railways and airports), around 5% to sports infrastructure and the rest to the hotels and others. From the perspective of the economy and its future development, this seems to be the best possible distribution of investments. Transport infrastructure investments will pay off most in Poland and Ukraine, as their infrastructures were in much worse condition compared to earlier organizers of EURO (Austria and Switzerland in 2008, Portugal in 2004). Before EURO 2012 preparations started, Poland had had the fourth lowest density of its motorway network in EU. However, it has been among the countries with the highest transport of goods. This naturally resulted in further deterioration of infrastructure quality. The same is true for the railways. According to a European Commission study, Poland does not have any high-speed railways (above 250 km/h) and has only 5% of lines adjusted to speeds above 160 km/h.
Infrastructure investments may also have a positive indirect effect. Besides increasing the efficiency of domestic producers and thus their competitiveness and overall productivity, this can attract more foreign direct investments, as the poor infrastructure was the most important factor discouraging investments in Poland, according to some surveys (e.g. one conducted by the Institute for Market Economics). Should these effects materialize, it would definitely help both countries in times when foreign direct investments plummet.
As for other investment projects, it is praiseworthy that organizers managed to reduce their share of investments in sports infrastructure to below 10%. Idle capacity of sports venues has proven to be the biggest problem organizers of mega sporting events usually struggle with after the main event. Quite often, operating such stadiums is loss-making, even leaving investment costs aside.
The massive investment activity also influences the employment rate. In an Impact report published by the Ministry of Sport and Tourism in 2010, the long-time effect is estimated to increase average employment per year by 8.2 thousand persons over a 13-year period, with a peak of 20-30 thousand additional jobs in 2012. This should help bring the unemployment rate to the government target of 12.3% at the end of the year.
And where did all the money come from? The majority of funds came from either central or local government budgets. However, a decent amount of 31% was financed via EU funds. This helped increase the net EU funds transfer from 0.9% of GDP in 2009 to 2.4% in 2011. According to the Convergence Program, this figure should decline to 0.9% in 2013. Besides its impact on the state budget, the decreasing volume of EU transfers (denominated in euro) could influence the FX rate and, in an extreme scenario, Monetary Policy Council (MPC) decisions as well. The government in the past widely used the exchange of these funds to support the zloty if necessary, exchanging them either at the central bank or on the market. Should these exchanges cease, the MPC will remain alone in its struggle for a stronger zloty and may be tempted to hike earlier. Moreover, there is one more effect that can influence MPC decisions. A temporary CPI increase will likely occur, as hotels, restaurants and retailers will react to the extraordinary inflow of customers. Even though the MPC did not refer to it, it is possible that they factored this effect in already in their surprising rate increase at the beginning of May.
Poland will also benefit from the increased number of visitors. According to Poland's Institute of Tourism, the number of visitors in 2011 amounted to 13.1mn (up from 12.4mn in 2010) and foreign expenditures in 2010 totaled PLN 31bn (EUR 7.5bn), or 2% of GDP. In this perspective, the additional 500- 700tsd tourists expected for the championship represent an amount comparable to the y/y change alone. Moreover, daily expenditure per capita averaged approx. EUR 60, while total expenditures per tourist were just EUR 300. Considering this, the expected spending of EUR 1000 per visitor seems a little bit challenging. We would rather stick to a somewhat lower number, around EUR 800. In any case, the overall effect of tourism related benefits will probably be short-lived, helping to cover extraordinary costs (e.g. security measures). As for long-term effects, they are even more disputable, in our view. The so-called Barcelona effect - an increase of the country's tourist attractiveness - is very rare and dependent on many other factors. Thus, we do not attribute any significant importance to the growth effect through tourism.
In Poland the overall EURO 2012 economic effect was estimated by the Ministry of Sport and Tourism as a 1.4-2.7% GDP increase (depending on the scenario1; the rise coming to 2.1% in the basic variant), as compared to the GDP value in 2009, while the increase is distributed over an extended period (2008-2020). The absolute value of the cumulative GDP increase amounts to PLN 18.4-36.6 billion, in 2009 prices (PLN 27.9 billion in the basic scenario), with the peak occurring in 2012, when the GDP rises by PLN 5.4-9.5 billion (2009 prices). The cumulative increase of household consumption adds up to PLN 12.8-26.7 billion, in 2009 prices (PLN 20.5 billion in the basic variant).
Could Poland benefit from EURO 2012 in any other way? One non-negligible effect is the surge of the gray economy. But, as this sector does not increase state revenues via taxes, it is very difficult to assess its precise contribution to the economy. There is still one more indirect effect, and it is not limited to host countries: Poland could benefit from any extraordinary success of its national team. Even though its FIFA ranking (32nd out of 53 UEFA members) is the worst in Group A, Poland still has a good chance to advance to the play-offs; bookmakers fancy Poland with Russia. And the play-offs are to a larger extent a matter of luck. Thus, Poland can make it with a little bit of luck to a medal position. In such cases, the winning mood stemming from the surprising success usually translates into the hard economy, increasing consumer confidence and household consumption and thus spurring economic growth, at least in the short term.