Misjudging the Football Transfer System

In 1995, the Bosman ruling put an end to transfer fees for out-of-contract players. This year, the Court of Justice of the EU (CJEU) is dealing with the Diarra case, which concerns players still under contract. The Advocate General (AG) has already given the Opinion, which seems to increase the chance that the upcoming ruling of the CJEU will further weaken the transfer system. In this blog, I argue that both the Bosman ruling and the AG Opinion in Diarra are fundamentally flawed. The reason is that they focus too much on the labour market and the freedom of movement of workers and neglect the fact that the football transfer system enhances competition in consumer markets at the benefit of smaller clubs and the football fans.

The transfer system: an economic analysis

When a professional player moves from one club to another, the first club can demand a transfer fee. In the pre-Bosman system, this rule pertained to all professional players. In the post-Bosman system, it only pertains to players still under contract. The evidence shows that in both systems, the amount of transfer fees flowing from large clubs to small clubs exceeds (exceeded) the amount flowing in the opposite direction. A reason is that many talented young players move from small to large clubs at a substantial transfer fee. In this way, transfer fee systems redistribute income from large to small clubs. The latter clubs can use their net benefits from the system to offer players higher salaries (and invest in other things, such as training facilities), thus improving their squads. As a result, they can better compete with large clubs on the pitch. In other words, the two transfer systems above improve the competitive balance on the playing fields. The pre-Bosman system is improving it most strongly; Bosman has reduced the size of this effect.

It is highly plausible that, in recent years, the competitive balance has been below the level that maximizes the pleasure of football fans. In relation to this, (total) welfare is lower than it could be. This supports the well-known argument that the need for competitive balance is one of the specific characteristics of sports that should be protected in the public interest. It follows from the above that a transfer system can be helpful here.

This blog, however, focuses on another point: lower competitive balance leads to less competition in consumer markets. This can be explained as follows. Lower competitive balance means, by definition, that the number of teams with a realistic chance of winning one or more important prizes declines. Consequently, there is less choice for the many consumers who want to become fans of, or watch, a club from their own country that can win important trophies. This means there will be less competition in consumer markets, especially in national consumer markets where domestic clubs compete for domestic consumers. This leads to higher prices, which, in turn, reduces consumption and therefore welfare.

It follows from the above that both the pre-Bosman and the post-Bosman transfer systems improve competition in consumer markets, but Bosman has reduced the size of this effect.

The Bosman ruling was flawed

In the 1995 Bosman case, the European Court of Justice (ECJ) prohibited transfer fees for out-of-contract players because they harmed the free movement of workers and were therefore incompatible with then Article 48 of the EC Treaty.

At the time, the main counterargument of the football authorities was that the transfer system improves competitive balance which is one of the specific features of the sports that should be protected in the public interest. The ECJ agreed that this could be a reason for not applying Article 48, but only if the system (also) met the condition of proportionality. The ECJ then argued that this condition was not met. Thus, the argument relating to the specific features of the sports, which can be seen as being based on soft law, did not override the argument from the hard free movement law of Article 48.

However, as explained above, a lower competitive balance means less competition in consumer markets and, therefore, higher consumer prices. This implies that the protection of competitive balance is important not only in the context of soft law but also within the scope of hard competition law. From this perspective, the argument of the ECJ against the transfer system, which was based on hard free movement law, should have been weighed against the combination of (1) the argument about the specific features of the sports as being based on soft law, and (2) the argument that the transfer system improves the competition in consumer markets and therefore deserves protection on the basis of hard competition law. Such a view might have fully changed the ruling. However, while the ECJ paid much attention to competition in the players’ market and the interests of players, it neglected the competition in consumer markets and the related interests of consumers. Therefore, the Bosman ruling was flawed.

On the contrary, one could argue for alternative measures that improve competitive balance and consequently market competition without harming the free movement of workers. (In 1995, the ECJ also spoke about the availability of such alternative measures to justify its idea that the transfer system did not meet the condition of proportionality.) In my view, the availability of alternative measures can only be a convincing argument in a hypothetical world in which power plays no role. Court rulings, however, should concern the real world. The larger football clubs are, and have been, successfully using their power to prevent UEFA from implementing measures for improving competitive balance (to a serious extent). The reason is that they want to become stronger on the pitch themselves, which also implies that they get more market power in consumer markets and can charge higher prices there. Thus, alternative measures are not available to UEFA or the smaller clubs.

In fact, the Bosman ruling has helped the big clubs to reduce market competition. The cheapest adult season ticket of Arsenal costs no less than 1,073 pounds at present. Ticket prices of other English top clubs are also very high nowadays. This is partly the result of the fact that, at present, England has only a small number of clubs that can offer their fans the prospect of winning the English title one day. This, in turn, is partly the result of the Bosman ruling. The ECJ, however, did not even discuss this problem. Clearly then, the ECJ did not do justice to the football fans.

The AG Opinion in Diarra is equally flawed

Lassana Diarra was a French player who signed a four-year contract with Lokomotiv Moscow in 2013. In 2014, however, he terminated the contract without just cause (according to the club). Therefore, FIFA decided that the player and/or any new club that might sign him should pay a high compensation (of 10.5 million euros) to Lokomotiv Moscow. However, no compensation was paid, and consequently Diarra was denied an International Transfer Certificate. This implied he could not play for any club in the 2014/15 season, losing income as a Belgian club would have liked to sign him. In 2015, Diarra brought a proceeding against FIFA before a Belgian Court, asking for compensation for his losses. After some proceedings, the Court of Appeal of Mons has requested the CJEU for a preliminary ruling. On 30 April this year, AG Szpunar gave his Opinion on the case.

The Opinion focuses on the FIFA transfer rules for players who have an ongoing contract with a club. According to these rules, a player and a new club that signs him are jointly and severally liable for a possibly high compensation to the old club. In case of non-compliance, FIFA and its member associations can impose heavy sanctions on the player and the new club. According to the AG, these rules restrict the freedom of movement of workers and the competition between clubs in the market for the acquisition of players. This implies they are incompatible with Article 45 TFEU and Article 101 TFEU at first sight at least.

Of course, the AG also discusses the question whether there are reasons for allowing the transfer rules nevertheless. One reason could be the old argument that the specific characteristics of the sport, for example, the need for competitive balance, should be protected in the public interest However, the AG is even more critical regarding this argument than the ECJ in 1995. He argues that the transfer rules constitute a restriction of competition by object, and he agrees with the relatively new view that the specific characteristics of the sports can only be a reason for allowing rules that restrict competition if the rules constitute a restriction of competition by effect (for a full description of the argument of the AG, see Weatherill, 2024). Accordingly, it is not unlikely that the upcoming ruling of the CJEU will strongly weaken the transfer system. In this context, Weatherill (2024) criticizes the way the AG deals with the specific characteristics of the sports, while Houben et al. (2024) are more positive (see also Houben, 2024).

This blog emphasizes a different point. The AG Opinion is flawed for the same reason as the Bosman ruling. The transfer system improves competitive balance. A higher competitive balance means more competition in consumer markets. Therefore, the protection of competitive balance falls within the scope of hard competition law, especially Article 101 TFEU. This means that the arguments of AG Szpunar against the transfer system, which are based on the hard free movement and competition law, should have been weighed against the combination of (1) the old argument about the specific features of the sports and the public interest, and (2) the argument that the transfer system improves the competition in consumer markets, which is based on hard competition law. This would have led to a much better analysis.

Conclusion

One of the most important aims of competition law is to promote welfare by contributing to an economy where producers offer consumers high-quality products at (relatively) low prices. Given this aim, it is highly remarkable that both the Bosman ruling and the AG Opinion in Diarra fully neglect the fact that a transfer system promotes competition in consumer markets, thus causing lower prices for consumers and higher welfare. Whether this fact, combined with the old argument about the specific features of the sports, is sufficient to counterbalance the fact that the transfer system reduces the freedom of movement of players and the competition in the players market, is open for debate. However, there can be no doubt that rulings on the transfer system that do not even consider the competition in the consumer markets and the related interests of football fans are far off the mark.