Italy scores for world economy

2006-07-11 09:35

New York - This will bring little comfort to the 60 million members of the French nation, but Italy's World Cup victory on Sunday was the best possible outcome for the world economy, as it stands to do more than a win by any of the other competing countries would have done to correct global imbalances.

That's the thesis of Dutch banking group ABN Amro, which expects the win to add 10 to 15 basis points to Italian economic growth in 2006, as a boost in confidence spills over into higher consumption and investment.

"We weren't really expecting Italy to win, but we do still believe it's the best result for the world economy," said economist Ruben van Leeuwen, co-author of ABN Amro's March report "Soccernomics," in which the bank first evaluated the macroeconomic and stock-market impact of a World Cup win.

The bank found that past figures show economic growth among soccer world champions outstrips growth in the losing finalist country, with an average "bonus" of 0.7% additional economic growth versus the prior year's gain. The losing country - this year, France - tends to suffer an average 0.3% loss compared with the previous year's growth.

Since 1970 there have been two major exceptions to the winner-takes-all rule, said van Leeuwen and report co-author Charles Kalshoven.

In 1974 and 1978, the report recalled, the German and Argentine economies, respectively, experienced sharp downturns - in the case of Argentina, a deep recession - after the national teams brought home the World Cup.

Champion countries' stock markets have also outperformed in the year of the victory, based on the last three World Cups, with an average positive return of 10% for the world champion and a negative return of 25% for the losing finalist, according to ABN Amro.

Brazil, the winner in the last World Cup in 2002, has done nicely since it beat Germany in Yokohama, Japan, according to a recent note from Jim O'Neill of Goldman Sachs. The Brazilian stock market has gained about 260% since its 2002 win, while losing finalist Germany's stock market is up a more modest 51%.

Italy's market gains

Italy's benchmark S&P/MIB index didn't exactly rally on Monday, closing up just 0.4%, with gains checked by a lower oil price that weighed on heavyweight Eni SpA (E).

But famed Turin football club Juventus outperformed, adding 6.9%. Those gains were partly because the players from the World Cup squad have increased their value through their win but also because the euphoria across the nation has led to hopes that a magistrate will be more lenient in penalising the club in an ongoing game-rigging scandal.

So why is Italy's victory so good for the world economy? Firstly, because it's good for Europe, which has lagged economic growth rates in Asia, the US and Latin America over the past few years. Stronger domestic demand within Europe would boost exports from those other regions.

That in turn would help the US shrink its crippling current-account deficit without too much economic damage - the idea being that higher demand from Europe would offset weaker demand at home.

The US deficit currently equates to an unsustainable 7% of gross domestic product, and the danger is that the eventual correction could be sharp and sudden, pushing the dollar sharply lower, sending US rates higher and tipping the US economy into a painful recession. That scenario would pose a danger to the rest of the world's economy.

An acceleration in European growth would also offer an attractive alternative investment opportunity to Asian investors, who are placing most of their money in dollars at the moment, further correcting imbalances.

Sick man of Europe

Within Europe, Italy was tapped as the best country to win because its economy, while major, is often called "the sick man of Europe". In 2005 its GDP grew just 0.1%, although it had been expected to fare better this year - even absent a favourable World Cup result.

"The Italian economy is hampered by an inflexible labour market and deteriorating competitiveness," said the ABN Amro report.

"An Italian victory in the World Cup final would boost consumer and producer confidence, and thus lead to more spending and investment. 'Made in Italy' would also reap more benefits abroad.

"This may well push economic growth upwards, which would then give the government scope to introduce economic reforms."

Germany may have lost the final, but it stands to benefit from its role as host nation, which has given a lift to the hospitality industry.

"There's direct and indirect effects, but it's also good for 'Brand Germany' in terms of the exposure it's brought," said van Leeuwen.

- Dow Jones