At major events such as the European Football Championship in Germany or the Olympic Games in Paris, politics is always at the forefront.
The European Football Championship began on Friday. In the opening match, Germany beat Scotland 5-1. But for the host country in particular, it is ultimately about more than just sport. The European Football Championship and the upcoming Olympic Games in Paris belong to the category of mega-events in which billions are at stake – and therefore politics is always involved. Five basic principles of economics are taken into account to advantage.
First: Lack of knowledge costs money. The contracts for mega-events are often awarded in complex application processes. On the one hand there is an international sports association, on the other hand there are the potential host cities. For the latter, the whole process is usually a one-off affair, which is why there is an information asymmetry: the host cities have less knowledge about the framework conditions of such a sporting event than the international sports associations.
This lack of knowledge, among other things, means that host cities regularly underestimate costs and end up running up large deficits. For example, the costs for the London 2012 Olympics were estimated at £2.4 billion when the bid was made in 2005, but two years later this figure had to be revised to £9.3 billion. This problem is difficult to mitigate. The best thing for host cities to do is to concentrate on recurring major events so that institutional knowledge can be built up – examples of this are the Ski World Cup in Adelboden or the WEF in Davos.
Secondly: Advantages and disadvantages are difficult to grasp. The problem of a lack of knowledge when bidding for a mega event is exacerbated by the fact that the benefits are usually vague. The arguments put forward by supporters of major events are usually difficult to quantify from an economic perspective. They are positive externalities such as an improvement in the image of the host country or the strengthening of national cohesion. For example, some people still remember the 2006 World Cup in Germany as a “summer fairytale” and the Swiss National Exhibition in 1939 is seen as the culmination of the spiritual defense of the country that was proclaimed at the time.
In addition to such elusive effects, there are also tangible effects. Major events are usually positive for the local hotel, catering and construction industries. But there are also negative external effects. In Zurich, for example, there is heated debate about hosting the cycling world championships this autumn – “Noise, crowds and stench” was the headline of a commentary in the NZZ. For residents and business people, major events come with certain restrictions. A balance of the various interests is necessary, which brings us to the next principle.
Third: The taxpayer has no lobby. As with industrial policy or tourism subsidies, the same applies to mega-events: the winners of a government measure represent a smaller group than the total number of taxpayers. This enables them to organize themselves better, which leads to an asymmetry in the political process. The result is inefficiently high public spending. Direct democratic institutions are a protective mechanism against such distortions. Very expensive projects have a hard time with the electorate – this was shown by the votes in 2013, 2017 and 2018 in Valais and Graubünden on hosting the Olympic Games.
Fourth: One-time is expensive. Speaking of costs: the really expensive are those “one-off” events that require new infrastructure. The most impressive example of this is the Olympic Games. In Athens in 2004, the Games probably cost more than double the budgeted 4.5 billion euros and contributed to Greece’s debt crisis. When hosting such a one-off event, existing infrastructure should be used wherever possible. From an economic point of view, it is even better to host an event repeatedly and with the same infrastructure in order to exploit economies of scale over time.
Fifth: Check alternatives. Anyone who has considered all the principles so far should ask themselves one final question: Could the public money for a mega-event not be better used elsewhere? The principle of opportunity costs is particularly important in times of strained public finances. The resources for the European Football Championship and the Summer Games could also have been used for national defense, tax cuts or education. This is all the more true as various studies attest that mega-events have a negative cost-benefit ratio for the economy as a whole.
Ultimately, this makes it clear: “bread and circuses” may be a political principle, but certainly not an economic one.