We all know that Europe means money. Lots of money. As a top-ranked UEFA association England holds the maximum number of European spots possible (four in the Champions League and three in the Europa), guaranteeing that seven clubs will collect the riches of continental competition each season. In 2010-11 the European adventures of just 6 clubs alone (Aston Villa did not make it through the Europa qualification round) contributed almost 7% of the Premier League’s total revenue!

The four Champions Leaguers earned €158.8m, while the two Europa clubs brought in €12.3m, in total the six clubs grossed €171.1m from the continental season. These figures only represent the TV money distributed by UEFA and do not include the extra matchday receipts, commercial partnerships, etc. The clubs are undoubtedly delighted to have done so well but there is a problem which takes some of the shine off their European bonanza; they are earning less because Europe is a mess. Distributions from the UEFA competitions are denominated in euros which English clubs must translate this back into British pound either for accounting or actual liquidity purposes. The need to exchange euros for pounds exposes the clubs to foreign exchange risk.

Foreign Exchange Risk? Is that like a ‘Shevchenko’?

Foreign exchange risk is not the risk that a 30-goal Serie A striker becomes a 0-goal Premier League striker. FX risk (or exchange rate risk) is the possibility that movements in currency rates may have an adverse affect on a firm’s foreign earnings. To illustrate, let’s set the Euro-Pound (EURGBP) exchange rate at 1.00, €1 euro buys £1 pound and vice versa. An English company that sells delicious, delicious crisps in Europe for €1 receives £1 in revenue after the exchange. If the EURGBP rate declines to 0.90, €1 euro now only gets you £0.90 pounds, each sale of crisps now only counts as £0.90 in revenue.  The English company has lost 10% simply because the value of currencies changed!

Ending in Tears

A decline in the EURGBP rate is exactly what has been happening the past year as concerns about the European economy and the integrity of the currency itself drive investors away:

The change in EURGBP year-over-year has been -9.43%. To get a sense of the potential size of the impact in terms of pounds here are the 2010/11 European earnings translated into pound terms, using the year ago EURGBP rate (0.8906):

And here are the same earnings applying the current EURGBP rate (0.8066) and the difference  between the sums:

You can see that if the UEFA distribution amounts stayed level in euro terms they would be worth approximately £14m less to English clubs just because of the currency fluctuation. This issue is unique to English clubs as all the other major leagues are in Eurozone countries. While it is likely that the value of participating in European competitions will continue to increase the instability of Europe is eroding the boost they give to England.