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Capital Markets

Germany, France or the Netherlands should win the euro championships, an economist take

ABN Amro answers the most pressing question facing global markets: who will win the euro championships, while the ECB notes its impact on stock market trading.


It''s the UEFA Euro championships 2012 and thus the season for lazy - but satisfying - jibes about whether sporting prowess is correlated with economic strength. Cue gags about Greece and Spain and their respective euro prospects. In a similar vein, the football-obsessed ABN Amro research team, in a wholly unironic research piece, have fleshed out various contagion and, conversely, confidence-boosting scenarios in the event a eurozone member emerges as the victor.


Firstly, economists at the state-owned eurozone bank brandish their public service credentials by pleading that a eurozone member should prevail at the tournament. From an economic perspective, of course:



"From an economic perspective, our starting point is the eurocrisis. In our view it would be very good for the world economy,for Europe and for the Netherlands as an open, export oriented economy if the eurozone survives the current crisis and remains intact as much as possible. The euro crisis is largely a crisis of confidence. Each time financial markets worry about the sustainability of the eurozone countries’ debt levels, it fuels doubts about the sustainability of the monetary union in its current form. Therefore, from a confidence point of view, we believe it would be best if one of the eurozone countries won Euro 2012. A victory for one of the opt-out countries (Denmark, England, Sweden) would not be welcome, because it would only encourage the eurosceptics. The question that immediately arises is whether one of the peripheral eurozone countries or one of the core countries should win."


It seems that senior emerging markets economist - and avowed football fan - Arjen van Dijkhuizen is more concerned about the spread of contagion than buoying the periphery:



"It is true that the probability of a Greek exit has recently increased again, along with the attendant risks. And perhaps a Euro 2012 victory for one of the peripheral countries would give their self-confidence a boost. But in our view it is imperative that the contagion does not spread to the core countries, because the eurozone is not sufficiently prepared to deal with that scenario

...

Therefore, from an economic perspective we believe it would be best if Germany, France or the Netherlands won Euro 2012, on the assumption that a victory for one of these countries would strengthen the conviction that the eurozone core is sufficiently robust and that the monetary union can survive. Of the core countries, France is closest to the “firing line” of the periphery. It has already lost its AAA status at S&P, and the markets are keeping a close eye on the direction it will take under its new socialist president François Hollande.."

So, the French should win from an economic perspective - a sentiment perhaps not shared by any England fans waiting tentatively for kickoff today -  but what say the math?



"''''Never change a winning team'''' is a favourite saying in the football world. Two years ago we accurately predicted that Spain would win the World Cup. So it would seem prudent to use the same prediction method this time. But we will not do so, not least because the previous prediction method was geared to a World Cup and not a European Championship. We are therefore basing our prediction on the above-mentioned all-time European Championship rankings and the latest FIFA rankings. But we also include our own ‘form ranking’, which is derived from the FIFA rankings and based on the scores since 2011. The table below shows the relevant figures and the outcome is clear enough. Germany and Spain have the best credentials, followed at some distance by the Netherlands. And bearing in mind the form trend (the Spanish team is older and seems to be nearing a saturation point; the German team is younger, this generation has not yet won a tournament and die Mannschaft is playing relatively close to home), we pick Germany to win Euro 2012."

And if anyone thinks that the bank''s economists have better things to do than predict football results, they should take a look at  a recent - and eminently informative - ECB research paper examining the links between the 2010 World Cup and stock trading:



At the 2010 FIFA World Cup in South Africa, many soccer matches were played during stock market trading hours, providing us with a natural experiment to analyze fluctuations in investor attention. Using minute‐by‐minute trading data for fifteen international stock exchanges, we present three key findings. First, when the national team was playing, the number of trades dropped by 45%, while volumes were 55% lower. Second, market activity was influenced by match events. For instance, a goal caused an additional drop in trading activity by 5%. The magnitude of this reduction resembles what is observed during lunchtime, and as such might not be indicative for shifts in attention. However, our third finding is that the comovement between national and global stock market returns decreased by over 20% during World Cup matches, whereas no comparable decoupling can be found during lunchtime. We conclude that stock markets were following developments on the soccer pitch rather than in the trading pit, leading to a changed price formation process.

And, in the unlikely scenario of a non-eurozone football team emerging victorious, we wonder if any subsequent psychological damage, which ABN Amro describes, will have an impact on FX trading..

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