Economic Countdown To The Olympics 4: Would The Euro Be A Winning Team?

Tyler Durden's picture

With just a few days left until the pre-opening soccer games begin in the UK, we continue our five part series (Part 1, Part 2, Part 3) on the intersection between markets and the Olympics by considering whether an integrated Europe would have performed relatively better - i.e. would 2+2>4 - and what are the factors. Goldman's analysis of the pros and cons of 'integrating' their Olympic teams is extremely apropos the current deteriorating (yet desperately dreaming of improving) coordination of these 17 disparate nations. The answer, of course, is that there are some benefits from this medal 'integration' in specific cases but since German reunification, their medal performance has deteriorated - even in the team events where aggregating talent pools should have its greatest gains. In a 'zero-sum' context such as competing for Olympic medals, Germany's gains must come at the expense of other countries - and rather notably there are few French medal winners before or after an 'integration. Sounds familiar?

Goldman Sachs: Would the Euro area Make a Medal-Winning Olympic Team?

“Wir sind jetzt die Nummer 1 in der Welt … Jetzt kommen die Spieler aus Ostdeutschland noch dazu. … Es tut mir leid für den Rest der Welt, aber wir werden in den nächsten Jahren nicht zu besiegen sein.”

 

(trans.) “We are already the best team in the world, and now we are going to add the top players from East Germany. … It is a pity for everyone else, but we will be unbeatable for the foreseeable future.”

 

Franz Beckenbauer, speaking at the press conference following the 1990 World Cup final. In 1990, Germany was reunified (under Chancellor Helmut Kohl) and won the World Cup (under the management of Beckenbauer).

A Unified Approach to the Olympics?

If the Olympic teams of Euro area countries were to unify in the manner of their monetary policies, what impact would this have on their Olympic medal-winning performance?

Applying the logic of Franz Beckenbauer to the Euro area would suggest a significant improvement. If, as Beckenbauer expected, a united Germany would outperform the two separate Germanies, an Olympic team combining the sporting prowess of 17 Euro area countries should excel. At a minimum, on the basis of Beckenbauer’s logic, one would expect a combined Euro area team to win more medals than the sum of those won by teams from its constituent individual parts.

Integration: Pros and Cons

But there is an important caveat here. While combining forces will improve the quality of a team by widening and deepening the pool of talent from which selection can be made, it also reduces the number of entries in the competition. For a team sport like soccer, the benefits of the former are likely to outweigh the costs of the latter: hence Beckenbauer’s assertion.

In the Olympics, individual rather than team sports dominate: a unified Euro area team would have a significantly smaller number of competitors than 17 individual countries. Where margins of winning are small and (as a result) luck inevitably plays a relatively more substantial role in determining results, having fewer entrants may lower the final medal tally.

A variety of other relevant factors also support the expectation of better medal performance from a unified team:

  • The intra-Euro area competition implied by the need to select Olympic entrants from a much wider pool may force athletes to train harder simply to be selected, honing their skills in a way that makes them more competitive on the global Olympic stage. 
  • Focusing the resources of the Euro area as a whole on a smaller number of top quality athletes with a real chance of winning medals would improve the overall medal count relative to a situation where those resources are distributed over a broader set of entrants with, on average, less likelihood of taking gold. 
  • Allowing high class athletes to specialise in their best event in the knowledge that others of a similar standard will focus on other events can improve their performance and thus the overall medal return.

Against these, there are other factors which operate in the opposite direction—after all, despite Beckenbauer’s confidence, Germany has failed to add to its three World Cup triumphs since reunification:

  • One cannot deny the role that national pride plays in driving sporting excellence. In the unforgiving environment of international sport, the extra motivation taken from representing one’s country may have a decisive effect: while athletes may be inspired to extra efforts by competing for Germany or France, representing a Euro area team may not arouse the same passion—and results could suffer as a consequence.
  • Support from the stands—again, something that may make a difference when the line between success and failure is so narrow—may be less passionate for a ‘remote’ Euro area than for a home country enjoying a greater emotional connection.
  • Lastly, in order to raise their profile and status, small countries may be prepared to devote a greater share of national resources to achieve sporting success. East Germany is a case in point—although its welldocumented programme of institutionalised doping illustrates how such nationalistic ambitions can lead in dangerous and damaging directions.

German Lessons

The German experience offers some insight into how Olympic performance could be improved by unifying teams at the Euro area level. The table on the previous page shows the medals won by Germans at the Olympics before and after reunification in 1990.

At first glance, the table does not suggest that German reunification led to a significant improvement in medalwinning performance. On the contrary, East Germany alone won more medals (and more gold medals) at the six Olympic Games prior to reunification than the united Germany has won in the five Games since. The number of medals won per participant is also much lower for the unified Germany than it was for East Germany before reunification.

Looks Like Team Spirit

This first table shows overall medal performance. Given the distinction we made between team and individual events above, in the second table we focus on team sports and evaluate how reunification influenced Olympic performance in these events. It is in this domain that the benefits of integration are likely to be most pronounced.

We first compare the combined medal performance of the two German teams prior to reunification with that of a unified German team since: the difference in shown in column A of the table below. Economists call this an ‘event study’ analysis—we simply look at changes ‘before and after’. The exercise shows mixed results: better performance in hockey, but worse in football (for example).

But, as economists, we are sceptical of such simple ‘before and after’ comparisons. In our view, these exercises offer a poor guide to the impact of unification on medal-winning performance: they fail to control for other factors that have influenced German success at the Olympics over the period we are studying. Ideally, we would seek to control for these other factors and identify the impact of unification more precisely, so as to develop a more refined view of what would happen if—other things equal—teams were to unify elsewhere.

To illustrate, consider the rise of China: it only started routinely participating in the Olympics at the Los Angeles Games in 1984, but has subsequently invested heavily in improving its sporting performance (and, of course, has a vast pool of potential talent to draw upon).

Chinese entry has affected the medal-winning opportunities of other countries, including Germany. It was easier to win medals prior to 1984 (and thus before German reunification) than after. If we do not control for this effect, we would end up with a (downward) biased estimate of the impact of reunification, which would lead us to forecast too weak an impact of Euro area integration on Olympic medals won.

Economists use an approach called ‘difference-indifferences’ estimation to deal with this problem. This approach compares the change in performance in the case of interest with the change seen in a control group over the same period. The differences between these two changes in performance (i.e., the ‘difference-indifferences’) captures what is special about the case being studied, controlling for other factors that influence the control group.

To use our example above, by comparing how German medal performance changed across reunification with how (say) French medal performance changed over the same period, we purge the impact of Chinese Olympic participation from our estimate of the impact of German reunification, since both Germany and France will have been influenced by China.

Not surprisingly, the key challenge in applying this approach is to identify a good control group. Two criteria are relevant here: (1) controls should perform similarly to Germany prior to reunification; and (2) controls should not experience a spill-over from the impact of reunification on German performance.

The latter criterion is challenging: in a ‘zero sum’ context like competing for Olympic medals, Germany’s gains must come at the expense of other countries. Nonetheless, we apply this difference-in-differences approach and select France as the control. The results are shown in column B of the table on the previous page.

Across the set of sports evaluated, the results remain mixed. We do see some cases of improvement, notably in hockey. But on average we identify a deterioration in German medal-winning performance after reunification.

However, a closer look at the table reveals that France may not be a very good control group. There are few French medal winners in the sports we consider, either before or after reunification. While this suggests caution in interpreting the difference-in-differences result, evaluating the robustness of our base case by using US results as an alternative control (not shown, for brevity) does not alter the conclusions.

Benefits of Sporting Integration

Our analysis identifies benefits from sporting integration in specific cases, but these cannot be generalised across all events. On average, German medal performance at the Olympics has deteriorated since reunification, even in the team events where the benefits should have been greatest.

 

We have identified a large number of potential pros and cons of unification: to capture the benefits, one naturally needs to develop a structure that maximises the former and minimises the latter. This requires a high degree of institutional development.

 

Sounds familiar? These messages may resonate with the Euro area’s ongoing attempts to grapple with its financial and sovereign crises.

Andrew Benito and Huw Pill