Global recovery brings opportunities for emerging markets

A policy push to improve education and productivity can stop a slowdown in growth

Martin Wolf

The world economy is enjoying a synchronised recovery. This is good news for emerging and developing countries. It is also an opportunity. A slowdown in the potential rate of growth is affecting many of these countries. This is not only the result of demographic change, but also of a weakening in productivity growth. They need to tackle this urgently.The World Bank’s latest Global Economic Prospects draws the picture. At market prices, global growth is thought to have been 3 per cent in 2017, with emerging and developing countries reaching 4.3 per cent.

This year it is forecast to reach 3.1 per cent, with that of emerging and developing countries reaching 4.5 per cent.

 Martin Wolf Trade growth charts

As always, Asia is expected to grow fastest. Elsewhere, performance is less encouraging.

Commodity-exporting emerging and developing economies are forecast to grow only 2.7 per cent this year, up from 1.8 per cent in 2017. The Latin American and Caribbean region is forecast to grow only 2 per cent this year, up from 0.9 per cent in 2017. Brazil is climbing only slowly out of a deep recession. Growth in Sub-Saharan Africa and the Middle East and north Africa is also forecast to remain slow, at 3.2 and 3 per cent, respectively.The good news, however, is that global conditions are conducive to widely-shared growth. Commodity prices have rebounded. Trade has recovered, supported by the strengthening of investment. The volume of world trade is estimated to have grown 4.3 per cent last year and is forecast to grow 4 per cent this year. Capital flows to emerging economies strengthened in 2016 and again in 2017. The recent increase has been in portfolio flows and other lending, but more than half is in the more stable (and more beneficial) form of foreign direct investment. (See charts.)

Martin Wolf Trade growth charts

As the report rightly points out, the evident downside risks of “financial stress, increased protectionism, and rising geopolitical tensions” threaten emerging and developing countries.

The biggest have room to respond to untoward external developments. China and India have shown the ability to manage adverse external developments. The same is not true for most other emerging and developing countries, even large ones such as Brazil or Russia. These countries may hope for a benign external environment; but if another crisis comes, they are likely to be hurt.What they can do is improve their underlying dynamism, which should also increase resilience. It is upon this that the report focuses. The slowdown in potential growth of the high-income countries due to ageing and the weakening growth of productivity is well known. The not dissimilar slowdown in emerging and developing countries is less so. Yet that slowdown is more disturbing.

Martin Wolf Trade growth charts

Emerging and developing countries have greater need for fast growth than high-income countries, because they are still so poor. Moreover, they should have a larger potential for growth, because of their ability (at least in theory) to catch up on the productivity levels of high-income countries.Yet the potential rate of growth of emerging and developing countries is slowing. The World Bank forecasts potential growth of emerging and developing economies at an average of 4.3 per cent between 2018 and 2027. This is 0.5 percentage points below the 2013-17 average and 0.9 percentage points below its average of a decade ago. Moreover, this slowdown is widely shared: between 2013 and 2017 potential growth was below its longer-term average in almost half of all emerging and developing countries.

Martin Wolf Trade growth charts

The slowdown in these economies partly reflects ageing, as is true in high-income countries.

Weak investment and slower growth of “total factor productivity” — a measure of the output generated by a given quantity of labour and capital — also drive the slowdown in these countries’ potential growth.Without significant policy changes, this slowdown is very likely to occur. Ageing of the population will proceed in most emerging and developing countries. Some of the slowdown of growth in total factor productivity might also be inevitable. It might have slowed because the information and communications technologies of the 1990s, especially the internet, have matured. The slowdown in the unbundling of production across borders may also be weakening the diffusion of technology and other know-how. Ageing workforces may be less adaptable. The growth of total factor productivity is also linked to the growth of investment. But, since 2010, investment growth has slowed sharply in emerging and developing countries, from double-digit rates in the wake of the global financial crisis to a post-crisis low of just 3 per cent in 2016.

Martin Wolf Trade growth charts

Yet determined policy might offset the forecast slowdown in potential growth. Improving the quality of the labour force is possible, for example. Completion rates in secondary education are closing on levels in high-income countries. But substantial room exists for further improvement in the quality and quantity of education, especially at the tertiary level, as well as in female participation in the labour force. Transforming the quality of the policy environment and of governmental institutions, not least of the legal system and regulation, might also be very helpful. The outcome should be greater entrepreneurial effort, more competition, higher investment and faster improvements in productivity. Emerging and developing economies should use today’s buoyant global growth to encourage higher investment and make reforms needed to raise productivity growth. They should act now. Economic sunshine never lasts. They should expect stormier weather ahead.

Europe’s Doom Loop in Reverse

Daniel Gros  

Banca D'italia in Milan

BRUSSELS – During the 2011-2012 euro crisis, the currency area became mired in a “doom loop,” in which weak banks in financially distressed countries rationed credit, causing a recession that intensified pressure on government finances, which were already burdened by the need to cover banks’ losses. But such self-reinforcing spirals can also operate in the opposite direction. Understanding these dynamics may be the key to determining the eurozone’s relative strength today.

In a doom loop, the expectations of default drive up risk premia until the economy reaches the brink of collapse, even if the underlying problems could be managed over time. At a certain point, when the gulf between financial-market pessimism and economic reality becomes too large, the market becomes ready for a reversal.

This was the case for the eurozone during the summer of 2012. European Central Bank President Mario Draghi’s pledge to do “whatever it takes” to prevent the euro from disintegrating reassured markets so effectively because investors’ fear was largely based, to paraphrase US President Franklin D. Roosevelt, on “fear itself.”

Draghi’s intervention marked the start of a new cycle: the doom loop reversed, and became a benign credit cycle in which lower risk premia allowed both banks and governments to refinance at lower rates, making more credit available to the economy and thereby fueling a recovery that increased government revenue. Governments in most of the eurozone countries that had previously been stuck in the doom loop were able to stabilize public finances without further expenditure cuts.

But this positive credit cycle is less visible than the doom loop, because it takes a lot less time to cut the number of borrowers and push the economy into a recession than to foster a recovery when credit becomes available again. Even if over-stretched borrowers can spend and invest, they most likely won’t do so right away. But, given time, easier credit conditions rarely fail to generate a recovery.

The ECB’s vast program of quantitative easing (QE), initiated in March 2015, reinforced the virtuous cycle. But the truth is that the doom loop had been reversed long before QE began. In any case, the common definition of that program – the large-scale purchase of government bonds by the ECB – is inaccurate. The ECB General Council makes the key decisions, but its policy is executed mostly by national central banks (NCBs).

Normally, all NCBs in the euro system undertake the same operations, and the results are pooled. But, when it comes to QE, each NCB buys only the bonds of its own government on its own account. The Banca d’Italia has bought only Italian government bonds, and the Bundesbank only German Bunds.

NCBs are part of their respective countries’ larger public sectors, and eventually transfer all of the profits or losses from these transactions back to their own government. So when they purchase long-term government bonds, they are acting like a subsidiary of a large corporation buying the debt of its parent company (issuing short-term liabilities to itself).

In short, the eurozone’s QE program amounts essentially to a massive asset-liability management exercise, in which (national) public debt is reshuffled from one part of the public sector (governments) to another part (the national central bank). While the sums involved are very large – a total of about €2 trillion ($2.44 trillion) so far – the real impact is minor.

Of course, the ECB claims that the QE program contributed decisively to the recovery. But the fact is that there has been little change in interest rates or risk spreads since the bond purchases started. This indicates that the end of QE – which is likely to come later this year – will not mean the end of the recovery. And, given that financial markets know that QE will end, they have already priced in that expectation.

But can today’s benign credit cycle last much longer? There may be some reason for concern; after all, the eurozone experienced a similar self-reinforcing cycle of easy credit, growth, and little pressure on government finances before the global financial crisis of 2007-2008. But it seems unlikely that the current cycle will lead to similar excesses and end in a similar bust, because the growth pattern in the peripheral eurozone countries has changed considerably.

During the pre-crisis credit boom, growth in countries like Spain and Portugal was based largely on domestic demand, financed by capital inflows. In Italy, domestic demand was less exuberant, but foreign capital was still needed at the margin to finance a large public debt. So when capital inflows suddenly stopped, these economies were thrown into crisis.

Today, however, growth in these countries is based mainly on exports, while domestic demand remains subdued. Moreover, these countries are maintaining current-account surpluses while their growth rates rise; in other words, far from relying on fickle capital inflows, they are repaying their external debt. This new, more robust growth model could be sustained until the remaining unemployment is absorbed.

No financial cycle lasts forever. But the one driving today’s recovery in the eurozone, including the peripheral countries that were hardest hit by the crisis, may be set to persist for a while yet.

Daniel Gros is Director of the Brussels-based Center for European Policy Studies. He has worked for the International Monetary Fund, and served as an economic adviser to the European Commission, the European Parliament, and the French prime minister and finance minister. He is the editor of Economie Internationale and International Finance.

Gold Jumps To Crucial Technical Level. Important Action Coming Up

After what seems like a decade in the shadow of tech stocks and cryptocurrencies, gold and silver are rocking again. Which of course leaves everyone wondering if this is the beginning of the long-awaited epic run, or just a head fake preceding yet another grinding, protracted, soul-sucking decline.

The following chart has a couple of technical indicators that, if history still matters, shed some light on the challenges gold now faces. The first is the 50-day moving average, shown here as the thin line that tracks the more colorful price line. Note how when gold’s price spikes above the moving average, it is, in technical terms, “overbought.” In other words, it’s ahead of itself and has to fall to get back into sync with longer-term momentum.

In late 2017 gold pierced its moving average and kept on going, and is now far into overbought territory. That’s a negative.

The second indicator is the $1,360/oz level, which seems to represent serious resistance. Whenever gold has gotten close (or briefly spiked above) this number, it’s been quickly smacked back down. As this is written on the evening of January 24, gold is at $1,362. Again, negative.

Bull markets frequently progress through a series of such tests, with a security or asset class trying and failing to break through – until finally it does. After which it rallies to the next, much higher resistance level.

Where is gold in this process? Will it have to bounce off more technical barriers before, someday in the indeterminate future, rising to its intrinsic value of $5,000 – $10,000? Or will today’s overwhelmingly positive fundamentals (spiraling global debt, rising inflation, the falling dollar, cryptocurrency profits looking for a home, Chinese and Russian gold demand, alarming geopolitical crises everywhere) bring sound money back into style sooner rather than later?

Technical analysis deals in probabilities, and based on the history of the above indicators the highest percentage bet would be to take some profits after Wednesday’s spike. But based on fundamentals — which are now a raging fire in the fiat currency theater from which everyone will soon be fleeing – selling precious metals or related mining stocks here risks missing out on what could be an epic bull market.

Put another way, technical indicators presume a consistent, continuous environment in which past is prologue. So they usually work, but become obsolete when the world changes in fundamental ways.

If a crisis (like the 2008 housing bust) decimates the financial Establishment, or a new idea (like the dot-coms or bitcoin) captures the world’s imagination, the result is a discontinuity in which old indicators lose their meaning. How many resistance levels do you think bitcoin blew through on its way to 19,000? How many support zones did Lehman Brothers pierce on its way to zero? Probably too many to count.

Gold and silver will eventually be caught up in a similar mass awakening. The only questions are when it happens and what sets it off.

The possible catalysts are multiplying, with an especially interesting new one being the gold-based cryptocurrencies now being planned that might make gold and eventually silver as portable as a credit card. Another is the panic out of bonds that will ensue if interest rates rise just a little more (1% of the global fixed income market flowing into gold would send it past $5,000 without a backward glance.).

Barring a major catalyst, the steady accumulation of debt at every level of every major society will still force a monetary reset, which is another term for massive devaluation of fiat currencies against real stuff, including gold.

As North Korea Goes Nuclear, U.S.-China Relations Sour

By Jacob L. Shapiro

The decision to attack North Korea or to allow its government to acquire nuclear weapons was always a choice between the lesser of two evils. One option brings with it the death and destruction that come with war. The other option brings with it the chance, however remote, that the United States could be nuked by an enemy state. Both options bring an additional consequence that must be taken into account: a worsening of U.S.-China relations. China promised to help with North Korea so that the U.S. wouldn’t have to choose either evil. China has failed, and the U.S. appears to be moving toward a decision to accept a nuclear North Korea. That, in turn, creates yet another decision the U.S. must make: whether to hold China accountable.   

A Reprieve, With a Condition

The U.S. has promised to get tougher on China for almost a year now. On the campaign trail, presidential candidate Donald Trump promised that, under his administration, China would not be allowed to take advantage of the U.S. through its trade practices. After Trump became president, his Cabinet excoriated China for its moves in the South China Sea and promised to push back. Then, just three months after Trump’s inauguration, while eating chocolate cake with Chinese President Xi Jinping at his Mar-a-Lago estate, Trump gave China a reprieve, albeit with one condition: that Beijing agree to help stop North Korea from acquiring nuclear missiles capable of striking the U.S.

For China, this deal was more charade than aligned interests. The government in Beijing would prefer a non-nuclear North Korea but ultimately does not consider it existential. China’s economic relationship with the United States is far more consequential. Because almost 20 percent of all Chinese exports go to the United States, the stability of China’s economy depends on access to the U.S. market. 2017 was the year Xi solidified his dictatorship over the country; he couldn’t risk its economic well-being during such a pivotal time. He therefore needed to stop the U.S. from following through on its trade-related threats. In effect, Xi paid for social stability at home with promises of Chinese cooperation on North Korea.

The issue now is that North Korea is closer than ever to having a deliverable nuclear weapon. And the closer it gets, the less valuable China’s offer of keeping Pyongyang in check becomes, and the more the U.S. begins to view China as a rival. Signs that their relationship is becoming more contentious have already appeared. In December, the U.S. released its National Security Strategy, which identified China and Russia – not North Korea – as the key threats to American security. More ominous from China’s perspective, Trump received an in-depth briefing on U.S.-China trade relations last weekend, suggesting action is coming. China has been quick to respond. Recent moves from Beijing are designed to show the U.S. government will pay the price if it follows through on Trump’s threats.

The significance of U.S.-China trade relations shouldn’t be understated. Since the Soviet Union’s collapse, economic dependence has been the only thing tying U.S. and Chinese interests together. It’s the result of a strategic decision made by both sides. China and the U.S. were enemies for the first few decades after World War II, but by the 1970s, China had come to see the Soviet Union, not the United States, as its most dangerous foe. The Nixon administration capitalized on this. Successive U.S. administrations, both Democratic and Republican, not only maintained the U.S.-China relationship but strengthened it. Even the Reagan administration, outspoken as it was against communism, encouraged economic interdependence with China in the 1980s. It was considered the glue that would bind the U.S. and China against the Soviet Union for a generation.

Of course, China’s help was not needed for a generation. As it turned out, the Soviet Union was on the verge of collapse. But U.S.-China economic interdependence couldn’t dissolve as quickly as the Soviet Union had. The spigot had already been opened, and the potential profits made it difficult to shut it off. In 1972, the year Nixon went to China, final household consumption expenditure in China was just over $59 billion. In 1990, at the end of the Cold War, it was just over $180 billion. Last year, it was $4.4 trillion, the second-highest household consumption expenditure in the world. Particularly attractive for foreign businesses is the annual growth in consumption. Since 1991, the lowest annual growth in consumption expenditure in China was 5.4 percent – higher than any year in the U.S. in the same time frame.
Charging Headlong
U.S. corporations saw the potential for growth in China as a huge opportunity. They charged headlong into the Chinese market, and they made a lot of money doing it. As a result, the U.S. and Chinese economies are more tightly linked today than at any point in history – and China is hoping to use that fact to its advantage. Now that it’s clear China can’t help on North Korea, this is China’s Plan B: to show the U.S. that it has just as much to lose from taking a harsh stance on trade relations as China does. In recent weeks, China has done this by suggesting it could slow or halt the purchase of U.S. treasuries and by taking aim at U.S. companies active in China.

The first measure – halting the purchase of U.S. treasuries – might generate some fear in the financial sector about a declining U.S. dollar but has little consequence for the U.S. economy. Last week, senior government officials told Bloomberg that China was reviewing its foreign exchange holdings and was indeed considering halting purchases of U.S. treasuries. The government has denied the report but likely didn’t mind that it set off jitters in the bond market. China can set off a lot of jitters when it leaks comments such as these, and it has a habit of doing so for political purposes. In 2011, it threatened to use its holdings of U.S. debt as “a financial weapon to teach the United States a lesson,” after the U.S. increased arms sales to Taiwan.

In reality, though, this “weapon” is fairly useless. Its holdings of U.S. securities are actually a symptom of China’s economic irrationality. China needs a place to park its foreign exchange reserves outside the Chinese economy, and U.S. debt is still considered one of the safest investments money can buy. If China were to sell a large quantity of U.S. securities, it might increase the value of the yuan – which would make Chinese exports more expensive. In addition, history shows that previous Chinese sell-offs of U.S. securities have had little effect on the U.S. From October 2015 to October 2016, China sold $140 billion in U.S. securities – about 11.1 percent of its total holdings. During that period, the yield on the 10-year bond increased by only 40 basis points – four-tenths of 1 percent. China can move markets and likes to play up its U.S. debt holdings, but this is an empty threat.

The second measure is potentially more damaging to the United States than the first. U.S. companies have made a fortune in China over the past 20 years, and many have formulated future business plans under the assumption that there is a great deal more money to make over the next 20 years. Beijing knows this and is sending a message to those companies that they access the Chinese market at the pleasure of the Chinese Communist Party. Last week, the Shanghai branch of the state cyberspace administration shut down Marriott International’s website in China because the hotel chain listed Tibet, Taiwan, Hong Kong and Macau as separate countries in a customer questionnaire. The questionnaire set off a firestorm on Chinese social media that eventually made its way to China’s Foreign Ministry. A spokesperson for the ministry said that if foreign businesses wanted to continue to do business in China, they should “respect China’s sovereignty and territorial integrity, abide by Chinese law, and respect the Chinese peoples’ feelings.”

Then, on Jan. 12, China’s aviation authority singled out the second-largest U.S. airline, Delta, for listing Taiwan and Tibet as countries on its website. It called for an investigation and an immediate apology.

American companies were not the only targets of this campaign. The cyberspace regulator also castigated Ireland-based medical device maker Medtronic and Spain-based clothing company Inditex for similar violations.
But a closer look at the U.S. businesses caught in Beijing’s crosshairs reveals they were not chosen at random. For Marriott, China is a crucial market in terms of current revenue and future growth. It owns 569 properties in the Asia-Pacific region, 300 of which are in China. The chain plans to build or acquire at least 300 more hotels there, which would mean nearly 10 percent of its properties would be located in China. In August, Marriott announced a partnership with Chinese e-commerce company Alibaba Group that would allow Chinese travelers to book rooms at Marriott hotels via Alibaba’s travel service. The deal would give Marriott access to more than 500 million new potential consumers. As for Delta, the airline is in the midst of a multi-year restructuring of its Asia-Pacific operations. It plans to move its main hub in the region from Tokyo to Shanghai – the “hub of the future” in the words of Delta’s CEO.

Marriott and Delta are not the only American companies heavily invested in the Chinese market. Boeing, for example, derived over 10 percent of its revenue from Chinese sales in 2016. Apple’s 2016 annual report noted that the U.S. and China were the only countries that accounted for more than 10 percent of the company’s net sales in the past three years. To be more precise, in 2016, “Greater China” announced for 22.4 percent of Apple’s net sales. Perhaps Apple will be next in China’s dog house. In the company’s publicly available reports, revenue for the “Greater China” segment includes China, Hong Kong and Taiwan. Should China’s Foreign Ministry read the report, it will likely be displeased that Apple has chosen to treat these parts of China as if they were separate.

U.S. businesses make a lot of money in China, and they have influence in the U.S. government. These companies do not want to be shut out of the Chinese market, and they have little concern for geopolitics. The only geopolitics these companies care about is the geopolitics that affects their bottom line. If apologizing for listing Tibet as a separate country helps their bottom line, it’s in their interest to do so. And if lobbying the U.S. government to refrain from putting pressure on the Chinese economy helps their bottom line, it’s in their interest to do so. By putting pressure on U.S. companies, China is in effect putting pressure on the U.S. government. Whether or not the U.S. decides to antagonize China on the issue of trade, U.S. and other foreign companies can expect to experience more Chinese nationalism firsthand. China’s market is so big that it can afford to be tough and expect that it will still find companies willing to kowtow to its demands.

In the early 1950s, the Korean War began as a U.S.-North Korea war and quickly became a U.S.-China war. The current North Korean crisis began as a U.S.-North Korea issue and will now become a U.S.-China issue. China sees the coming storm and is demonstrating what it can do if the Trump administration gets tough on trade, the area where the U.S. can hurt China the most. This clash is different from the North Korea crisis, where the U.S. had very limited options and China could easily manipulate the situation to its benefit. It is much more dangerous for China to duel with the U.S. over the bilateral economic relationship. At this point, however, China has little choice. It agreed to help on the North Korea issue to buy time and stall U.S. trade retaliations so Xi could consolidate his power and prepare the country for a rocky path of reform ahead. That power is about to be tested as China braces for the U.S. response.

FC Barcelona Star Lionel Messi

Tax Troubles, an Audit and a 100-Million-Euro Contract

Why is FC Barcelona paying superstar striker Lionel Messi over 100 million euros a year? Confidential documents contain evidence of more tax trouble, a questionable loan and the negotiating tricks employed by Messi's father. By SPIEGEL Staff

FC Barcelona star Lionel Messi

The City Center complex in Rosario, Argentina looks not unlike a bunker. Its low profile and plain concrete exterior is the polar opposite of flashy. Yet it still manages to attract hundreds of thousands of visitors each year, most of them gamblers. City Center is home to South America's largest casino, its mirrored galleries packed with blinking and jingling slot machines into which an army of players shove their coins.

On June 28, 2017, members of an anti-corruption unit paid a visit to the building on suspicions of money laundering. Rosario, located a four-hour drive northwest of Buenos Aires, is considered one of the key hubs for the worldwide drug trade. And where gambling is rife, mafia money isn't far away.

Lionel Messi didn't let such concerns bother him. Two days after the police raid, the five-time FIFA player-of-the-year recipient married his long-time girlfriend Antonella Roccuzzo. The entire country was obsessed with the wedding: What dress would Antonella wear? Would the pop icon Shakira, the girlfriend of Messi's teammate Gerard Piqué, sing for the couple? What would be on the menu?

The 30-year-old Messi, of course, is seen as a football god far beyond the borders of Argentina. And his story reads like a fairy tale: A boy who grew up in poverty and suffered from impaired growth, only to be discovered as a 13-year-old and brought to Europe, where he received medical treatment - and where he developed into one of the best football players in the history of the game.

Despite his fame, though, the boy from Rosario has remained approachable - a shy, friendly young man who isn't a big talker. He prefers to spend his free time with his friends and family, or with his PlayStation, leaving the more complex aspects of adult life to his advisers, his father Jorge Horacio first and foremost. Indeed, it was his father who decided in 2000 to have his diminutive son play a trial for FC Barcelona. Following intensive hormone therapy, Messi was able to develop his tremendous talent for the Catalonian club.

Thanks to Messi, the team has enjoyed the most successful era of its history, having won 30 titles thus far during the player's career. Messi himself has scored 365 goals in 400 league matches, more than any other player in the history of Spain's Primera División.

Even though Spain has been his home for almost two decades, Lionel Messi has always emphasized his deep ties to Rosario, the city where he was born and where part of his family still lives. Partly for that reason, no doubt, "La Pulga," or "The Flea," as Messi is sometimes called, returned to his hometown last summer to tie the knot at the City Center with Antonella, with whom he already has two children. Rosario's provincial airport suddenly found itself packed with private jets for the event, with the bride and groom having invited 260 guests, including almost all members of both the Argentinian national team and of FC Barcelona. A tabloid paper calculated that the market value of all the professional players in attendance exceeded 2 billion euros.

June 30 was a day in the public limelight for Lionel Messi. But the events that took place on that same day in Barcelona were strictly confidential.

And they have remained so. Until now.


Messi's new contracts, extending his tenure at FC Barcelona until 2021, were dated to the day of the star player's wedding. The deal was preceded by difficult negotiations. The old contract had been set to expire in summer 2018, at which point Messi would have been available without the need to pay a transfer fee, a horror scenario for every Barça fan.

This deep foreboding felt by FC Barcelona executives - that they would have to explain to angry fans how they ended up without their idol and without a transfer sum - is reflected in the contracts, which DER SPIEGEL has obtained. For the first time ever, a club has guaranteed a player an annual income of more than 100 million euros. By comparison, the annual revenues of a club like the German team Werder Bremen are around 120 million euros in total, from which the club must pay its entire personnel in addition to other operating costs.

Such is the gap between middle-class clubs like Bremen, which found success on the European stage as recently as the 1990s, and the gleaming global brands of today, teams that hungrily snap up the best players in the world. And this chasm is growing deeper and deeper. The turbo capitalism seen in recent years has ratcheted up the earning potential of the world's best players to obscene levels.

Yet the excessive salaries, the industry's greed and the growing disconnect between the lives lived by football stars and those lived by their fans have triggered a Europe-wide discussion: How much longer are fans going to be willing to pay increasing amounts of money for tickets, television subscriptions and jerseys just so their favorite players can earn astronomical salaries? Toni Kroos of Real Madrid earns a fixed salary of 14.5 million euros per year. Zlatan Ibrahimovic makes 22.6 million euros. Neymar rakes in 36.8 million. And Cristiano Ronaldo earns 38.2 million. Are such paydays appropriate?

Lionel Messi's new contracts with FC Barcelona promise to add yet more fuel to the fire. Yet it goes beyond the mere numbers. The history behind Messi's contracts provides a deep look into the business of top-level football, an industry which seems to have completely abandoned concepts such as congruity and probity in the scramble to hire the next global superstar.

It is a story that can be told on the basis of hundreds of internal emails from FC Barcelona in addition to account statements, remittance slips, reports, official documents, legal briefs and a large number of contracts. DER SPIEGEL received the material from the platform Football Leaks and analyzed it with partners from European Investigative Collaborations (EIC).

The documents, many of them marked confidential, shine a spotlight on the questionable business practices the Messi clan engages in. The papers also show how FC Barcelona bent over backwards to avoid losing its hero.


Lionel Messi and his father Jorge have criminal records. With the help of his father, the player evaded 4.1 million euros in taxes by using offshore companies to hide more than 10 million euros in marketing income from the Spanish tax authorities from 2007 to 2009. In summer 2016, they were each ordered to pay a large fine and sentenced to 21 months in prison. Because it was their first offense, the judges did not force them to serve their sentence.

As such, Lionel and Jorge Messi must have been particularly concerned when, even as the trial was still underway, they again ended up in the focus of Spanish tax authorities. During an audit of FC Barcelona, four agents from the Agencia Tributaria, Spain's tax office, stumbled across money transfers worth millions of euros from the club to Messi's father and to the player's nonprofit foundation, called Fundación Leo Messi, which aims to help children in need.

The Football Leaks papers show that the tax agents demanded all club documents relating to payments made to the foundation in the years 2010 to 2013. The officials demanded precise information regarding why, exactly, the club had made the payments, suspecting that they were not, in fact, donations but hidden salary payments to Messi himself.

FC Barcelona seemed unsettled by the tax authority's investigation. Out of "loyalty," as an internal email notes, the club's chief legal representative notified the Messis of the questions to which the authorities had requested answers. But Jorge Messi responded confidently: "Don't worry, we have become quite knowledgeable on these issues."

The team retained a renowned lawyer to compile a risk analysis. His draft report made it clear that the club's position in this dispute with the tax authorities was far from advantageous. As was Lionel Messi's. The lawyer believed there was a "high" probability that the tax authorities would see the millions of euros Barça transferred to Messi's foundation as salary payments and thus as an "offense."

A Significant Problem

The lawyer lists several scenarios for Lionel Messi. One of them says: "The player clears up his tax situation in its entirety before the tax authorities approach him." Messi would likely face a penalty along with the back payment, but a settlement would forestall legal proceedings for tax evasion. This scenario, the lawyer wrote, is the safest one for Messi, "also against the backdrop of the tax evasion trial he is currently facing."

Additional court proceedings wouldn't just have been a significant problem for Messi, but also for FC Barcelona. The team's entire marketing strategy is dependent on the star player, as is the team's on-field strategy.

When FC Barcelona met with Messi representatives for a first discussion of the Agencia Tributaria investigation into the player's foundation, team president Josep Maria Bartomeu implored the club's chief lawyer in an email: "Please stay at their side, quick, make sure that everything is done properly."

The lawyer who had compiled the risk analysis contacted FC Barcelona lawyers again in late July. He was concerned about the potential consequences that Lionel Messi could face: "Our view is that the risk of the player being summoned has been extremely high for several weeks and is essentially unavoidable once the authorities next visit us, no matter what happens or whether we deliver files to them or not."

In the weeks that followed, several meetings between club management and the player's tax advisers took place, with Messi's father likewise being kept abreast of developments. As President Bartomeu noted in an email, the father was "concerned." The term the two sides used when discussing the tax problems was "el asunto," or "the affair."

Even if Lionel Messi's advisers insisted that the transfers from FC Barcelona to Messi's foundation were in no way part of the player's salary, they reached a deal with the authorities. Lionel Messi paid around 12 million euros. But he already knew at the time that the club would take care of the penalty.

To do so, Barça chose an extremely questionable model.

Pain in the Neck

The draft contract shows that the club intended to loan Lionel Messi 12 million euros, money with which the player was to pay his tax debts. "Even if the sum in question will be formally paid by Señor Messi, it will be absorbed by FC Barcelona in full," the draft noted. In October 2016, Messi and the club reached agreement on the loan, and 12 million euros were wired to the player's Caixabank account.

Messi, for his part, wouldn't have to pay back the loan: He and the club had agreed on a special premium. The bonus they had agreed on, to be paid in the coming season in addition to Messi's salary, was 23.1 million euros. Of that, 9.6 million was to pay back taxes on the consulting fees received by his father with 13 million earmarked for the tax problems relating to his foundation. The net total of the bonus is roughly equal to the sum of the loan: 12 million euros.

Virtually the entirety of FC Barcelona management was involved in coming up with the solution to Messi's most recent tax difficulties - and nobody was particularly bothered by the fact that the club would be left paying the bill. Except for one: Sabine Paquer, the club's compliance officer.

Paquer spoke up in October 2016. In an internal email, she asked if the contract for Messi's loan had been checked by Barça lawyers and consultants. She returned to the issue again later, asking whether external auditors had been consulted. The compliance officer indicated that she had her doubts about the loan period, the interest rate and additional clauses pertaining to the loan.

It is safe to say that the rest of FC Barcelona's executive team viewed Sabine Paquer as a pain in the neck. That, at least, seems to be the message of the tone used by team directors when discussing her queries among themselves. Ultimately, one of them asked the CFO to please explain to "Sabine" that "the club isn't a listed company" and that "this loan could help convince Leo to extend his contract. And if we don't do it, the whole thing could become more complicated (or impossible)."

Paquer, in short, was brought into line. In an email, the CFO explained to the compliance officer how important the deal was. "We have to keep in mind that this matter has to do with the club's most important asset," he wrote. Thanks to Messi, he continued, it will likely be possible to land additional important sponsors in the future.

Ms. Paquer stood down. But the issue facing the club has by no means been resolved. The audit of FC Barcelona is ongoing.


In early 2017, shortly after Lionel Messi's wedding in Rosario, Román Gómez Ponti, FC Barcelona's chief legal representative, wrote an email to CEO Óscar Grau. It consisted of a single word, written in the subject line: "ALELUYA" - with the final A repeated 69 times. Grau replied: "Thanks to ALL for your dedication and effort. The extension of Leo Messi ... was important for the survival of FC Barcelona." President Bartomeu wrote to Messi's father Jorge: "Congratulations to everyone! Leo remains where we all want him to be."


To ensure that their superstar would remain tied to FC Barcelona beyond 2018, Bartomeu, his deputy Jordi Mestre and club CEO Grau drafted three core contracts, all of them written in Catalonian. The first was a 14-page employment contract, countersigned on behalf of Lionel Messi by his father; the second a 15-page contract with the company Leo Messi Management S.L., pertaining to the player's image rights, likewise signed by Messi's father; and the third a contract with Messi's foundation in Barcelona.

The amount of money the three contracts oblige FC Barcelona to pay is unprecedented.

If one assumes that Messi will fulfill the contract and remain a key player for Barça for the next four years, and if one-time payments like the signing bonus and loyalty bonus are broken out over the duration of the contracts, then the player is guaranteed to receive 106,347,115 euros per season. If FC Barcelona achieves a "treble" - which entails winning the Champions League, the Spanish league title and the Spanish cup all in a single season - and if Messi is crowned FIFA player-of-the-year that same year, then he stands to earn an annual salary of 122,515,205 euros.

Paying Messi's Tax Debts

The club is making it possible for him to earn almost half-a-billion euros in four years - despite the fact that Messi has already seen his 30th birthday come and go and currently finds himself on the home stretch of his career. How is such a thing possible?

In professional football, bookkeeping is often close to unadulterated magic. In the case of Messi, it is even able to transform tax debt into guaranteed salary earnings.

When FC Barcelona signed its contracts with Messi at the end of June 2017, the two sides agreed to annul the bonus payment of 23.1 million euros. In the previous year, it had been a core element of the effort to make the club responsible for Messi's tax back payments. Now, though, that sum became part of Messi's new fixed salary.

Or, to put things more plainly: The club, which has for years enjoyed millions of euros worth of tax concessions from the Spanish state, has now formalized in this monster contract its willingness to compensate the state for the latest tax debts of its star player, a man who has already been convicted once of tax evasion.

Club executives described the vast scope of the contracts in internal calculations. In one instance, they worked out that expenditures on Messi would account for 40 percent of the team's future payroll. Another document noted: "The player needs to be aware of how disproportionately high his salary is relative to the rest of the team."

Messi's father knew that he could ask for pretty much whatever he wanted for his wunderkind. The global football market has become so overheated in recent years that it would not be difficult to find a Chinese, Russian, Arab or American investor willing to meet the Messi family's demands.

Even Real Madrid, FC Barcelona's greatest rival, seems to have tried to wrest the Catalan team's star away on one occasion. The documents obtained by DER SPIEGEL tell the tale of an offer for Lionel Messi that has thus far remained secret.


On the morning of June 22, 2013, Iñigo Juárez, the lawyer tasked at the time with taking care of affairs relating to Lionel Messi, sent an email to the player's father Jorge. Juárez wrote that he had met with Real Madrid representatives in his capacity as Messi family liaison - and the lawyer added that the team in the Spanish capital was eager to buy the striker out of his contract with FC Barcelona. Messi had only just extended his contract with Barça in February 2013.

The contract stipulated a termination fee of 250 million euros. Real Madrid, Juárez wrote to Messi's father, was prepared to pay that sum as a transfer fee. According to Juárez, Real hoped to sign Lionel Messi through the end of the 2021 season and intended to pay him an average of 23.125 million euros per year for the eight seasons in question - after taxes.

The team also showed generosity when it came to image rights: Messi would be allowed to hold on to all income resulting from the contract he signed prior to the summer of 2013, Juárez wrote, a total of 20 million euros per season, according to his calculations.

"They want to quickly know what the future holds," Juárez wrote, "after all, they are willing to spend all that on your son." Real Madrid apparently proposed that a meeting take place in the coming days. "I told them that you were traveling," Juárez wrote.

But Real Madrid seems to have had an answer to that hurdle as well. And quite an extravagant one at that.

The plan according to Juárez called for chartering two private planes. The first was for the Messis, their lawyer, Real President Florentino Pérez, the team's sports director and a team lawyer. The plan called for negotiations to take place in the air, with the plane then landing at a predetermined location. One plane would take the Real officials back to Madrid while the second would be used by the Messis.

Something Fishy

The team executives had brought along two incentives, Juárez wrote. One was for Messi's father: "Your commission is fixed at 5 percent," the lawyer continued, or 16 million euros over eight years, before taxes. The other one, according to Juárez, had to do with the tax evasion investigation into Lionel Messi by public prosecutors in Barcelona, an investigation that had just been made official at the time. "They tell me that they would exert pressure on Rajoy to reach a solution for your son that is as advantageous as possible," Juárez wrote.

Mariano Rajoy had been prime minister of Spain since 2011. Was he under Real Madrid's thumb?

"I don't consider that to be particularly credible," Juárez added. Indeed, while it has repeatedly been claimed that Real Madrid's influence reaches to the highest levels of Spanish politics, written evidence is sparse. When reached for comment, Iñigo Juárez answered that the publication of internal emails is a violation of the law. Real Madrid wrote that the account is "totally false."

The episode with Real Madrid gives an indication as to the possibilities that were open to the Messi family. There seem to be no lines they won't cross, even up until today. If Juárez's account is true, Messi's father even negotiated with a Barça fan's greatest enemy to drive up his son's value.

Ultimately, of course, Lionel Messi remained in Barcelona. In May 2014, the club gave him a significant raise over the raise he had only just received the previous year. According to a draft contract DER SPIEGEL has obtained, Messi's gross guaranteed earnings rose to an average of 29.9 million euros per year.

Either go with the flow or lose out: The market for top players these days doesn't allow for weaknesses. And FC Barcelona executives were well aware in 2016 that if they wanted to have a chance of keeping Messi in Catalonia, their next offer would have to reach unprecedented dimensions. Barça likewise promised Jorge Messi an agent commission equaling 5 percent of his son's gross earnings, or more than 24 million euros in the best-case scenario.

But there was something fishy going on in summer 2017.


After Messi's father and FC Barcelona executives had all signed the contracts last summer, the club wanted to issue a statement that it had reached an agreement to keep "the best player in history" on the team until summer 2021. Messi himself was scheduled to sign his contracts as soon as he had returned from his honeymoon.

Furthermore, FC Barcelona wanted to fix a transfer fee that a club wishing to buy Messi out of his contract would have to pay: 300 million euros. Making such a fee public was "standard," CEO Óscar Grau wrote to Jorge Messi. But the father was opposed to the plan. Naming the 300 million sum "contributes absolutely nothing," he replied. He noted that he was concerned that additional details from the negotiations could be leaked or handed to the media. "It would bother me if numbers leaked out because it would only stoke unrest," Jorge Messi wrote.

FC Barcelona had planned an event on July 18 on the VIP stage at the Camp Nou stadium to announce the contract extension to the global press. Messi, fresh off a PR tour through Japan, was to sign the contract while seated next to the three team executives. In closing, President Bartomeu was to hand him a jersey reading "Leo 2021."

"We are waiting for you to confirm the date," Grau wrote to Jorge Messi on July 14. But he got no response. With time running short, Grau wrote again two days later. "It surprises me that you haven't replied," he wrote. "We would like to hold the event before we depart for the U.S.A." The team was scheduled to fly to New Jersey on July 19 for a tournament.

But Lionel Messi didn't sign.

It is possible that his father Jorge had gotten wind of the approaching excesses on the global football market. The summer in which Messi's contract was extended was like a goldrush. In early August, teammate Neymar transferred to Paris Saint-Germain for the record fee of 222 million euros while FC Barcelona bought Ousmane Dembélé from Borussia Dortmund for 145 million. Manchester United spent around 160 million on transfer fees, while AC Milan invested almost 200 million in new players. Manchester City forked out 250 million euros for new personnel.

The market had exploded.

That was good news for Jorge Messi. Such inflationary tendencies strengthened his negotiating position and led to higher income. It also allowed him to make additional demands.

Although the contract had been signed on June 30, negotiations were apparently reopened. It was only in the last weekend of November that Messi publicly signed his contract, almost five months after the "ALELUYA" email. And suddenly, club president Bartomeu was allowed to publicly mention the transfer fee, which had more than doubled to 700 million euros, apparently in response to Neymar's transfer to Paris. Jorge Messi wrote DER SPIEGEL that the contract was the result of "negotiations which took into account all relevant circumstances currently affecting the market."

After all the pressure from the tax authorities, the loan bargaining, the bonus pledges, salary negotiations and post-negotiations, one thing can be said with some certainty: When it comes to shaping a contract, Jorge Messi is almost as masterful as his son is on the football pitch.


DER SPIEGEL began its efforts to establish contact with the Messis to discuss the foundation, the audit and the record-breaking contract in early November. They did not reply. Following additional written requests for comment, a PR representative who advises one of the Messis' companies got in touch just before Christmas. He promised to speak to the lawyers, but never ultimately provided an answer.

Only after DER SPIEGEL sent a long list of questions at the beginning of last week to Jorge, Lionel and Rodrigo Messi, the player's brother, did the family respond. Jorge Messi answered for himself and on behalf of Lionel. "Me and my son have duly fulfilled our tax obligations," he wrote, adding that all payments from FC Barcelona have been properly declared by both sides. Rodrigo Messi, who is responsible for the Messi foundation in Barcelona, answered that the charitable entity has never violated the law and "has always replied timely to any request from the Spanish authorities."

The Messis did not supply comment on why Lionel Messi made a 12-million-euro back payment to the Spanish tax authorities and why the club ultimately covered the player's tax debt. FC Barcelona issued a statement saying that all money wired to Messi's foundation was for charitable purposes. "The interpretations that you or other people can make of these donations do not change this position at all." Team executives Bartomeu and Grau likewise declined to comment on why they paid their superstar's back taxes.

It would likely be incorrect to accuse Messi of being responsible for the business conduct of his confidants, for all the tricks used to heap pressure on his employer and for disregarding existing agreements because the market suddenly made it possible to rake in even more money.

The many emails and contracts show that Messi's business matters are taken care of almost exclusively by his father, his brother Rodrigo and a handful of selected lawyers. But doesn't he carry some degree of responsibility for their behavior?

After being convicted of tax evasion, the judges gave Messi another chance, through which he only barely avoided serving time. Yet even long before the verdict, he could have sorted out his business affairs with the help of independent, professional advisers. Instead, though, Messi continues to place his trust primarily in his father - with whom he sat at the defendants' table.

Rafael Buschmann, Jürgen Dahlkamp, Nicola Naber, Gunther Latsch, Jörg Schmitt and Michael Wulzinger