June 10, 2010 RDQ Economics LLC www.rdqeconomics.

com John Ryding
Chief Economist ryding@rdqeconomics.com (212) 584-3881 Conrad DeQuadros Senior Economist dequadros@rdqeconomics.com (212) 584-3882

World Cup Special
Forget the G-20: It’s the G-32 That Matters
On June 26-27, the G20 will hold a summit in Toronto. However, the world’s eyes will be focused on the 32 nations that will meet over the next month in South Africa in the World Cup. Canada is the only member of the G-7 to fail to qualify for the tournament (though it is the reigning Olympic hockey champion). Success in soccer is only very weakly related to economic success. Seven of the 32 countries to qualify for the World Cup have smaller GDPs than the New York City budget! The 32 teams are divided into eight groups of four teams. Group play begins tomorrow, on June 11th. We see the most interesting group games as England versus USA on Saturday June 12th and Brazil versus Portugal on Friday June 25th. (Full schedule at http://www.fifa.com/worldcup/matches/index.html). Sixteen teams will advance to the knockout stage, which is like the Sweet 16 bracket in basketball (http://www.fifa.com/worldcup/matches/kostage.html). First round key games will likely be USA versus Germany on June 27th and Spain versus Portugal on June 29th. Mathematically, because of the draw, one of the world’s top three ranked teams must be eliminated by the end of the first round of knockout games. We present key economic and soccer facts for each of the 32 nations in the tournament and give you our round by round predictions. Also we present out fantasy RDQ World 11 team. We hope the World Cup provides some relief from the dreary financial news that we are bombarded with from overseas each day. We hope even more that Europeans forget their financial woes for the next month, put aside riots and protests, and spend the next month watching the beautiful game.

The information herein has been obtained from sources which we believe to be reliable, but we do not guarantee its accuracy or completeness. Copyright 2010 RDQ Economics LLC. All rights reserved. Unauthorized duplication, distribution or public display is strictly prohibited by federal law.

Weekly Economic Commentary

A Level Playing Field
It may be difficult for many of our U.S. clients to appreciate the passion that the soccer FIFA World CupTM produces in the rest of the world. However, understand it or not, the 2006 World Cup final between Italy and France drew a start-to-finish audience that has been independently estimated at 260 million (according to Initiative Sports Futures— FIFA’s cooked figures are much higher) or roughly two-and-a-half times the global audience for the last Super Bowl. The World Cup qualifying process, which began two years ago, has whittled down a field of 204 teams to the 32 that will begin on Friday June 11th to compete in the World Cup finals when host nation South Africa kicks off against Mexico. In light of all the global economic turmoil and tensions, the 2010 World Cup will provide some welcome relief for traders and investors who have been battered by the markets in recent months. We provide this short tour of global economics and soccer our contribution to this magnificent event that will culminate in the World Cup Final on July 11th (and on a legal note, RDQ Economics LLC is in no way affiliated with FIFA nor is this any kind of official guide to the World Cup—FIFA has a habit of suing people and institutions so it is most important to stay on FIFA President Sepp Blatter’s right side!) The 32 teams that reached the World Cup Finals have been divided into eight qualifying groups of four teams. Each team plays one game against every other team in the group. The top two teams on points (three for a win, one for a draw—which means that soccer is not a zero sum game and this arrangement provides a strong incentive to win a game rather than play for a draw) advance to the knockout stage. The second stage is simple for followers of March Madness college basketball to understand since it is just a Sweet Sixteen bracket (a tie is settled by two 15 minute periods of extra time—not sudden death—and then a penalty shoot out if necessary). It is theoretically possible (although extraordinarily unlikely) that North Korea will meet South Korea in either the semi-final or final and be involved in a shootout that doesn’t involve torpedoes or artillery shells! One game that will take place is a group stage game between troubled Greece and Argentina—the country that gave the world its largest default on sovereign debt in 2001.

What Determines Success in the World Cup?
One of us had the good fortune to interview Financial Times sportswriter Simon Kuper recently on Bloomberg Radio. Simon, along with sports economist Stefan Szymanski, wrote the very thought-provoking Soccernomics (think Freakonomics meets Money Ball). Anyone who is interested in soccer and is not turned off by statistics should take a look at this book. The authors crunched a lot of numbers examining all international games played between 1980 and 2001. First and foremost, home-field advantage was the most dominant factor (worth about two-thirds of a goal) and the only team this applies to in the World Cup is South Africa. Second, the amount of international experience is the next most important factor (which is a major drawback for the U.S., which has limited international experience). Population and GDP per capita have a slight influence on results but the emphasis is on slight and is strongly outweighed by experience. However, the model leaves plenty unexplained (almost three-quarters of the goal difference in games is left unexplained by these factors). The country that outperforms most relative to their model is Brazil, which does two-thirds of a goal better on goal difference than the model suggests (France is second at slightly more than a third of a goal). Countries that are closely interconnected to the core of the soccer world, which is Western Europe, tend to do well (in the economics jargon this is called network externalities). However, the


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regional qualification process that FIFA employees ensures representation from around the world (hence the presence of New Zealand in the tournament—think qualification by relatively isolated countries playing each other as they do in the Oceana qualifying area).

The Groups
Group A: South Africa, France, Mexico, Uruguay South Africa

GDP (2009) $495 billion Debt-to-GDP 27% Population 49.1 million Deficit-to-GDP 6.1% Unemployment 24% FIFA Ranking 83 Star Players Benni McCarthy (West Ham), Steven Pienaar (Everton) South Africa qualified by virtue of being the host nation. While being host nation gives it home-field advantage and it is an improving team, this is likely not enough advantage to get the team beyond the group stage. France

GDP (2009) $2.11 trillion Debt-to-GDP 68% Population 64.1 million Deficit-to-GDP 7.9% Unemployment 9.7% FIFA Ranking 9 Star Players Thierry Henry (Barcelona), Frank Ribery (Bayern Munich) Having failed to qualify cleanly by finishing second in its group, France drew Ireland in a two-leg knockout and won by virtue of a last minute goal that was set up by a handball from Thierry Henry that was seen by everyone but the referee. Alas for Ireland, FIFA does not use instant replay and there was no way to replay the game from that point. As a result, Ireland became the only one of the PIGS not to qualify for the World Cup. Mexico

GDP (2009) $1.48 trillion Debt-to-GDP 39% Population 112.5 million Deficit-to-GDP 4.7% Unemployment 5.6% FIFA Ranking 17 Star Players Rafael Marquez (Barcelona), Guillermo Franco (West Ham) Mexico went through a period of managerial turmoil and only just squeaked into the World Cup. However, the new head coach Javier Aguirre appears to have turned things around for the team and it should be competitive for the second spot in the group.

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GDP (2009) $45 billion Debt-to-GDP n.a. Population 3.5 million Deficit-to-GDP n.a. Unemployment 7.9% FIFA Ranking 16 Star Players Diego Forlan (Atletico Madrid), Christian Rodriguez (FC Porto) Remarkably for its size, Uruguay is only one of seven teams to have won at least one World Cup. In Uruguay’s case it has won two, defeating Argentina in 1930 (as host nation) and Brazil in 1950. Bottom Line: France is the clear favorite to win the group and advance to the knockout stage. The second spot is a virtual tossup between tiny Uruguay and massive Mexico. These two teams last met in 2007, when Mexico won 3-1. We simulated five games between the two teams on an advanced computer system using sophisticated software (read EA Sports’ wonderful and entertaining 2010 FIFA World Cup South AfricaTM on an Xbox 360 with no human input—our thanks go to unpaid child laborer Ian Ryding for technical assistance with these results) and Mexico won three games and drew two. Edge to Mexico (note that no Xbox simulations were run on RDQ time nor was the Xbox system written off against taxes—should have thought of that one last year!) Group B: Argentina, Greece, Nigeria, South Korea Argentina

GDP (2009) $558 billion Debt-to-GDP 60% Population 41.3 million Deficit-to-GDP 3.9% Unemployment 9.6% FIFA Ranking 7 Star Players Lionel Messi (FC Barcelona), Javier Mascherano (Liverpool) If only Argentina’s economy had replicated the success of its national soccer team. In 1909, Argentina was the eighth most prosperous country in the world (see What Happened to Argentina? by Ed Glaeser, Economix October 2009). Based on its standing a century ago, Argentina has been the world’s most underperforming economy largely due to extremely poor economic policies (Peronism, which was highly protectionist, favored large state enterprises and heavy regulation). Argentina experienced a monetary disaster in 2002, when it abandoned its currency board (that tied the peso to the dollar). The currency collapsed some 75% against the greenback. This year, in something of an Evita rerun, Argentina’s president, Cristina Kirchner, who was the former first lady, ousted Martin Redrado, the head of the central bank, so that she could raid the foreign exchange reserves to pay off some government debt. On the soccer field things have gone rather better and Argentina has won two world cups (1978 and 1986—the latter thanks in part to another famous handball incident, Maradona’s Hand-of-God goal). Now, Maradona is Argentina’s coach and, with little managerial experience, is the team’s greatest obstacle to winning the World Cup for a third time. Once again, a case of exceptional promise managed by questionable leadership!


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GDP (2009) $341 billion Debt-to-GDP 115% Population 10.7 million Deficit-to-GDP 13.6% Unemployment 9% FIFA Ranking 13 Star Players Sotirios Kyrgiakos (Liverpool) If any country could do with finding a return of its 2004 form (when Greece won the Euro—not to be confused with the euro!) and going far into the competition, it is embattled Greece. Fortunately with a FIFA ranking of 13 (not boosted with the assistance of Goldman’s derivatives desk!), Greece has a good chance of finishing second in the group and meeting France in the round of 16. Nigeria

GDP (2009) $357 billion Debt-to-GDP 9% Population 152.2 million Deficit-to-GDP 10.1% Unemployment n.a. FIFA Ranking 21 Star Players Obafemi Martins (Wolfsburg), Yakubu (Everton) Standing in the way of a second place finish for Greece is Nigeria. Nigeria will miss John Obi Mikel, who has not recovered from knee surgery. Furthermore, Nigeria’s star striker Yakubu struggled to find the back of the net this season with only five goals scored in the Premiership in 21 appearances and he didn’t score in eight appearances in European competition. If he finds his form on African soil, Nigeria could well snatch the second spot from the more highly ranked Greek team. South Korea

GDP (2009) $1.36 trillion Debt-to-GDP 33% Population 48.6 million Deficit-to-GDP 0.0% Unemployment 4.1% FIFA Ranking 47 Star Players Park Ji-Sung (Manchester United) Korea massively outperformed in the 2002 World Cup, showing the advantage of being a host country, by reaching the semi-finals. However, while South Korea is a relative economic powerhouse and has amassed foreign exchange reserves of $270 billion, it looks a very long shot for South Korea to reach the round of 16 in what looks to be a tough group. Bottom Line: Despite the coach, Argentina should emerge in first place in group B. Calling the second place is one of the most difficult calls of the group stage. If Nigeria prevails, however—and it is likely to be close—and Greece crashes out at the group stage, it will only add to the political difficulties of the Papandreou government (in 1970, England’s Prime Minister Harold Wilson called an election for the day after the World

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Cup semi-finals to capitalize on patriotic fervor—unfortunately England blew a 2-0 lead over West Germany and Harold Wilson’s Labour Party lost to Ted Heath’s Conservatives in the election). Which way will it go? In simulations, Nigeria and Greece play each other very evenly. However, with Mikel out, we will look for Greece to advance. Group C: England, U.S.A., Algeria, Slovenia England

GDP (2009)* $2.15 trillion Debt-to-GDP* 62% Population 51.5 million Deficit-to-GDP* 10.9% Unemployment* 8% FIFA Ranking 8 Star Players Wayne Rooney (Manchester United), Steven Gerrard (Liverpool) * Data for the U.K. England has not won a World Cup since the tournament was held in England in 1966 (home field advantage again). However, under Fabio Capello, England has a winning percentage of 79% over 24 games (compared to an average of 67.4% in 411 games between 1970 and 2007) and hopes run high for England to reach at least the semi finals (last achieved in 1990, when England lost to Germany). A good performance by England would help the new Cameron-Clegg coalition government as it prepares the country for some deep cuts in public spending. USA

GDP (2009) $14.3 trillion Debt-to-GDP 58% Population 310.2 million Deficit-to-GDP 12.5% Unemployment 9.7% FIFA Ranking 14 Star Players Tim Howard (Everton), Landon Donovan (LA Galaxy & Everton) England has lost two major encounters with the United States over the course of history: the Revolutionary War 1776-83 and a World Cup clash in 1950 (lost 1-0). Ranked 14 by FIFA, the U.S. national team is improving and would be stronger if, like many countries, it had a foreign coach would bring advanced tactical knowledge. The U.S. should have no problems moving on to the round of 16. Unlike Europe, however, life on this side of the pond will likely continue much as normal from June 11th to July 11th. However, we confidently anticipate that spending in bars by foreign nationals living in New York during the day will boost the local economy over the next month! Algeria

GDP (2009) Population Unemployment FIFA Ranking Star Players

$240 billion Debt-to-GDP 34.6 million Deficit-to-GDP 12.4% 30 Karin Ziana (VFL Wolfsburg)

n.a. n.a.


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GDP (2009) Population Unemployment FIFA Ranking Star Players

$56 billion Debt-to-GDP 2.0 million Deficit-to-GDP 9.4% 25 Robert Koren (West Brom)

30% 6.1%

Bottom Line: According to form, England should finish first and the U.S. second in Group C. However, given the relatively low ranking of the other two teams, the group could well be decided by the opening game (June 12th) between England and the U.S. England’s recent friendly form has been poor with unconvincing wins against Mexico (31) and Japan (2-1). In addition, England’s captain, Rio Ferdinand, was injured in training and is out of the tournament. Whoever wins this game probably wins the group and a draw might leave the ranking decided on goal difference in the other games. The winner of the group should have an easy passage to the quarter finals while the second place team will likely have a very difficult game against Germany in the round of 16.

Group D: Germany, Australia, Serbia, Ghana Germany

GDP (2009) $2.81 trillion Debt-to-GDP 64% Population 82.3 million Deficit-to-GDP 3.3% Unemployment 8.2% FIFA Ranking 6 Star Players Miroslav Klose (Bayern Munich) Angela Merkel has lost her domestic popularity and her party was defeated in key elections in North Rhine-Westphalia. Germany’s fiscal deficit has deteriorated to over 5% of GDP and Merkel is instituting €80 billion in deficit reduction over the next four years to try to hit the target of 0.35% deficit-to-GDP. This fiscal austerity puts her at odds again with French President Nicolas Sarkozy. It is unlikely that France and Germany will meet in this World Cup since they would only meet in the final (unless one of these two teams fails to win its group) but if it were to happen, it is hard to imagine that it would help French-German relations! Germany has won three World Cups (1954, 1974, and 1990) and has been a finalist seven times (combining the record of the former West Germany with the reunified Germany). Germany’s last appearance in a World Cup final was in 2002, when it lost 2-0 to Brazil. Unfortunately, Germany’s chances of reaching the final will be severely hampered by the injury to Michael Ballack (the captain and leader of the team), which rules him out of playing in the competition. Germany is a fit and well organized team and, according to form, will be the team the U.S. plays in the round of 16.

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GDP (2009) $824 billion Debt-to-GDP 0.2% Population 21.5 million Deficit-to-GDP 4.1% Unemployment 5.7% FIFA Ranking 20 Star Players Tim Cahill (Everton), Harry Kewell (Galatasaray) Australia has a strong fiscal position and was the first major economy to hike rates in October 2009, which makes the Australian dollar one of our favorite currency plays. Australia’s soccer team has been improving too and will likely battle it out with Serbia for the second qualifying spot in the group. Serbia

GDP (2009) $78 billion Debt-to-GDP n.a. Population 7.3 million Primary Deficit-to-GDP n.a. Unemployment 16.6% FIFA Ranking 15 Star Players Nemanja Vidic (Manchester United) Serbia had an impressive qualification run, finishing ahead of France. However, as Kuper and Szymanski argue, there is no strong correlation between qualification record and progress in the tournament. Nonetheless, second place in the group should be between Serbia and Australia. Ghana

GDP (2009) $37 billion Debt-to-GDP n.a. Population 24.4 million Primary Deficit-to-GDP n.a. Unemployment 11% FIFA Ranking 32 Star Players Sulley Montari (Inter Milan) The African nations are on the rise in the world of soccer—thanks in large part to the export of African players to Europe—and it is a blow to the hopes of Ghana that its superstar player Michael Essien is out with an injury. Bottom Line: While Germany should cruise to first place in the group, any of the other teams could finish second in the group. Before the injury to Essien, we might have given the nod to Ghana (especially playing in Africa). Now we see it as a close call between Serbia and Australia. A five game simulation gave the edge to Serbia over Australia and our call is for Serbia to advance to the round of 16. However, the contest between Australia and Serbia will be one of the more interesting ones during the group stage.


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Group E: Netherlands, Japan, Cameroon, Denmark Netherlands

GDP (2009) $655 billion Debt-to-GDP 41% Population 16.8 million Deficit-to-GDP 4.9% Unemployment 5% FIFA Ranking 4 Star Players Robin Van Persie (Arsenal), Arjen Robben (Bayern Munich) The Dutch have a relatively manageable fiscal situation and an impressive soccer team. Holland revolutionized soccer in the 1970s with its tactical innovations. Although Robben will miss the first game against Denmark due to an injury, the Netherlands should be good for a first place finish in the group. Japan

GDP (2009) $4.14 trillion Debt-to-GDP 112% Population 126.8 million Deficit-to-GDP 10.3% Unemployment 5.6% FIFA Ranking 45 Star Players Koisuke Honda (CSKA Moscow) Although China is moving ahead of Japan in terms of the size of its economy, Japan remains the stronger soccer nation. Japan has a fit team but it suffers by the relative lack of experience that players have playing in Europe and by having a Japanese coach. Japan failed to progress beyond the group stage in the 2006 World Cup and we fear the same is in store this year. Cameroon

GDP (2009) $43 billion Debt-to-GDP n.a. Population 19.3 million Primary Deficit-to-GDP n.a. Unemployment n.a. FIFA Ranking 19 Star Players Samuel Eto’o (Inter Milan) Cameroon is the most fortunate African nation in this year’s World Cup by virtue of it being in a relatively easy group as it competes against 36th ranked Denmark and 45th ranked Japan. In economic terms, Cameroon is tiny (about the same size is Uruguay but with over five times the population). Cameroon outpunches its economic weight on the soccer field. Samuel Eto’o is one of the top players from Africa, who plays on Champions League winning Inter Milan. Unlike Drogba and Essien, Eto’o is not injured and we see his performance as key to carrying Cameroon into the round of 16.

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GDP (2009) $199 billion Debt-to-GDP -7.3% Population 5.5 million Deficit-to-GDP 3.0% Unemployment 4.3% FIFA Ranking 36 Star Players Nicklas Bendtner (Arsenal) Denmark was the only Scandinavian country to qualify for the World Cup. This country outperforms its economic weight on soccer field and won the 1992 European Championships (although the tournament back then was a far more limited affair than it is these days). Denmark is fortunate to find itself in one of the weaker groups and has a legitimate shot of advancing to the round of 16. Bottom Line: In the 1970s, the Dutch gave the world total football—tactically superior to anything else—but the world has been catching up. Nonetheless, it would be a shock for any other team to finish first in the group. Cameroon looks likely to be second in the group, although given the small number of games played in the group stage, either Denmark or Japan could pull off an upset and come second. Group F: Italy, Paraguay, Slovakia, New Zealand Italy

GDP (2009) $1.76 trillion Debt-to-GDP 113% Population 58.1 million Deficit-to-GDP 5.3% Unemployment 7.5% FIFA Ranking 5 Star Players Gigi Buffon (Juventus), Andrea Pirio (AC Milan) Defending World Champions, Italy begins its defense of its title in a relatively easy group. Italy should go undefeated in the group and, in this case, advance easily to the quarter finals, where it will likely meet either Portugal or Spain. Paraguay

GDP (2009) $28 billion Debt-to-GDP n.a. Population 6.4 million Deficit-to-GDP n.a. Unemployment 7.9% FIFA Ranking 31 Star Players Nelson Haedo Valdez (Borussia Dortmund) Paraguay’s strength on the soccer field is its defense, which gave up only 16 goals in 18 qualification games. While Italy should be good for first place in the group, Paraguay will be competing with Slovakia for second place. This contest for second place should be one of the most interesting battles in the group stage of the World Cup.


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GDP (2009) $116 billion Debt-to-GDP 34% Population 5.5 million Deficit-to-GDP 6.3% Unemployment 12.1% FIFA Ranking 34 Star Players Martin Skrtel (Liverpool) This is Slovakia’s first trip to the World Cup since it emerged as a country from the division of Czechoslovakia in 1992. The Slovakian team has experience at a high level with every member of the team playing outside the country at club level. Slovakia received a boost when it learned Liverpool hard man Martin Skrtel will be fit for Slovakia’s opener against New Zealand. New Zealand

GDP (2009) $115 billion Debt-to-GDP 26% Population 4.3 million Deficit-to-GDP 3.6% Unemployment 7.3% FIFA Ranking 78 Star Players Ryan Nelson (Blackburn Rovers) Delighted to be at the World Cup, it would take nothing short of a miracle for New Zealand to progress to the round of 16. Bottom Line: Defending champions Italy should have no trouble finishing first in this group, while New Zealand will be just glad to be in the tournament. Second place is a tough call but our gut call is an improving Slovakia team will edge out Paraguay. Group G: Brazil, Portugal. North Korea, Cote D’Ivoire Brazil

GDP (2009) $2.0 trillion Debt-to-GDP 44% Population 201.1 million Deficit-to-GDP 1.5% Unemployment 7.4% FIFA Ranking 1 Star Players Kaka (Real Madrid), Luis Fabiano (Seville), Julio Cesar (Int Milan) Finally Brazil is beginning to get the economy that its soccer team deserves. Five time World Champions, Brazil has long been able to hold its head high on the soccer stage and it enters the tournament ranked in first place. Brazil is in the toughest group and its game against Portugal will be the biggest clash at the group stage of the competition. This group will likely, therefore, be decided on the June 25th—the last day of the group stage—when the two teams meet.

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GDP (2009) $233 billion Debt-to-GDP 73% Population 10.7 million Primary Deficit-to-GDP 9.4% Unemployment 9.2% FIFA Ranking 3 Star Players Christiano Ronaldo (Real Madrid), Ricardo Carvalho (Chelsea) Along with the Greek’s, the Portuguese are in great need of a successful World Cup run to divert attentions from the sovereign debt contagion. While the team is likely to progress a long way through the tournament, the injury to Manchester United star Nani, which will keep him out of the World Cup, is a severe blow. North Korea

GDP (2009) n.a. (but guessed at around $40 billion) Population 22.8 million Unemployment n.a. FIFA Ranking 105 Star Players The entire team for making it to the finals! North Korea is the most dysfunctional economy and political system in the competition. It also has the lowest ranked team in the competition playing in the toughest group. There is nearly as high a chance that it will snow in New York during the competition as there is of North Korea reaching the round of 16. Cote D’Ivoire

GDP (2009) $36 billion Debt-to-GDP n.a. Population 21.1 million Primary Deficit-to-GDP n.a. Unemployment n.a. (but CIA suggests 40%-50% on account of the civil war) FIFA Ranking 27 Star Players Didier Drogba (Chelsea), Kolo Toure (Manchester City) It is a shame the Ivory Coast was drawn into this group and that Drogba is injured. Bottom Line: Usually in the World Cup finals there is one so-called Group of Death and in 2010 this is it. While we think the FIFA rankings are somewhat generous in putting Portugal third in the world, it is nonetheless a very strong club and many of the games in this group will be must watch and must win. Brazil ought to finish first in the group. For the Cote D’Ivoire to have a chance of finishing second, it must beat Portugal in its opening game on June 15th. Unfortunately for the Ivory Coast, its superstar player Didier Drogba broke his arm in a warm up match against Japan and it is not clear whether he will be available for that clash. On the other hand, the injury to Nani weakens an otherwise very strong Portuguese team. We have to go with Portugal though are hearts are rooting for the Ivory Coast. 12 RDQ Economics

Weekly Economic Commentary
Group H: Spain, Chile, Honduras, Switzerland Spain

GDP (2009) $1.37 trillion Debt-to-GDP 46% Population 40.6 million Deficit-to-GDP 11.4% Unemployment 18.1% FIFA Ranking 2 Star Players Fernando Torres (Liverpool), Xavi and David Villa (Barcelona) The Spanish will divert their attention from fiscal austerity and towards the national team as Euro 2008 champions make a run at the final of the World Cup. This team has such an incredible depth of talent that the Spanish government could only wish that they could privatize it to pay off some of the national debt! Chile

GDP (2009) $244 billion Debt-to-GDP -8.7% Population 16.7 million Deficit-to-GDP 4.4% Unemployment 10% FIFA Ranking 18 Star Players Humberto Suazo (Monterrey) Chile has an unbelievably good fiscal situation and, since it privatized social security, it does not have a ticking demographic time bomb threatening this fiscal situation down the road. After suffering the massive earthquake earlier in the year that killed 711 people (a relatively small number given the 8.8 magnitude of the quake), Chile will likely get some welcome relief with a berth in the round of 16—although one misstep could open the door to either Honduras or Switzerland. Chile’s greatest economic advisor was Nobel Prize Winner Milton Friedman, who can take credit for much that has gone right with the country—just not its soccer team! Honduras

GDP (2009) $33.2 billion Debt-to-GDP n.a. Population 8.0 million Primary Deficit-to-GDP n.a. Unemployment 6% FIFA Ranking 38 Star Players David Suazo (Inter Milan) Qualifying from the CONCACAF, Honduras has limited international experience and will struggle to move beyond the group stage.

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GDP (2009) $317 billion Debt-to-GDP 38% Population 7.6 million Primary Deficit-to-GDP -1.4% Unemployment 4.4% FIFA Ranking 24 Star Players Tranquillo Barnetta (Bayer Leverkusen) Switzerland has the best fiscal situation of any major European country and also possesses the strongest currency. Unfortunately, it also has one of Europe’s weaker national soccer teams. Nonetheless, Switzerland has a shot at finishing second—even if it’s an outside shoot. Bottom Line: Spain should walk to first place in the group and second place looks likely to go narrowly to Chile over Switzerland.

The Knockout Stage
Teams RDQ projects to reach the round of 16 Group Winners: France, Argentina, England, Germany, Netherlands, Italy, Brazil, Spain Runner Ups: Mexico, Greece, USA, Serbia, Cameroon, Slovakia, Portugal, Chile By the close of June 25th, half of the teams in the competition will have been eliminated and the other half progress to the knockout phase. The winner of group A plays the runner up of group B, while the runner up in A plays the winner of B, etc. Geographically, we do not expect a team from Asia to advance. Furthermore, even with the contest being hosted in Africa, we see only one team from the continent reaching the round of 16 (such a shame that the Ivory Coast was drawn in the same group as Brazil and Portugal). The clash of the first round of the knockout phase will likely take place on June 29th, when the second place team from Group G (likely Portugal, but possibly Brazil) will play Spain. Since Spain and Portugal are neighbors, this is what we call in soccer a derby game. Spain and Portugal are also both suffering from difficult fiscal situations and contagion from Greece. Spain has a very strong squad but Portugal has one of the best players in the world in the form of Christiano Ronaldo. We give the edge to Spain and expect the world’s number two ranked team to advance to the quarter finals (although we note that in a five game simulation, the games split evenly with Spain winning two, Portugal winning two, and one match was tied). However, this game (depending on whether Brazil or Portugal finish first in Group G) will likely result in the elimination of one of the top three ranked teams in the world. The United States will likely face elimination in the round of 16 (assuming it finishes second behind England in group C) at the feet of Germany. If, however, England finishes second, USA will likely reach the elite eight of the quarter finals. In other interesting games, France has a high chance of meeting Greece in the round of 16, while in a Western hemispheric clash, Mexico will likely meet Argentina. While Mexico would trounce Argentina in a head-tohead battle of economies, it is likely to come off the loser on the soccer field.


RDQ Economics

Weekly Economic Commentary

Quarter Finals While the laws of stochastic processes will likely lead to the following predictions not coming true (bear in mind, at the knockout stage, a tied game after 90 minutes is settled with 30 minutes of overtime and, if still tied at that point, a five penalty kick shootout— England’s favorite way of getting eliminated from major international competitions!) Moreover, key players on any given team could pick up an injury that forces them out of the competition. With that said, here are our elite eight (note that mathematically, one of the top three teams—Brazil, Spain, or Portugal—will be eliminated by the end of the round of 16). France, England, Netherlands, Brazil, Argentina, Germany, Italy and Spain We have laid out our picks in such a way that we see France playing England, Holland playing Brazil, etc. In the replay of the Battle of Waterloo (the English have a tendency to see soccer as war), we see England edging out France, while, in what promises to be a very entertaining game, we expect Brazil to beat the Netherlands. Perhaps the hardest game to call is Argentina against Germany. Assuming that Messi has the World Cup that we think he will, we see Argentina advancing to the semi finals (these two teams are England’s arch-nemesis teams and at least of them is likely to be eliminated before the final four semi-finals). Italy against Spain is also a very hard game to call as the current World Champion would be playing against the current Euro champion. Both teams are full of quality players but in key positions, we expect Spain to prevail. Semi Finals Stretching the laws of chained probability (note that to win the competition, not only do you have to emerge from the group but also win four games in a row—if your chance of winning one game is 80%—roughly England’s record under Capello—the chance of winning all four games in a row is only 41%). With this caveat in mind, our final four is: England, Brazil, Argentina, and Spain Any team reaching this stage of the competition can view the tournament as a success. At the same time, being one game away from the World Cup Final, a defeat is heartbreaking. It will be four more years before the competition is held again. If it comes down to a penalty shoot out, then it is the team with the calmest nerve (and more often than not the one that wins the toss and elects to shoot first). While England have a legitimate chance of beating Brazil (and that is where our hearts are), rational analysis suggests that the Brazil team is just too strong. A five game simulation has Brazil winning three games and losing two against England. This is similar to the view of the weight of money, which puts the odds of making the final around 2-1 for Brazil but 3-1 for England (and bear in mind that the weight of money will tend to be behind England, perhaps making the true probabilistic odds rather than the bookies’ odds somewhat longer). It is easier to be dispassionate about Spain versus Argentina. Argentina arguably has the best player in the world in Messi. However, Spain matches up better in most positions and has one of the best goalkeepers in the world in Casillas. Perhaps under a different manager we could see Argentina besting Spain, but we expect the number two ranked team to advance to meet the number one ranked team in the final. RDQ Economics 15

Weekly Economic Commentary

World Cup Final Brazil vs. Spain New World against Old World. BRICs against the EU. If this is the final, it should be a fantastic game as Spain vies to become the eighth member of the elite club of World Cup champions and prevent Brazil from becoming a six-time champion. This game would appear to be too close to call. Brazil won the Confederation Cup in South Africa, coming back in the second half to defeat the USA 3-2, as Luis Fabiano was the tournament’s top scorer with five goals. However, Spain’s David Villa and Fernando Torres were close behind with three goals each (amazingly, Spain lost 2-0 in the semi-finals to the U.S.) While this game could go either way, we give the edge to Brazil. Brazil’s coach Dunga has been changing the style of Brazilian play by raising the emphasis on defense and shifting away from an all out attacking style. RDQ-11 We end our tribute to the world’s most important gathering of nations with our RDQ-11 team. Forwards: Midfielders: Defenders: Goalkeeper: Head Coach: Fabio Capello Gerrard A Cole Messi Kaka Vidic Xavi Terry Casiallas Rooney Ronaldo Maicon

Subs: Buffon, Alves, Ribbery, Iniesta, Torres No doubt our choices will be controversial both in terms of predicted results and our fantasy world team. However, we look forward to enjoying the tournament and obtaining some relief from the dreary news on the global financial front. Stay tuned to the World Cup. Enjoy!

Notes on sources Population, GDP and unemployment comparisons were largely taken from the CIA World Factbook, while net-debt and deficit data came from the IMF’s World Economic Outlook. Football sources included FIFA, BBC, and numerous soccer websites. Thanks to Microsoft and EA Sports (with whom we are completely unaffiliated) and a very special thanks to Simon Kuper.


RDQ Economics

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