Schalke will not exercise their option to buy Arsenal’s Sead Kolasinac this summer.
The left-back spent the second half of last season on loan at the German club, but could not help them avoid relegation from the Bundesliga.
Schalke were expected to make the move for the Bosnian permanent, but their demotion to the second tier next season means their transfer budget has taken a hit as a result, and Kolasinac will return to the Gunners.
Schalke director of sport and communication Peter Knäbel confirmed the news and insists they were left with no choice.
He said: “This decision hurts us both in sport and human terms.
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“In view of the current budget and squad structure – all the known and publicly discussed challenges – there was no alternative.
“We have to be so honest. In view of the short preparation and the early start of the season, we cannot afford a week-long hang-up game either, but have to make decisions for Schalke 04 now.
“That’s why we decided on this clear cut.”
Kolasinac has one year left on his deal at Arsenal and is not a part of their long-term plans.
Schalke cashing in on the 27-year-old would have been a welcome early addition to their transfer kitty and the ideal scenario for Arsenal as they enter a summer rebuild.
The Premier League side will now have to hope another suitor will come along for Kolasinac when the window opens.
Arteta admitted that there are likely to be wholesale changes at the club this summer.
Speaking on Tuesday, he said: “We have already had an incredible amount of changes at the club over the past year or so, more than ever. We are looking to improve and be much closer than where we are at the moment. In order to do that there are certain things that we have to improve.
“There are so many things to do because we already have a lot of players on loan and a lot of players with contracts still that we need to sort. It will depend on what happens with a lot of those players and what we are able to recruit to improve the team. That is going to determine where we are.”