Download publication

Working Paper

Returns on foreign assets and liabilities: exorbitant privileges and stabilising adjustments

Large stock of foreign assets and liabilities could foster international risk diversification. US, British and Japanese investors earn high yields on FDI assets, which might also relate to tax, intellectual property and financial sophistication issues. Valuation changes on net foreign assets had a stabilising impact.

By: and Date: November 29, 2017 Topic: Finance & Financial Regulation

Financial globalisation has led to large increases in foreign assets and liabilities in recent decades, increasing the scope for valuation changes that are potentially greater than trade or financial flows.

We confirm that the United States enjoys an ‘exorbitant privilege’ on flow income from foreign assets, which is primarily related to foreign direct investment (FDI). The geographical allocation of FDI assets explains only a small part of the US yield advantage. The key reason is that US, and also British and Japanese, investors were able to outperform the average yield earned in the countries of their FDI destinations, while most continental European investors earn the average. Further research should explore if large FDI investment in ‘tax optimisation’ countries, the improper consideration of intellectual property, or financial sophistication contributed to these high yields.

For several countries, valuation changes were larger than current account and financial transactions, highlighting the importance of such changes. In the European Union, the generally negative international investment positions of a number of central and southern European countries were greatly supported by EU transfers.

Valuation changes on net foreign assets do not look random and played an important role in the sustainability of international investment positions before and after the 2008 crisis. Countries with negative net international investment positions tend to have positive revaluation gains, while countries with large net foreign assets tend to suffer from revaluation losses. Large net foreign asset holders including China, Saudi Arabia, Switzerland, Japan and Germany, suffered significant losses in 2007-16, helping the sustainability of the negative positions of other countries. Risk sharing was also fostered by losses suffered by the US since 2007. There is no uniform tendency in relation to the asset classes from which these losses arose. Future research should aim to better understand the drivers of these valuation changes.

View comments
Read article More on this topic More by this author

Blog Post

What is in store for the EU’s trade relationship with the US ?

If faced with a resurgent President Trump after the next US election, the EU will have some difficult decisions to make as it is compelled to enter a one-sided negotiation. Failure to strike a deal will imperil the world’s largest trade relationship and contribute to the progressive unravelling of the rules enshrined in the World Trade Organization – although the changes required of Europe by Trump’s demands may ultimately turn out to be in the interest of Europeans.

By: Uri Dadush Topic: Global Economics & Governance Date: May 16, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Evolution of US-China relations amid trade-tariff conflict

Bruegel director Guntram Wolff and Bruegel fellow Uri Dadush welcome William Alan Reinsch, senior adviser and Scholl chair in international business at the Center for Strategic and International Studies, for a discussion of how China-US relations are developing in the context of unfolding trade war.

By: The Sound of Economics Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic More by this author

Blog Post

Implications of the escalating China-US trade dispute

If allowed to escalate, the trade dispute between China and the United States will significantly increase the likelihood of a global protectionist surge and a collapse in the rules-based international trading system. Here the author assesses the specific impacts on the Chinese and US economies, as well as the strategic problems this dispute poses for Europe.

By: Uri Dadush Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic More by this author

Blog Post

All eyes on the Fed

Last week the US Federal Reserve left the federal funds rate unchanged and lowered the interest rate on excess reserves. We review economists’ recent views on the monetary policy conduct and priorities of the United States’ central bank system.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: May 6, 2019
Read article More on this topic

Opinion

Life after the multilateral trading system

Considering a world absent a multilateral trading system is not to promote such an outcome, but to encourage all to prepare for the worst and instil greater clarity in the mind of policymakers as to what happens if compromise fails.

By: Uri Dadush and Guntram B. Wolff Topic: Global Economics & Governance Date: April 25, 2019
Read article Download PDF More on this topic

Working Paper

What drives national implementation of EU policy recommendations?

The authors use a newly-compiled dataset to investigate whether and why European Union countries implement the economic policy recommendations they receive from the EU.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 25, 2019
Read article Download PDF More by this author

Parliamentary Testimony

Promoting sustainable and inclusive growth and convergence in the European Union

This speech was delivered by Guntram Wolff at the Informal ECOFIN Meeting in Bucharest on 5 April 2019.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, Testimonies Date: April 8, 2019
Read article Download PDF More on this topic More by this author

Working Paper

Europe in the midst of China-US strategic competition: What are the European Union's options?

With the trade conflict between the United States and China bringing China-US strategic competition into the open, the European Union faces an urgent question: how to position itself in the competition.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: April 8, 2019
Read article Download PDF

Policy Contribution

Promoting sustainable and inclusive growth and convergence in the European Union

This Policy Contribution was written for the Informal ECOFIN Meeting, Bucharest, 5 April 2019. The authors look at the EU’s economic agenda, discussing the priorities for the next five years.

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: April 4, 2019
Read article More by this author

Opinion

Europe and the new imperialism

For decades, Europe has served as a steward of the post-war liberal order, ensuring that economic rules are enforced and that national ambitions are subordinated to shared goals within multilateral bodies. But with the United States and China increasingly mixing economics with nationalist foreign-policy agendas, Europe will have to adapt.

By: Jean Pisani-Ferry Topic: Global Economics & Governance, Innovation & Competition Policy Date: April 3, 2019
Read article More on this topic

Opinion

Brexit: When in doubt, slow down

Uncertainty over Brexit remains high despite looming deadlines. Here, the authors argue that the UK should take the necessary steps to make time to build consensus around the final shape of Brexit, and that the UK population should be consulted.

By: Maria Demertzis and Nicola Viegi Topic: European Macroeconomics & Governance Date: March 29, 2019
Read article More on this topic More by this author

Opinion

Takeaways from Xi Jinping’s visit to France and Italy and ideas for the EU-China summit

The author appraises China's strategy towards Europe ahead of next month's EU-China summit.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: March 27, 2019
Load more posts