OFCs, Europe and U.S in a Love-Hate Relationship.

Eurostat – the statistical office of the European Union (EU) defines Bahrain, Hong Kong, Singapore, Philippines, Guernsey, Jersey, the Isle of Man, the Faroe Islands, Liechtenstein, Andorra, Gibraltar; Panama, Bermuda, the Bahamas, the Cayman Islands, the Virgin Islands and 23 unnamed others as Offshore Financial Centres (OFCs).

EU Foreign Direct Investment (FDI) results for 2011 released this month show that OFCs were the second largest recipient of EU investment at EUR59bn; after the USA at EUR111bn. In third place was Switzerland at EUR 32bn.

The Eurostat report does not include Switzerland among its named OFCs possibly because as a European ‘tax haven’ and financial centre for EU purposes it cannot be properly described as ‘offshore’. Neither is there a classification for European ‘onshore’ financial centres. Clearly if the EU’s ‘Onshore’ FCs were not disaggregated as they have been in the report, countries like Switzerland and Luxembourg would fall into that class of financial centres.

The importance of Luxembourg in EU FDI was explained by Eurostat by reference to its substantial financial intermediary activity. At EURO110bn, this landlocked EU member was the largest investor outside the Union beating the UK at EUR89bn, Germany EUR 34bn, France EUR21bn, Spain EUR19bn and Belgium EUR16bn.

Luxembourg was also the main recipient of non-EU investment at EUR86bn, followed by Sweden EUR16bn, Spain Eur15bn, UK EUR14bn, France EUR12bn and Germany EUR11bn.

Unsurprisingly the EU continued to be a net investor in the rest of the world with outflows eclipsing inflows by EUR145bn. In this regard Luxembourg was second at EUR25bn to the UK at EUR75bn.

Definiton of FDI

In a helpful footnote Eurostat defines FDI as the category of international investment that reflects the objective of obtaining a lasting interest by an investor in one economy in an enterprise resident in another economy.

The lasting interest implies that a long-term relationship exists between the investor and the enterprise, and that the investor has a significant influence on the way the enterprise is managed.

It further states that such an interest is formally deemed to exist when a direct investor owns 10% or more of the voting power on the board of directors (for an incorporated enterprise) or the equivalent (for an unincorporated enterprise).

Another Clue to the EU meltdown?

In an interesting paradox Eurostat goes on to explain that Special Purpose Entities account for most of Luxembourg’s FDI which, in the context of the importance of FDI that ‘sticks’ to an economy creating the jobs needed for the sustainable development of the Union, provides useful pointers to the possible underpinnings of the European financial crisis.

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