Andorra’s model: time for change

Fred Halliday
28 September 2009


The principality of Andorra has long resisted the encroachments of the outside world. "We fought off the Arabs, we survived Napoleon, two world wars, and the Spanish civil war. Do not underestimate us", a local intellectual proudly tells me. The Andorrans - whose small land (470 square kilometres) perched on the southern slopes of the Pyrenees has an electorate of just 20,000 out of a population of 85,000 - indeed exhibit the feistiness and stolidity of mountain peoples the world over. The national anthem celebrates its historic independence in forthright terms: "Charlemagne the Great", it declares, "who delivered us from the Arabs. Alone I remain the only daughter of Charlemagne, Christian and free for eleven centuries. Christian and free I will remain, between my two valiant masters, my two protecting princes."  

Fred Halliday is ICREA research professor at IBEI, the Barcelona Institute for International Studies. He was formerly professor of international relations at the London School of Economics. He is a widely known and authoritative analyst of middle-eastern affairs who appears regularly on the BBC, ABC, al-Jazeera television, CBC and Irish radio. Among his many books are The Middle East in International Relations: Power, Politics and Ideology (2005) and 100 Myths about the Middle East (2005)

"Iran's revolutionary spasm" (30 June 2005)

"The matter with Iran" (1 March 2007)

"The mysteries of the US empire" (30 November 2007)

"Islam, law and finance: the elusive divine" (12 February 2008)

"Stolen Wealth Funds: fantasies of control" (4 March 2008)

"Two feminist pioneers: Iranian, Lebanese, universal" (18 April 2008)

"Tibet, Palestine and the politics of failure" (9 May 2008)

"1968: the global legacy" (11 June 2008)

"The miscalculation of small nations" (24 August 2008)

"Armenia's mixed messages" (13 October 2008)

"The futures of Iraq" (4 December 2008)

"The greater middle east: Obama's six problems" (21 January 2009)

"Iran's revolution in global history" (2 March 2009)

"Iraq in the balance" (26 March 2009)

"The Dominican Republic: a time of ghosts" (23 April 2009)

"Iran's evolution and Islam's Berlusconi" (9 June 2009)

"Yemen: travails of unity" (3 July 2009)

All that has now, abruptly, changed. The three main bases of the Andorran economy are in trouble. Winter-ski tourism was down last season because of the low quantities of snow. The duty-free shopping on which Andorra relied (with goods available from an urban strip-mall of electrical goods, perfume and motor-vehicle stores in its main centres) has fallen seriously as a result of the crisis, above all that in its major market, Spain. Most seriously, one of the two "protecting princes" has taken a distinct dislike to Andorra's role as a tax-haven. This is France's president, Nicolas Sarkozy, who has threatened Andorra with severe sanctions if it does not fall into line with its fellow European tax-haven states Switzerland and Liechtenstein on issues of transparency, exchange of banking information, and tax-equalisation.  

The lair of freedom

In August 2008, Standard & Poor's lowered its credit-rating for Andorra, from AA to AA-, citing its various "vulnerabilities", including the weakness of its state finances and rising debt. Informed in February 2009 that he was, along with the Bishop of the Catalan town of Urgell, one of the two "co-princes" of Andorra, and hence of a haven for tax-evasion, Sarkoky saw an opportunity to prosecute his crusade against such traditional refuges of the rich and threatened the micro-state with severe sanctions. "Either you change, or you perish", his envoy told the Andorran government.

Spain, eager to put pressure on its other dependent tax-haven, Gibraltar, has joined in. The Andorrans have been told that if they do not sign a range of agreements on exchange of information immediately they may face punitive surcharges - of 30% or 40% - on all credit-card transactions carried out within the country.  In part as a result, Andorra's parliament passed a law on 7 September 2009 that will remove some elements of secrecy from its banking codes; the country is also consulting with a dozen other states over possible agreements on banking and tax-data, and on 22 September signed such an agreement with France.

For decades Andorra has enjoyed its status as a small island of fiscal and banking freedom between France and Spain. Income-tax was a flat rate of 10% on incomes above €35,000. There was no VAT - hence the appeal to duty-free shoppers. Government revenue came from a 4% tax on foreign savings, and import-taxes. From the 17th century, Andorra, with appropriate altitude and soil, was a major producer of tobacco and fields of subsidised tobacco can be seen in the suburbs of the main towns.

As Spain became more prosperous from the 1960s, more and more people could drive there for duty-free shopping. Liberal taxation and banking secrecy then boosted the population: of the population of 85,000, Andorran citizens account for only 37% (the rest being Spaniards [32%], Portuguese [16%], and French [6%]). There is also a small community of British retirees. Smuggling consumer-goods to Spain, over the two dozen or so unregulated forest tracks, also played its role: in the past year there has been a large rise in cigarette-smuggling, with small vans transporting up to 60,000 cartons a time. With a carton of Marlboro costing €20 in Andorra, and €34.50 in Spain, the wholesale profit-rate is 50%.

The balladeer's vote

Andorra was ruled from 1258 under a feudal arrangement between the Count of Foix (subsequently the king, and later still the president, of France) and the Bishop of Urgell. For centuries Andorra appeared to enjoy its isolation. Electricity arrived only in the 1930s. It stayed out of both world wars and, in 1934, when a White Russian émigré, Count Boris, seized power and declared himself "King of Andorra", he lasted only a day before Spanish police came to arrest him. It acquired a constitution and popular vote only in 1993.

Until recently, upon the reporting of a death, the justice of the peace would go to the body, hit it over the head, and enquire in the language of the country, Catalan: Mort, qui t'hat mort? ("Corpse, who killed you?"). At times of elections, some old practices prevail: after casting their votes in one of the seven constituencies of the country, voters are invited to various forms of hospitality: in one, there is a breakfast of sausages, flat bread and wine; in another snacks are on offer all day; in a third voters are given a key-ring, the modern equivalent of the peseta coin that heads of families, until 1933 the only people allowed to vote, were given as payment for casting their ballot.

Andorra has not always been fortunate in the uses to which its name has been put. In 1961 the Swiss playwright Max Frisch wrote a play in which, rather unjustly, Andorra substitutes for his native Switzerland in an exploration of the hypocrisy of neutral countries who profit from wars nearby but who reproduce the prejudices, in the case of this play, anti-semitism, of their larger neighbours. Perhaps the greatest tribute paid to it was by the American folk-balladeer Pete Seeger, who, on a holiday with his family in 1960, stumbled across the co-principality and celebrated his discovery by recording a song whose lyrics were written by Malvina Reynolds:

I want to go to Andorra, Andorra, Andorra, 
I want to go to Andorra, it's a place I adore, 
They spent four dollars and ninety cents 
On armaments and their defence,
Did you ever hear of such confidence? 
Andorra, hip hurrah!

In the mountains of the Pyrenees 
There's an independent state, 
Its population five thousand souls, 
And I think they're simply great. 
One hundred and seventy square miles big 
And it's awf'lly dear to me.  
Spends less than five dollars on armaments, 
And this I've got to see. 

The coroner's verdict

Three decades after Pete Seeger's visit, a modern constitution confirmed the power of the representatives of the banking elite that have long dominated the principality. As long as the economic prospects were fine, and a steady stream of day-visitors from Barcelona and Toulouse, each under four hours away by car, came for duty-free goods and to take money from their undeclared bank accounts, there was no reason to change. But the shifting economic climate - as well as pressure from France and Spain over banking secrecy - has altered that.

The elections of April 2009 for the twenty-eight seats in the Andorran parliament brought to power for the first time the Andorran Social-Democratic Party (PSA), headed by the lawyer Jaume Bartumeu. The traditional ruling party, the Reformist Coalition (and a recent split from it, Andorra for Change [ApC]) were pushed into opposition. There is also a small Green Party, which won 3.5% of the vote, and supports the PSA: its representatives are proud to declare that they are the first party in Andorran history to call for a "republic", i.e. the abolition of the "co-princes" arrangement.  

All parties have committed themselves to meeting the demands of the new European banking and taxation systems: if Switzerland is unable to resist pressure from Europe and the USA, it is evident even to the most resistant of Andorrans that they cannot either, even as they point out that the biggest fraud in Europe is not the existence of tax-havens, but the European Union's VAT system. Sarkozy's threats, and the sharpening of the global-governance response to the crisis reflected in the formalisation of the Group of Twenty (G20) at the Pittsburgh summit on 24-25 September 2009, have served to focus minds in the co-principality.

However, as younger Andorrans are quick to point out, it is not just the banking and tax systems that are in need of change, but the whole "Andorran model" of banking, duty-free and winter sports. At present, considerable efforts are going into promoting Andorra as an all-year round tourist resort. The country has a rich heritage of Romanesque churches - although, sadly, over 80% of all the original frescoes are now housed elsewhere (in the Museu Nacional d'Art de Catalunya in Barcelona, in private collections in the United States and other, unknown, places, and, in the case of some works stolen by the visiting members of the Gestapo during the second world war, in Germany). The country can certainly boast a healthy climate and its mountain slopes are ideal for summer walking.

It may also be possible to move away from the limit of "shopping tourism": whereas previously foreign investors could own or control only 33% of the capital in Andorran businesses, operating under the umbrella of Andorran prestanoms (literally "name-lenders"), they will now be permitted to own 100%. All of this will depend on more than the changes introduced by the new government in Andorra: certainly, as the old model fades, any coroner of economic death who came to this country and asked "corpse, who killed you?" would have little difficulty in naming the prime suspect: co-prince Nicolas Sarkozy. 

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