Andorra’s model: time for change

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."

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.