Finance

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Dario Lopez-Mills/AP
Albert Pintat, Prime Minister of the
Principality of Andorra

Andorra Opens Up, Giving New Dimension to Global Recession

December 23, 2008 02:53 PM
by Anne Szustek
With two of its main income sources—tax sheltering and skiing—on the decline, the tiny European nation is lessening its barriers to foreign investment to boost the economy.

For Andorran Economy, Do Downhills Mean a Financial Upturn?

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Since soon after World War II, European microstate Andorra has been a hideaway for both skiers and for foreigners’ bank accounts.

But the Pyrenees Mountain principality’s $4.1 billion economy—for a country of some 83,000 residents—is the latest to falter in the current financial climate. Tourism, which accounts for some two-thirds to four-fifths of Andorra’s gross domestic product, is dwindling. And as its larger European neighbors such as France and Germany, as well as multinational organizations such as the Organization for Economic Cooperation and Development, have cast greater scrutiny on Andorra’s apparent offshore tax shelters, foreigners have pulled out their millions from the country’s banks.

Andorran Prime Minister Albert Pintat was quoted as saying by Bloomberg, “We need to change the image the world has of us from tax haven to investment haven. … For a long time, we’ve been closed off the outside world. Now we need to open up.”

Onshore in Andorra, foreign entities were allowed to own only up to one-third of an Andorran business. But in early November, Pintat ushered in reforms to let non-Andorrans own up to 49 percent in key industries, such as real estate development, ski resorts and high-end fashion retailers.

Real estate agents operating in the principality are now marketing Andorra as a hot buy for wealthier customers looking for a quiet home in a tax-free haven. In the areas of Anyos and La Massana, the going rate for a sizeable chalet is some £800,000 ($1.2 million), according to realtor Roger Munns. He told British paper The Independent, “You wouldn’t even get an apartment in Monaco,” another well-known tax haven, “for that.”

Some Andorrans contest that the country’s financial problems are its own, rather than collateral damage from an external economic crisis. Andorra is facing a steep credit crunch cutting into medical center and education budgets, due largely to liquidity problems at the country’s five commercial banks.

Jean-Christophe Queyroux, the general manager at Andorran retail and hospitality company Pyrenees SA, told Bloomberg, “Everyone’s talking of the global crisis, but this is purely an Andorran crisis. We’ve been living very expensive lives, had the best of everything, and now it’s time to pay the bills.”

Background: Countries crack down on tax havens

Thirty-eight countries are currently on an OECD list of countries considered “tax havens,” meaning they have strict banking secrecy laws and little to no taxation. Three of those, European microstates Andorra, Liechtenstein and Monaco, have been blacklisted by the OECD for disclosing scant information on their financial industries. This is down from the year 2000, when the OECD identified 40 countries as “uncooperative” in terms of banking transparency.

Placement on the list carries little in the way of penalties, other than the stigma of being on it.

Reference: Andorra

Andorra is a landlocked principality nestled between France and Spain in the Pyrenees Mountains. From gaining its independence in 1278 until 1993, the country was ruled as a co-principality governed by parties in France and Spain; after that point the country converted into a parliamentary democracy that kept both titular heads of state. The “princes” in question are the president of France, currently Nicolas Sarkozy, and the bishop of Seo de Urgel in Spain.

The 83,000-person microstate, about 2.5 times the acreage of Washington, D.C., has Catalan as its official language, although French and Castilian Spanish are also spoken. During the decades since World War II, Andorra’s economy has thrived on tourism. Accounting for some 80 percent of the country’s GDP, the local sector is based on skiing and duty-free shopping. Andorra is also known as a haven for offshore banking.

Andorra lacks a currency of its own, so it uses the Euro despite lacking full EU status. The tiny country currently boasts the world's longest life expectancy. Andorran men born in 2008 can expect to live over 80 years; while their female contemporaries can look forward to seeing at least their 85th birthday.

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