ANDORRA — Andorra, one of Europe’s smallest nations, has relied on banking secrecy, tourism and duty-free trade to turn itself into one of the Continent’s most impressive postwar economic success stories.
Wedged between France and Spain and with a population of 84,000, Andorra has benefited from its hybrid status as a principality headed by representatives from its two neighbors to attract their entrepreneurs and tourists. It also gained a reputation for being unwilling to share information, particularly financial data.
Still, Andorrans take pride in having transformed their mountain farming community into a financial and commercial center that coupled massive immigration from France, Spain and Portugal with several years of double-digit economic growth.
But lately, those engines of growth have begun to backfire, forcing landlocked Andorra to find new sources of revenue.
“The three engines of our economy — trade, tourism and finance — have all shown signs of exhaustion,” said Marc Pantebre, president of the Andorran Chamber of Commerce.
Gross domestic product per capita has dropped every year since 2006 — a decline reflected in almost every sector. Tourism has fallen steadily over that period, down to about 9 million from 10 million annual visitors, who are mostly attracted to the winter skiing in the Pyrenees and a mix of duty-free shopping and hiking in the summer.
In response to the downturn, this year, for the first time, every Andorran company will be required to publish its accounts, thereby also allowing the government to work out the exact size of the Andorran economy (it cannot for now provide exact G.D.P. figures). The state is also proposing to collect its first-ever direct taxes, in the form of a corporate levy and to introduce a new system of value-added taxation — all pending approval by lawmakers.
Meanwhile, the Andorran banking sector has also been forced to reposition itself as a more competitive and transparent financial center.
During the worldwide financial crisis, Nicolas Sarkozy, the French president, who also carries the title of co-prince of Andorra, placed himself at the helm of an international crusade to clamp down on tax evasion. Mr. Sarkozy told Andorra to fall in line if it did not want to be ostracized, even threatening in early 2009 to drop his princely title. Spain, desperate to plug its ballooning budget deficit, also became more determined to recoup money hidden in offshore accounts.
Andorra complied, signing agreements with its two neighbors as well as with several other countries to collaborate on cross-border fraud investigations. As a result, the Organization for Economic Cooperation and Development removed Andorra last year from its list of “uncooperative tax havens.”
Mr. Sarkozy also applauded. “Transparency is not in conflict with the Andorran identity,” he told a public gathering while visiting Andorra last month.
Such recent praise has come as a major relief to Andorrans. The country’s ongoing transformation is also perhaps a test case for other smaller nations and tax havens that have been pressured into joining the international mainstream.
But whether a better reputation as a more transparent banking center will also translate into a stronger nation remains unclear. Some local politicians deplore the fact that Andorra allowed itself to be bullied, as they see it. The country, the politicians argue, should instead have introduced reforms of its own accord — before Europe’s economic downturn started to complicate such an overhaul.
“We should have made these changes much earlier,” said Rosa Ferrer, mayor of Andorra la Vella, the nation’s capital.
One immediate worry for Ms. Ferrer and others is that Andorra’s reform drive might soon run into political instability. The center-left government that spearheaded reform is now struggling to get lawmakers to approve its budget. Without an absolute parliamentary majority, the governing party needs another party’s lawmakers to endorse its budget plans. Otherwise, it would probably be forced to call early elections, having come into office only last year.
In important steps toward joining the international mainstream, Andorra added a constitution in 1993 and then joined the United Nations. Andorra’s latest priority is to reach an association agreement with the European Union, as well as to end a system of double taxation imposed by France and Spain that has largely prevented Andorran companies from expanding beyond their borders no teletrack payday loan.
Meanwhile, all the proposed reforms are testing citizens’ tolerance for change. “A lot is now being asked of people here in terms of change, but we have our idiosyncrasy, and losing our identity wouldn’t be good,” said the Rev. Jordi Miquel, parish priest in Massana, another Andorran town. “Uniformity tends to make this world poorer, and there is more to learn from our differences.”
One concern has been Andorra’s fading appeal as a duty-free shopping paradise, with items like electronics and alcohol traditionally available at much lower prices than in Spain or France. But since the switch to the euro in 2002, the price differential has dropped. Andorran shops no longer get preferential treatment from suppliers, said Mr. Pantebre, because larger brands now use regional distribution structures in which tiny markets like Andorra lack clout.
A traffic warden, who asked not to be named, said that the local police force had acquired bicycles from Spain — to the frustration of local retailers but at almost half their price.
“The only real asset that we can still offer shoppers is security,” he said. “You could leave everything in the car, with the keys in the ignition, and nothing would happen.”
Still, Andorra’s planned value-added tax, at 4.5 percent, will be far below that of almost every other Western nation, local politicians noted. But should shopping tourism continue to decline, it could seriously hurt a country that put business ahead of charm as a drawing card.
Arguably the biggest unknown is the future of Andorra’s five banks: BancSabadell d’Andorra, Banc Internacional-Banca Mora, Andbanc, Banca Privada d’Andorra and Credit Andorra. Having to relax secrecy rules was “a real shock for Andorra,” said Pascal Saint-Amans, who heads the O.E.C.D. secretariat handling international tax cooperation from Paris.
Andorran banks also have a more limited product offering than institutions in similarly sized offshore centers like Monaco or Jersey, with its thriving trust business, said Mr. Saint-Amans. “Andorra has been far less diversified and more dependent on secrecy,” he said, reflecting in large part the needs of entrepreneurs based just across Andorra’s borders.
The aggregate assets of Andorran banks fell 15.6 percent in 2009, according to a report from the banking association published this month. The banks, however, remained profitable and kept their default ratio at 2.2 percent, benefiting from a cautious lending approach that also steered clear of the subprime meltdown.
That conservative management should help offset the loss of full secrecy guarantees, according to local executives and politicians. “Our banks can still provide security as well as a good return,” said Joan Gabriel Estany, leader of the opposition Liberal Party. “Why is Switzerland attractive? Not because of its banking secrecy but because of the stability that it offers.”
Still, Pere López, the country’s economy and finance minister, hinted in an interview at changes in the secluded banking landscape. “We want to facilitate the international expansion of our banking sector and the arrival of new entities in Andorra,” he said.
Meanwhile, the government is hoping the anticipated income from a corporate tax will erase a budget deficit that reached 5 percent of G.D.P. last year. The country’s debt burden is expected to rise to about 39 percent of G.D.P. this year from 35 percent, said Mr. López. That remains well below many other European countries, but Andorra had to act rapidly because “we have a chronic deficit that could turn into a very difficult situation,” the minister said.
In direct response to the downturn, the country also introduced a system of unemployment compensation last September to help stem a recent population outflow in a country that had relied heavily on an immigrant work force to grow.
“Economic activity was so strong that joblessness was literally not an issue until now, but things have changed, and helping the unemployed is a social responsibility,” said Gérard Martínez, an independent economist, who estimates that as many as 3,000 workers have left Andorra since 2006. “Without benefits, somebody without a job pretty much had to leave.”
Adding Taxes, Shedding Secrecy
