Leave no stone turned
Apr 9th 2009
Microstates flourish because big countries need them
RICH and powerful people in Russia and Ukraine clearly find the “Pridnestrovian Moldavian Republic”—more commonly known as Transdniestria—a useful entity. If they didn’t, they would close it down. That is something that the European Union, the Organisation for Security and Cooperation in Europe and others like to point out in a finger-wagging kind of way. The puppet states of South Ossetia and Abkhazia are the same. A flick of the switch would turn off the power. A turn of the tap would stop the gas. A telephone call would close the border. And the regimes would fall soon afterwards.
It would be nice to think that dodgy microstates are strictly a post-Soviet phenomenon. In the law-governed space east of the pre-war Soviet frontier, all countries, surely, are real. Their financial systems are transparent. They abide by their international obligations. Their political systems are accountable.
Yet look closely at the three European countries still listed as “non-compliant” (in other words, tax havens) by the Organisation for Economic Cooperation and Development (OECD), and some striking features emerge. Andorra, Liechtenstein and Monaco have a combined population of about 130,000—rather more than South Ossetia, but far less than Abkhazia or Transdniestria. Liechtenstein’s Prince is the last secular feudal ruler in Europe, with the right to veto legislation he doesn’t like. The Vatican, of course, is not a democracy at all (but as it is not a financial centre either, it escapes any criticism on that front).
Clearly, if countries such as France and Germany offered simpler and user-friendlier tax and legal regimes, some of the microstates’ advantages would diminish. But the real point is the symbiotic relationship between the microstates and the big countries. Liechtenstein depends entirely on Switzerland and Austria, Andorra on Spain and France, and Monaco on France alone. None of the three tiddlers would survive for a minute without the cooperation of their neighbours.
It is encouraging that the authorities in all three microstates now profess great eagerness to sort out their remaining misunderstandings with the OECD and get their countries off that organisation’s bad books. But it is troubling that it has taken a decade to bring them this far. Part of the reason may be that Switzerland and Austria themselves are not wildly enthusiastic about tax compliance. But what explains the curious benefits enjoyed by Monaco, which enjoys its charmed life thanks only to the cooperation of France?
Casting an eye further afield, it is also interesting that Britain’s offshore islands (Guernsey, Jersey and the Isle of Man, as well as the Caribbean crown dependencies such as the British Virgin Islands) have managed to develop as financial centres so easily, despite the losses to the exchequer in London. Suspicious minds might wonder if these places are so useful to British business that no government wants to go to the trouble of closing the loopholes they provide.
On tax transparency at least, the tide now seems to be turning against countries that are, in some respects, western versions of Transdniestria. On the equally important question of ownership, it is far from clear that real change is afoot. It is still possible to use a web of companies in these places to deter nosey outsiders wanting to know who owns what. Such anonymous entities may soon be forced to pay more tax, but it will not be any clearer who owns them. That scandal erodes the moral authority of the West in demanding that corrupt elites in places such as Russia and Ukraine bring their offshore entities into the light of day.
Thursday, April 09, 2009