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In 2006, Liechtenstein celebrated the 200th anniversary of its independence. However, the tiny principality’s banking-secrecy laws, and its attendant status as a tax haven, continued to act as an irritant in its relations with other countries.
Liechtenstein was established as a principality in 1719 after being purchased by Austria’s Liechtenstein family, and gained its sovereignty when the Holy Roman Empire was dissolved in 1806. Native residents of the state are primarily descendants of the Germanic Alemanni tribe, and the local language is a German dialect. From 1938 to 1997, the principality was governed by a coalition of the Progressive Citizens’ Party (FBP) and the Fatherland Union, now the Patriotic Union (VU). The FBP was the senior coalition partner for most of this period. Otmar Hasler, the current leader of the FBP, became prime minister after the party won a majority of seats in parliament in the February 2001 elections.
In 2000, the Financial Action Task Force of the Organization for Economic Cooperation and Development (OECD) labeled the principality “noncooperative” on money laundering because of its traditional banking-secrecy laws. Liechtenstein then passed a law ending anonymity for account holders, and it was removed from the list of noncooperative states in June 2001. However, after the terrorist attacks in the United States on September 11, 2001, concerns reemerged that Islamist terrorists could be laundering money there. The International Monetary Fund (IMF) reported in September 2003 that Liechtenstein had made progress in updating its banking regulations, but it expressed concern that the government and banks might not have enough staff to fully enforce regulations.
In a March 2003 referendum, voters approved a constitutional amendment that concentrated significantly more power in the hands of the monarch, Prince Hans-Adam II. The prince had threatened to leave Liechtenstein for Austria if the measure failed to pass. The amendment, which made Liechtenstein’s monarchy the most powerful in Europe, gives the prince the power to dismiss the government, veto legislation, and appoint judges. However, it removes the prince’s right to rule by emergency decree. The Council of Europe, which monitors democracy among its member countries, has decided not to pursue formal monitoring of Liechtenstein.
On August 15, 2004, Prince Hans-Adam handed his constitutional powers to his son, Hereditary Prince Alois, though Hans-Adam retained his title as head of state. Alois, born in 1968, studied at Britain’s Royal Military Academy at Sandhurst and has training in law and accounting. He is expected to be somewhat less confrontational with Liechtenstein’s other political institutions than was his father.
In two-stage elections in March 2005, the two main parties—the VU and the FBP—split most of the vote, winning 10 and 12 of the Parliament’s 25 seats, respectively. However, since a small third party, the Free List, captured three seats, the two larger parties were forced to form a grand coalition. Hasler remained prime minister, and his FBP took three of the five cabinet seats.
In 2006, Liechtenstein marked its 200th year of independence with a large celebration in Vaduz, the capital. Leaders of neighboring Austria and Switzerland attended.
Prince Alois reiterated in 2006 that Liechtenstein would not make further changes to its banking-secrecy laws. Though it had been criticized by the OECD as a tax haven, the prince claimed that given the principality’s dependence on banking, no major change would survive a necessary referendum.
Liechtenstein is an electoral democracy. However, the unelected monarchy won greater powers in 2003, and Liechtenstein’s ruling family is now perhaps the most politically powerful in Europe. The unicameral legislature (Landtag) consists of 25 deputies chosen by proportional representation every four years. These freely elected representatives determine the policies of the government, but the monarch, currently Hereditary Prince Alois, has the power to veto legislation, dismiss the government, and appoint judges.
Political parties are able to freely organize. Two parties—the VU and the FBP—have dominated Liechtenstein’s politics over the last half-century; however, the small Free List won three seats in the 2005 elections. Switzerland and Austria, the two countries that surround Liechtenstein, have a substantial measure of influence on the tiny principality.
Liechtenstein’s politics and society are largely free of corruption, and the country continues to work to build sufficient capacity to fight money laundering in its banking system. Although Liechtenstein has a reputation as a tax haven, it signed an agreement with the European Union (EU) in 2005 promising to impose withholding taxes on savings income earned by EU nationals. (The withholding would not apply to nationals of other countries, leading to further complaints from the OECD.) Liechtenstein was not ranked by Transparency International in its 2006 Corruption Perceptions Index.
The constitution guarantees freedom of expression and of the press. One private television station competes with the state broadcaster, and the only radio station is in private hands. The two daily newspapers are aligned roughly with the two major political parties. Broadcasts from Austria and Switzerland are available and popular in the country, as are foreign newspapers and magazines. Internet access is unfettered.
The constitution establishes Roman Catholicism as the state religion but protects freedom of belief. Catholic or Protestant religious education is mandatory, but exceptions are routinely granted. All religious groups are tax exempt. The government respects academic freedom.
The right to assemble freely is not infringed. The right of association is protected, and the principality has one small trade union.
Judges are appointed by the prince. Due process is respected, and conditions in prisons are acceptable. Following the controversy over the monarch’s new powers, the Council of Europe’s secretary-general sought to reassure those concerned about democracy that “Liechtenstein’s status as a law-based state is unarguable.” The IMF has rated the financial services regulators, important to a country so reliant on banking, as capable but too understaffed to fully police all banks and account holders. Crime is rare. Switzerland is responsible for Liechtenstein’s customs and defense.
A third of Liechtenstein’s population is foreign born. While the majority come from Germany, Austria, and Switzerland, a growing proportion are from more distant countries and do not speak German. Some native Liechtenstein citizens have expressed concern over the number of immigrants in the country. The government has responded by seeking to teach newcomers the language and culture of Liechtenstein in formal integration programs.
Liechtenstein has been a member since 1995 of the European Economic Area, a free-trade area that links non–EU members Norway, Iceland, and Liechtenstein with the EU. Liechtenstein’s currency is the Swiss franc. Living standards are high, and the country has a large number of small businesses and a strong financial sector.
A restrictive abortion law was liberalized in November 2005, and abortion is now legal in the first 12 weeks of pregnancy. A 2003 court decision upheld the principle of equal pay for equal work for women, but Liechtenstein’s society remains conservative—women did not receive full voting rights until 1986—and practice lags behind principle. Women are underrepresented in upper levels of business and government, but have equal rights in family law. Liechtenstein’s five-person cabinet includes one woman.