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In 2008, Liechtenstein’s status as a tax haven once again caused tension with its European neighbors. As a result, the principality’s planned accession to the European Union’s zone for the free movement of people was pushed back to 2010.
Liechtenstein was established as a principality in 1719 and gained its sovereignty in 1806. From 1938 to 1997, it was governed by a coalition of the Progressive Citizens’ Party (FBP) and the FatherlandUnion, now the Patriotic Union (VU). The latter party then ruled alone until the FBP replaced it in 2001, having won that year’s elections.
In 2000, the Organization for Economic Cooperation and Development (OECD) labeled Liechtenstein uncooperative on money laundering because of its traditional banking-secrecy laws. The principality passed a law ending anonymity for account holders, and it was removed from the list of uncooperative states in June 2001. However, the September 2001 terrorist attacks on the United States helped to renew concerns that Islamist terrorists could be laundering money in Liechtenstein. The International Monetary Fund (IMF) reported in September 2003 that the country had made progress on updating its banking regulations, but it expressed concern that understaffing in the government and banks could weaken enforcement.
In a March 2003 referendum, voters approved a constitutional amendment that granted significantly more power to the monarch, Prince Hans-Adam II. He had threatened to leave for Austria if the measure failed to pass. The amendment gave the prince the authority to dismiss the government, veto legislation, and appoint judges. However, it removed his right to rule by emergency decree. In August 2004, Hans-Adam handed his constitutional powers to his son, Hereditary Prince Alois, though the elder prince retained his title as head of state.
In two-stage elections in March 2005, the VU and the FBP won 10 and 12 of 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. FBP leader Otmar Hasler, the prime minister since 2001, retained his post.
Prince Alois reiterated in 2006 that Liechtenstein would not make further changes to its banking-secrecy laws. In 2007, the OECD restated that the principality was an uncooperative tax haven, one of only three countries (along with Andorra and Monaco) that were so designated. However, partly in an effort to burnish its reputation, Liechtenstein did cooperate with an investigation into Siemens, the German-based engineering giant, regarding the alleged laundering of 190 million euros ($256 million) that may have been used for bribes.
In 2008, Liechtenstein’s European neighbors renewed their tax-related complaints. German interior minister Wolfgang Schaeuble criticized the country directly after his government began an investigation into German citizens hiding money in Liechtenstein. Concerns about tax havens took on new urgency as a worldwide financial crisis developed late in the year. Largely as a result of Liechtenstein’s status,the principality’s entry into the European Union’s “Schengen area,” which allowed the free movement of people across international borders, was delayed until 2010. Liechtenstein had been expected to enter in 2008 alongside Switzerland, which was also a non–EU member.
Liechtenstein is an electoral democracy. However, the unelected monarchy won greater authority in 2003, making it the most politically powerful in Europe. The unicameral Parliament (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 politics over the last half-century; however, the small Free List won three seats in the 2005 elections.
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. Liechtenstein has a reputation as a tax haven, despite promising in a 2005 agreement with the EU 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 2008 Corruption Perceptions Index.
The constitution guarantees freedom of expression and of the press. There is one private television station, 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 exemptions 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 also 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 controversy over the monarch’s expanded powers, the Council of Europe’s secretary-general gave assurances that “Liechtenstein’s status as a law-based state is unarguable.” The IMF has rated the financial-services regulators as capable but too understaffed to fully police all banks and accountholders. Crime is rare in the country. Switzerland is responsible for its customs and defense.
A third of the population is foreign born. Some native citizens have expressed concern over the growing number of immigrants from non-German-speaking countries. 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.
Under a 2005 reform, abortion is 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 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. The five-person cabinet includes one woman, responsible for foreign affairs, culture, and family affairs.