There is this intriguing selection of tiny independent states with populations of just a few tens of thousands that attract international attention beyond proportion and punch diplomatically far above their weight. They may be home to the rich and famous and boast an image of glitter and glamour, such as Monaco, or be coveted for placid luxury leisure, such as mountain-climbing, skiing, wellness, visiting castles and attending prestigious cultural events, such as Liechtenstein, Andorra and San Marino. They often enjoy the rule of glorious hereditary princes living in palaces rather than clumsy prime ministers who are always compelled to explain their political actions. And their symbolism go by distinct flags and colorful post stamps telling the impressive story of their national glory. Simply irresistible! Following a narrower exclusive definition, Monaco, Liechtenstein, San Marino and Andorra are micro-states; a wider interpretation that would include the Vatican, Luxembourg, Malta and Iceland is not considered here. Martin de Jong and Roza Behroozi have mapped a great variety of background materials, and conducted interviews with officials, residents and visitors to examine how these micro-states collected their exclusive wealth and reputation, and then verified their conclusions with AI tools. They present their main findings below.
How resilient the dwarves
It is remarkable that these very tiny entities established by dukes, counts, bishops or saints in medieval times were able to withstand the appetite of powerful popes, generals, monarchs and presidents around them and have survived until the year 2025. Their resilience can historically be explained by their remoteness or mountainous location, which initially made them less attractive and/or easy to access and conquer, as well as by their beneficial protection from powerful religious or secular leadership of much larger political entities. Over time, the rulers of these micro-states have given in to’ mounting pressures of power-sharing and democratization, but not nearly as much as their larger European neighbors. They established councils chosen by the national electorate, but their princely dynasties preserved decidedly more influence over policymaking processes and budget management than was the case elsewhere, and they made becoming a national citizen a rare and exclusive occasion: why share wealth and influence when ‘luxury and awe’ policies did their precious work to keep people happy and quiet. Foreign residents could barely obtain citizenship and foreign workers would never have the means even to become residents. Moreover, there was always little need to spend money on armies and payments could be made in other nation’s currencies: France, Switzerland, Italy or Spain were friendly enough to provide such security services. In most cases, infrastructure links with their valiant neighbors are now of excellent quality, since isolation is a feature of times long gone by. Still, they shun joining the European Union which surely would impose strict legal, political and economic conditions on them. Membership of the European Economic Area, as Switzerland and Norway have also done, has allowed them to join the benefits of free trade with European partners without having to comply with undesirably strict banking regulations or tax regimes and the significant administrative burden involved. Being a paradise on earth means leaning on Europe’s support without actually being a part of it.
How beautiful the life of parasites
Although Friedman once said that the business of business is (and should be) business, there is one recipe in the world that works still much better when it comes to profit-maximization and he may have graciously overlooked it: concocting and utilizing brilliant banking and tax regimes. This obscurantist job of making tax evasion and covering up secret banking transactions legal is a piece of cake for the initiated. Lo and behold, the results are dramatic: if one wants to attract exorbitantly rich people, wealth taxes, income taxes, gift taxes, inheritance taxes and dividend taxes should be very low to zero. If the presence of head offices or high-profile research divisions of promising enterprises and corporations are the target of one’s attention, then lowering various kinds of company profit taxes and capital gain taxes to zero or minimum percentages are the card to be played. If a dominant role of the always lucrative industry of personal or corporate financial services is what one needs to thrive, slowly and reluctantly or even hardly complying with international requirements of financial openness is by far the best recipe. The actual implementation depends on how important one finds a clean global reputation. Monaco and Liechtenstein make it rather obvious that respectability on that count is not really vital to them and that attracting and keeping the super-wealthy in the world firmly in their midst is their absolute highest priority. Monaco fulfils this task through promoting flashy luxury lifestyles for the rich and famous, while Liechtenstein opts for doing this by encouraging introverted wealth enjoyment for those preferring to stay far removed from the limelight. San Marino and Andorra have felt compelled in recent years to give in to pressure from the European Union and the United Nations for more openness and collaborative attitudes and softened their reputations as tax haven. Consequently they are unfolding more as middle-class oriented entities with strong reputations in banking, finance and tourism. Regulatory permeability for European and other international disapproval, even if it has become practically inevitable, comes with a price though: exclusiveness is lost and droves of normal noisy tourists enter the fray. Alas!
How powerful the branding
Is that all there is to it, the empowerment of sophisticated wealth generation and preservation tactics? No, there are additional powerful tools of government that can best be summarized with the word ‘place branding’. Given that they are all sovereign states, they have at their disposal the display of conspicuous flags visible everywhere in the public space, they have their own traditional printed and broadcasting media, they sponsor major sports events such as the Formula 1, they have a world-class public sector investing into cultural facilities such as theaters, opera houses, music halls and castles alongside decadent private-sector entertainment areas for yachts, car racing, casinos, cruises, jet set-style shopping. skiing, wellness and luxury hotels and restaurants. And to further boost their business they have enacted special arrangements for drawing in celebrities and famous influencers to tout their magnificent experiences to a wide global audience on social media. This again includes favorable tax regimes, but also favorable residency rules, zero to low income tax, facilitation of property acquisition, providing exclusive access to sites and events in exchange for exposure and offering symbolic citizenship to create loyalty. They must have followed their place branding classes much better than we have and their societal impact is also much larger than mine. Have we been sleeping all these years?
One-way mirror enclaves that last a lifetime
During his childhood when Martin was camping and caravaning with his family in Southern France like so many of his compatriots, he still listened to radio broadcasts in a Volkswagen Golf up while driving up hairpin bends in the mountains. This was a frustrating experience, because the radio signal of French station was rarely particularly good. But one stood out and always made it through: Radio Monte Carlo. It was so popular with his sister and him that whenever his father boldly attempted to play classical music from weak French channels, they would always sing their most popular words and exhort him to switch back: Radio Monte Carlo, click! These days Martin travels by train and consult music performances discretely on his smart phone, but whenever he checks short videos on YouTube, stylishly dressed women sitting next to substantially greyer men getting out of hyper-expensive cars guided across red carpets guided by uniformed porters towards Café de Paris always appear prominently in his news feed. We leave it to the reader to tell what this says about him, but it is clearly a novel incarnation of the same childhood phenomenon. Monaco is both the prototype but also the most outspoken version of the modern European micro-states. They are politically conservative, not quite gender egalitarian, selectively accessible to outsiders, expert in rent-seeking and classy consumption, yet very popular with old and young both inside and outside the enclave. Their nationals are multi-linguals for whom the tongues of their larger neighbors operate as their native speak: French, Italian, German, Spanish. But they have also preserved their specific dialects that serve as markers of their national identities and to which mere residents and guest workers have no access: Monegasque, Alemannic, Sammarinese and Catalan. We have not seen better examples of privileged enclaves acting as lasting breeding grounds for the dynamics of exclusive prosperity. How shall Europeans deal with this pernicious temptation?
- Professor
- Researcher
