200th Anniversary of Liechtenstein
Liechtenstein has remained free and at peace in a world that has suffered from continuous war for the last 200 years
July 1, 2006
Fred Foldvary, Ph.D.
Economist

The Principality of Liechtenstein celebrated its 200th year on July 12, 2006. Located between Switzerland and Austria by the Rhine River, the principality was established within the Holy Roman Empire in 1719. Napoleon's forced the emperor of the HRE to abdicate in 1806, and Liechtenstein became a sovereign state within the Confederation of the Rhine. When Germany unified, Liechtenstein, nestled away from the other states, was the only state within the old Holy Roman Empire to keep its independence.

The population of 34,000 and area of 160 square kilometers (62 square miles, about the size of Washington DC) make Liechtenstein one of the smallest countries on earth, but like its fellow tiny country Monaco, Liechtenstein's prestige and influence is much greater than its population size.

As an independent country, Liechtenstein issues its own postage stamps and has been a member of many international organizations, including the Council of Europe, the European Economic Area, the Universal Postal Union, the World Trade Organization, and the United Nations. Its currency is the Swiss Franc, and it has a customs union with Switzerland for foreign trade. Liechtenstein has no army, its defense is also handled by Switzerland. Liechtenstein has embassies in several countries, including the United States.

Some 95 percent of Liechtensteiners are ethnic Germans who speak the Alemannic dialect. The country also has foreign workers from nearby countries. Most of the inhabitants are Catholic, and Pope Benedict XVI sent a message of congratulations to Prince Hans Adam II.

The prince of Liechtenstein is a hereditary monarch and the head of state, and lives in a real castle. (Prince Hans Adam II has transferred some of his powers to his son, Prince Alois.) Under the constitution of Liechtenstein, the county is also governed by an elected legislature, and it has an independent judicial system.

Franz Joseph II, Prince of Liechtenstein from 1938 to 1949, kept Liechtenstein out of World War II and helped guide the economic development of Liechtenstein from a poor agricultural economy into an economy with one of the highest per-capita incomes in the world.

The country enjoys almost full employment, the main occupations being light industry, farming, tourism, and banking. With relatively low taxes (a top income tax rate of 18 percent) and few restrictions, many companies are incorporated in Liechtenstein. The tax revenue as a percentage of total income in Liechtenstein is about 23%, compared with 27.5% in Japan, 30% in the United States, and 42% in Europe. The top income tax rate for natural persons is 18.1%.

Both moveable and real property are subject to property taxes. The property tax varies, subject to municipal surcharges; typically the tax rate is between .16% and .85% of the value. While taxation is light compared to most countries, Liechtenstein would be even richer if it replaced all its taxes with a charge only on land value.

With strong privacy laws, its banks hold accounts of depositors world wide. Although Liechtenstein cooperates to prevent terrorist financing, the criminal code of Liechtenstein does not include tax evasion.

Why did so many people of Germany elect and support the Nazis during the 1930s and 1940s, while the people of Liechtenstein, also ethnic Germans, remained free and peaceful? The difference was the structure of government, as a small principality. The Swiss also remained peaceful; though much larger than Liechtenstein, Switzerland is highly decentralized into cantons, which limits the power of the central government.

In 2001, the government of Liechtenstein appointed a Historians Commission to examine Liechtenstein’s role in World War II. During the Nazi era, several hundred persons found refuge in Liechtenstein, with many others passing through to Switzerland. As a small state dependent on Switzerland and next to Austria, which was annexed to Nazi Germany, Liechtenstein could not act with total independence. Its policies during that time were compromised, e.g. its banks had dealings with Germany, but nevertheless Liechtenstein, like Switzerland, did not descend into the brutality of Nazi Germany.

The main lesson we can learn from Liechtenstein is that it has remained free and at peace in a world that has suffered from continuous war for the last 200 years. The county also shows us that people can prosper and have liberty in tiny countries. If all countries had the population of Liechtenstein, we would not have suffered the enormous conflicts of the past two centuries. For countries, small is indeed beautiful.

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Fred Foldvary, Ph.D.
Economist

FRED E. FOLDVARY, Ph.D., is an economist and has been writing weekly editorials for Progress.org since 1997. Foldvary's commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and currently teaches at San Jose State University.

Foldvary is the author of The Soul of LibertyPublic Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary's areas of research include public finance, governance, ethical philosophy, and land economics.

Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.