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Apr 26, 2015 | 13:46 GMT

13 mins read

The Condition of Europe's Curious Microstates

Senior Europe Analyst, Stratfor
Adriano Bosoni
Senior Europe Analyst, Stratfor
A general view of Andorra's capital, Andorra la Vella the capital of the principality of Andorra, in the east Pyrenees.
(DAVID RAMOS/Getty Images)

On first examination, Europe's microstates seem irrelevant, mere historical oddities that somehow managed to survive despite being surrounded by larger powers. They are, however, some of the wealthiest places on Earth and play an important role as service economies. European microstates are notable because they offer lessons on how to build a foreign policy on the principle of survival, the most basic need of any sovereign state.

These tiny entities also highlight a key feature of European geography. While 15 of the world's 20 smallest sovereign states are islands, the five smallest continental microstates are located in Europe's mountainous south, a region that both facilitates political fragmentation and offers shelter from invasion. For centuries, a combination of political skill, resilience and even luck allowed Vatican City, Andorra, Monaco, Liechtenstein and San Marino to survive the Continent's endless political conflicts. In the future, however, external pressure to reform their opaque banking sectors and Europe's prolonged crisis could threaten their economic models.

In broad terms, a microstate is a state that has little territory and a small population — usually both — but shares most of the features of larger states, including sovereignty and international recognition. This differentiates microstates from other small political entities such as overseas territories or special administrative regions.

Europe is home to the five smallest continental microstates in the world: Vatican City, Monaco, San Marino, Liechtenstein and Andorra. These states have been autonomous or independent for most of their centurieslong history and were rarely invaded. Their existence and longevity is the result of at least two key factors: geography and political genius.

The Liechtensteins, consequently, maintained close ties with the Habsburg family. This strategy eventually paid off because, in the early 17th century, Holy Roman Emperor Matthias made Karl I of Liechtenstein a prince and allowed the family to amass lands that would later become a sovereign member state of the Holy Roman Empire. Ironically, the Liechtensteins rarely visited their new holdings and preferred to stick to playing politics in Vienna.

A map of microstates bordering the European Union

Most of these states are sheltered by mountains, making them easy to defend. Andorra, for example, is located in the eastern Pyrenees. Andorra la Vella, its capital, is situated 1,023 meters (3,356 feet) above sea level. Similar geography influences San Marino. In A.D. 301, when stonecutter Marinus of Arba fled the Roman persecution of Christians in the coastal city of Rimini, he chose nearby Mount Titan as the site of the small church and Christian community that would eventually become the independent state of San Marino.

Microstates' lack of natural resources also played a key role in both their development and survival. More often than not, these states were situated in places unattractive to larger surrounding states. As a result, political and military powers left them alone, sometimes for centuries. The position of many of these microstates in the borderlands between powerful nations also allowed them to play adjacent countries against each another.

A picture of the fortress dominating the City of San Marino.

The fortress of the City of San Marino.

(MAX RYAZANOV/Wikimedia)

But geography alone is not enough to allow a state, especially a very small one, to survive for centuries on a tumultuous continent. In some cases, the leaders of Europe's microstates had to request help from their larger neighbors. For example, the Grimaldi family, which has ruled Monaco since the late 13th century, was continuously forced to seek protection from the French and, in some cases, the Italians. France accepted Monaco's sovereignty in the 17th century, but Monaco's princes remained vassals of the French king. After the Napoleonic Wars, Monaco became a protectorate of the Kingdom of Sardinia, only to return to French protection after the unification of Italy.

Political brilliance enabled many of these microstates to craft complex legal systems that served to please the various powers competing for influence. This is the case in Andorra, which in the late 13th century agreed to be co-ruled by the Count of Foix in southern France and the bishop of Urgell in Catalonia. This solution solved the conflict between the French and the Catalan forces in dispute over Andorra's territory. Eventually Andorra evolved into a parliamentary democracy, but the aforementioned agreement survives to this day, with the bishop of Urgell and the French president serving as official co-princes of Andorra, which ironically makes socialist Francois Hollande an actual monarch, at least to the Andorrans.

Friends in High Places

Europe's microstates have also received help from well-placed allies in high positions. This is particularly true of San Marino, to which Pope Pius II granted extra lands in the mid-15th century. This grant allowed the country to expand its domains beyond Mount Titan. San Marino then signed a treaty of protection with Pope Clement VIII in 1603 and ultimately survived the process of Italian unification because it spent decades befriending and sheltering Italian patriots, including Giuseppe Garibaldi, during times of conflict. This ensured that Italy's leaders respected the country's independence once the peninsula was finally unified.

A picture depicting Italian revolutionary Giuseppe Garibaldi and his wife, Anita, traveling to take refuge in San Marino in 1849.

Italian revolutionary Giuseppe Garibaldi and his wife, Anita, traveling to take refuge in San Marino in 1849.

(Wikimedia)

San Marino's ability to go with the flow continued through the 1930s, when the country followed Italy's lead and elected its own fascist government. This proved helpful in the later stages of World War II, when the little country asked Benito Mussolini to intercede with Adolf Hitler to prevent a German invasion.

In other cases, the survival of these microstates is linked to the ability of a single family to climb to the top. This is the case with Liechtenstein, a country that takes its name from the family that governs it. The Liechtenstein family is originally from Lower Austria and was wealthy enough to acquire small plots of land across Central Europe but not powerful enough to be a decision-maker within the Holy Roman Empire.

A picture of Vaduz Castle, the official residence of the prince of Liechtenstein.

The official residence of the prince of Liechtenstein, the Vaduz Castle.

(FABRICE COFFRINI/AFP/Getty Images)

The Liechtensteins, consequently, maintained close ties with the Habsburg family. This strategy eventually paid off because, in the early 17th century, Holy Roman Emperor Matthias made Karl I of Liechtenstein a prince and allowed the family to amass lands that would later become a sovereign member state of the Holy Roman Empire. Ironically, the Liechtensteins rarely visited their new holdings and preferred to stick to playing politics in Vienna.

The pictures shows Italian President Sergio Mattarella speaking to Pope Francis during a visit at the Vatican.

Italian President Sergio Mattarella (C) speaks to Pope Francis during a visit at the Vatican. 

(MAURIZIO BRAMBATTI/AFP/Getty Images)

Having highly placed friends is important for microstates, and no institution has friends in higher places that the Roman Catholic Church's central governing body, the Vatican. The seat of the Vatican, Vatican City, is different from Europe's other microstates. To begin with, it is a sacerdotal-monarchical state ruled by the bishop of Rome, the pope. More important, it was not always so "micro." The Papal States controlled a sizable portion of the Italian Peninsula for over a thousand years before the creation of the Italian Kingdom in the 1860s. The popes have traditionally been involved in international affairs, even maintaining their own armies and intervening in wars. The Vatican's religious status, however, did not prevent the Papal States from being invaded, sacked or having their leader exiled. The pope also had tense relations with the Italian monarchy and its Catholic kings, a conflict that ended only in 1929, when the Lateran Treaty officially created the state of the Vatican City, the tiniest country in the world.

Dealing With Invasion

Although geography and political genius helped these microstates survive, the microstates have never been completely protected from invasion. The French Revolution and the Napoleonic Wars were particularly risky for such small entities, protected or otherwise. These conflicts completely redesigned the map of Europe between the late 18th and early 19th centuries.

Shortly after the revolution, French forces captured Monaco. They seized and auctioned the ruling Grimaldi family's possessions, including a notable art collection, and converted the family's castle into a hospital. Napoleon annexed Monaco again during his "Hundred Days" in 1815. This, like the emperor's return to power, did not last long.

Andorra chose to remain neutral during the Napoleonic Wars, hoping to maintain its ties with both France and Spain. But this was not enough to prevent the French Empire from annexing the tiny nation in 1812. Napoleon's plans for Europe also affected Liechtenstein. The French emperor decided that the small state belonged in the Confederation of the Rhine, one of the several states he created after dissolving the messy Holy Roman Empire.

World War II was equally challenging for these states. Monaco remained neutral, and after the Nazi occupation of France, Monaco's Prince Louis II expressed his support for the German-backed Vichy regime. The Italians, however, were interested in Monaco and invaded the country first in 1940 and then again in 1942. Later in the war, Nazi troops ousted the Italians and occupied Monaco in turn. Allied troops liberated Monaco in September 1944.

A pictures shows British troops from the 93rd Anti-Tank Regiment passing infantry of the 5th Sherwood Foresters during the advance to the Gothic Line in August 1944.

British troops from the 93rd Anti-Tank Regiment pass infantry of the 5th Sherwood Foresters during the advance to the Gothic Line in August 1944.

(Lupson, No. 2 Army Film and Photographic Unit)

San Marino also chose to remain neutral during the war but was pulled into the conflict in 1944 as the Allies advanced across Italy. The mountain nation was trapped just a few kilometers north of the Gothic Line, a major Nazi defensive front across the Italian Peninsula. As a result, San Marino was first bombed by the Royal Air Force and then invaded by the Nazis, who sent troops to stop the Allies. The Allies briefly occupied San Marino as they moved north, but the country was shortly given back to local authorities.

Although Liechtenstein remained largely unaffected by the war, the conflict resulted in the royal family losing its possessions in Bohemia, Moravia and Silesia. After the war, Czechoslovakia and Poland considered these lands German property and took possession of them, which led to a legal dispute that continued into the 21st century.

Money Matters

Considering the complex geographical and political factors that shaped them, Europe's microstates are historical oddities. Nevertheless, they are also some of the wealthiest places on earth, at least on a per capita basis. Like their maneuvering between larger neighbors, this is part of a deliberate strategy. 

Their economic success rests on four pillars: banking secrecy, low taxes, tourism and duty-free trade.

In recent years, however, Europe's microstates have been under pressure from the United States and the European Union to open up their opaque financial systems and improve information sharing in their banking sectors. Thus far they have complied reluctantly and only on a moderate scale. In 2009, the Organization for Economic Cooperation and Development removed Andorra, Liechtenstein and Monaco from its list of uncooperative tax havens. In most cases, however, these countries share information about bank accounts only if an individual is already under investigation.

But old habits die hard. Andorra is still an important entry point for smuggled goods, most notably tobacco, into the European Union. Local media are full of stories of Italians entering San Marino by bicycle, with money hidden in their shoes, to avoid police searches of cars. In July 2013, U.S. federal prosecutors and Liechtensteinische Landesbank, Liechtenstein's oldest bank, reached a settlement to stop any criminal prosecution of the bank after it admitted to helping U.S. clients evade taxes between 2001 and 2011.

A picture of the The Liechtensteinische Landesbank in Vaduz, Liechtenstein, with twin flags blowing in the foreground.

The Liechtensteinische Landesbank in Vaduz, Liechtenstein.

(JOHANNES SIMON/Getty Images)

These countries have also made the strategic choice to cooperate with the European Union but without seeking full membership. Andorra, Monaco, San Marino and the Vatican have agreements with the European Union to use the euro as their official currency. They have even issued their own coins. For example, there are euro coins with the face of the pope on them. However, they are not considered to be part of the eurozone by the European Central Bank and do not participate in the bloc's decision-making. Liechtenstein, on the other hand, privileged its relationship with Switzerland and uses the Swiss franc.

Andorra, Monaco and San Marino are also part of the European Union Customs Union, which abolished internal customs and established a common external tariff on goods entering the area. Liechtenstein's relationship with the European Union is even deeper. The country participates in the European Economic Area, which allows the free movement of goods, services, capital and people within the bloc.

Liechtenstein is the only one of these microstates that is a formal member of the Schengen Agreement, which eliminates border controls within Europe. However, San Marino has an open border with Italy and Monaco has an open border with France. This makes them de facto members of the Schengen zone, even if they still apply some sporadic border controls. Among these microstates only Andorra keeps formal border controls with its neighbors, but EU citizens do not need a visa to enter the country.

Not all of Europe's microstates have stayed out of the European Union, however. Malta, a tiny island nation with a strategic position in the Mediterranean and a former part of the British Empire, entered the European Union in 2004 and joined the eurozone in 2008.

Since keeping a military force and a diplomatic body is expensive, most of these microstates have delegated their defense and foreign representation to their larger neighbors. Liechtenstein, for example, has only four diplomatic representatives in Europe — Austria, Belgium, Germany and Switzerland — and one in the United States. Liechtenstein citizens abroad often have to turn to Swiss embassies in case of need. Andorra signed treaties with Spain and France for its protection, while Monaco and San Marino have similar defense deals with France and Italy, respectively.

The Future of Microstates

Microstates on the Continent have showed a remarkable ability to survive. For centuries, a combination of political skill, adaptability and sometimes outright luck have allowed them to survive Europe's endless political vicissitudes. In the future, however, these microstates will face new challenges.

First, the pressure from the European Union and the United States for more transparent financial systems is threatening their economic model. In mid-March, for example, the United States accused Andorra's Banca Privada d'Andorra of laundering money for organized crime groups, and the bank's subsidiary in Spain, Banco de Madrid SA, filed for bankruptcy. Over the past five years these countries have become more cooperative, but most of them still rely on wealthy foreigners and offshore companies for a significant portion of state revenue.

Second, the crisis in Europe has led to uncertainty about the future of the eurozone, a currency area that most of them participate in but over which they do not have a say. Since these countries are not formal members of the eurozone, strains on bank liquidity and solvency are more dangerous because their banks cannot count on the European Central Bank as a lender of last resort. Finally, Europe's low economic growth will also challenge these countries' banking and tourism sectors.

The irony behind the prolonged existence of Europe's microstates is that they have never been truly independent. With only geography on their side, these countries have traditionally had to adapt their national strategies to events beyond their control. Their main challenge in the coming decades will be to continue this never-ending process of adaptation, especially as the rest of the Continent continues to fragment.

As Stratfor's Senior Europe Analyst, Adriano Bosoni focuses on political, social and economic issues pertaining to the European Union and the eurozone.

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