Prince threatens to abolish tax haven

Vaduz - The floodlit castle of Prince Hans-Adam II hangs like an apparition above the jewellery shops that clutter the capital of his realm. It is perched on a sheer cliff, 500ft directly above the rooftops, providing a natural barrier to boomtown Vaduz.

Generations of Liechtensteiners have basked in the light and wealth radiating from the ramparts, but the present incumbent could be the last of the line.

His Highness, the thirteenth reigning monarch, is so displeased with his subjects that he is threatening to move abroad. Without the Liechtenstein family, he told parliament last month, the 62 square miles of rock and the narrow strip of arable land along the Rhine might cease to exist as an independent state.

The 51-year-old Prince is outraged by efforts to drag his tax haven into the 20th century. The government would like to govern in tandem with the monarch; the Prince wants to preserve his absolute powers enshrined in the constitution. Under the present laws, he can rule by decree, dissolve parliament and government at will and throw back legislation which is not to his liking.

Since his ascension to the throne in 1989, Hans-Adam has used all these prerogatives with great frequency, provoking enormous opposition among his once doting subjects. At first, the confrontations were on a Ruritanian scale. In 1992 he clashed with parliament over the timing of a referendum about membership of the European Economic Area, a trading block that encompasses the EU and members of the European Free Trade Association.

Both sides were in favour of membership, but the government wanted to hold the referendum after Switzerland's similar plebiscite, while the Prince decided Liechtensteiners should hold the ballot first. The result was that the principality voted Yes, while the Swiss decided to stay outside, an outcome that vindicated the monarch but left his popularity in tatters.

He was booed in the streets and more conflicts were to follow, culminating in a suggestion from a senior judge that the Prince should be made accountable to the Court of Appeal.

The Prince reacted in absolutist style, barring the author of the proposal, Herbert Wille, the presiding judge to the Court of Appeal, from a further term of office.

Mr Wille is taking his case to the European Court of Human Rights in Strasbourg, but the Prince holds the trump card. Parliament, he told MPs last month, may tinker with the law, but he will only stay in Liechtenstein if "the monarch retains his existing constitutional tasks".

If he left, the country would have several options, the most obvious being to join one of the two neighbouring states, he added. "Of the two possibilities, I think joining Switzerland would be the more sensible alternative, not least because of the smallness of the country," he said. Liechtenstein already forms a customs union with Switzerland, and the national currency is the Swiss franc.

There is a catch. Even if the country could survive as a republic, it might face economic turmoil. "The transformation of the principality of Liechtenstein into a republic would cause severe damage to its financial sector," the Prince predicted.

It was rather a neat way of saying "I am the State." For, Hans-Adam is Liechtenstein, not just because he lends the family name to the country, but also because he is, in effect, its largest shareholder. Without his cash piles, the people of Liechtenstein, who are among the richest in the world, would have to return to herding goats.

The principality's wealth flows from two main sources: the 70,000 letter- box companies "based" in Vaduz and the foreign money pouring into the accounts of native banks. One third of the state budget, which is controlled by the Prince and the government, comes from the foreign companies' registration fees.

Their importance to the economy can be gauged from the proliferation of brass plates at almost every available address. Liechtenstein has only 30,000 inhabitants, so competition for a friendly letter box is fierce. Even the brand new art museum in Vaduz has five company names on its front door.

The rest of the financial sector, which accounts for 50 per cent of the gross domestic product, looks after the money of tax-avoiders in other countries. At the centre of this web stands the LGT Bank in Liechtenstein, which is owned by the ruling family. The group, one of the largest in Europe, manages 55bn Swiss francs, (pounds 30bn) and made a profit of 129m francs last year. Naturally, the Prince pays no tax on his earnings.

The bank does not ask questions about where the money of depositors comes from, but denies it is handling the ill-gotten gains of crime syndicates. "This is a small place," says Rene Ott, the bank's managing director. "Everybody knows everybody here. In any case, we are just passing a very tough law on money-laundering."

Whatever its colour, the foreign cash keeps Liechtensteiners in luxury. Work is a relative concept. About a third of all jobs are filled by commuters from abroad. The Swiss bring brains, the Austrians brawn, while the locals perform the duties in between, provided they are not too strenuous.

This could disappear if the Prince takes his business elsewhere. He has given his subjects one year to come up with a formula to keep him in the country, which only became the family's residence in 1938, when Hitler annexed Austria, the dynasty's homeland. He expects the two governing conservative parties to outbid each other in monarchist sentiment in elections due next March.

Paul Vogt, the only opposition MP in the 25-member parliament, believes that the ruler will prevail, because the people cannot afford to lose him.

"The monarchy is not under threat," he says. "First, there is tradition, and second there is the economy. The financial sector, the banks, want no turbulence, no negative headlines."

The trouble is that the turbulence comes not from popular demands to abolish the monarchy, but from the monarch's erratic statements. The Prince, whose function is to provide stability to Liechtenstein Inc, is undermining it by his tempestuous behaviour.

"His warning was not good for investor confidence - that's the problem with the speech," says a government source.

"Many people are beginning to say: 'Let's get rid of him'." He predicted the Prince would ride out the coming year, but then will come the deluge. "After the elections something has to happen, because pressure from the people is growing," he says.