An externally dependent economy
If the primary and secondary sectors were driving the Andorran economy until the middle of the 20th century, the opening up of the principality and its openness to both tourism and trade have changed the situation: today, more than three quarters of the active population work in the tertiary sector, with trade and the hotel and restaurant industry in the lead, placing Andorra in a situation of great dependence on the rest of Europe. Let's explore Andorra's economy in more detail.
The primary sector to begin with. Due to the mountainous terrain, there are no specific agricultural resources in Andorra other than the cultivation of tobacco (since the late 19th century), potatoes and livestock (mainly cattle and horses). These agricultural lands, which occupy only 2% of the territory, are threatened today by the construction of tourist accommodation, shops and parking lots, and only 0.4% of the population is employed in this unprofitable sector. However, even if agriculture plays a negligible role in the Andorran economy, the areas used for crops and livestock contribute to the principality's tourist appeal. The secondary sector employs 4.7% of the population. The industries that made Andorra famous have all or almost all disappeared. The textile industry, located mainly in Escaldes due to the presence of a sulfurous water source, ceased all activity in the 1930s. The iron, reputed to be of good quality and worked since the 17th century, was no longer exploited at the end of the 19th century. Only the tobacco industry persists, but in an almost anecdotal way, as well as hydroelectric production, which nevertheless requires additional foreign imports to satisfy Andorra's needs. This low production, both agricultural and industrial, makes Andorra extremely dependent on other nations, mainly Spain and France. As a result, it has to import large quantities. Currently, machinery and electronic equipment, agricultural products, transport equipment and chemical products are the main areas of import. More than 90% of these products come from Europe, with France and Spain in the lead.
Despite this, the principality has a per capita income above the European average. This is because, like most developed countries, Andorra derives its income from the service sector, which employs 94.9% of the population. Andorra has the highest percentage of people working in the service sector (80%) and of businesses (89%) compared to the European Union member states. Trade, finance and tourism are the key positions in this economic dynamic. More specifically, trade and the hotel industry account for three quarters of the activity and more than half of the workforce, composed mainly of Spanish and French employees, some of whom are seasonal. This concentration in a single sector of activity is obviously dangerous: a significant drop in tourist numbers, especially in 2010 and 2011, has shown the country, without it being able to really remedy this...
The essential role of tourism
Tourism took off in Andorra in the 1960s. The hitherto unexploited mountainous setting made it a European destination of choice for lovers of the great outdoors and snowy descents. The democratic practice of skiing, already widespread in the Alps, reached the Andorran Pyrenean summits and soon became one of the main reasons to visit the principality. Due to its proximity, French tourists were the first to come and enjoy the Andorran resorts of Pas de la Casa and Grau Roig. However, the world crisis of 1973 put a serious brake on this emerging sports tourism, and the French stayed at home because of the colossal rise in the price of gasoline. The Spaniards, on the other hand, quickly made Andorra their home and discovered skiing, an activity that had been rather unknown until then. Andorra became very fashionable and the Spaniards quickly got into the habit of coming to ski and do their shopping.
Nowadays, the Spaniards continue to be the first visitors to Andorra. Next come the French, then members of other European countries, including the Russians. The Russians are increasingly visiting the principality, especially in winter, taking advantage of the ski areas of the small Pyrenean country. However, visitors do not usually stay in Andorra for very long, rarely exceeding a week's vacation. In fact, two thirds of tourists only stay in Andorra for one day, with the main reason for their visit being to buy tax-free goods. Because of the great difference in prices and the geographical proximity, the French represent the largest percentage of this passing tourism: Pas-de-la-Case, with its formidable range of stores at attractive prices, is a border town with France.
For a country with a microscopic surface area and population, tourism represents an incomparable financial vector from which it draws its wealth. It allows Andorrans to maintain a good standard of living with a GDP per capita and life expectancy among the highest in Europe. Thus, in 2018 alone (latest figures available), the number of visitors exceeded the 3 million mark for the first time (9 million overnight stays), mainly French and Spanish, confirming the increase in tourism since 2012. It should also be noted that the number of visitors to the principality has increased significantly during the summer season, proving that Andorra does not only attract visitors for its ski slopes. However, the year 2020 has, here as in the rest of the world, put a serious brake on tourist numbers. And the year 2021 was not much better. In the summer of 2022, however, tourism figures were up on the previous two years.
Taxation and sovereignty
Andorra has a unique political status in the world, created by the signing of the Paréages in the 13th century: it is a principality under the joint sovereignty of two co-princes. Thus, the Bishop of Urgell and the President of the French Republic share the role of head of state. Executive power is held by the government, while legislative power is in the hands of the 28 members of the General Council. The great economic, demographic and cultural changes that the principality underwent at the end of the 1960s gradually led it to embark on a process of reform of its institutions. Thus, in March 1993, the Andorran Constitution now in force was adopted. For almost thirty years now, the modernization of legal and economic structures has been pursued through legislation. While Andorra is deeply attached to its independence, it has followed the general European trend and enacted numerous laws relating to the education system, heritage protection, immigration, social protection and public finance.
In the wake of the 2008 crisis, Andorra was forced to revise many of its tax laws to comply with European law and Brussels' policy against tax havens. France has played a leading role in this process: in 2010, President Sarkozy threatened to relinquish his prerogatives as co-Prince if international agreements were not signed more quickly. In February of the same year, Andorra agreed to sign agreements with 17 other countries and was removed from the official OECD list of tax havens. In 2013, was also introduced a corporate tax and a direct tax rate. Today, the IGI (the equivalent of VAT) still caps at 4.5%.
On March 10, 2015, while Andorra was in the midst of a rehabilitation process and managing to gain credibility in the eyes of its European neighbors, a major multi-billion dollar money laundering scandal (belonging to Russian and Chinese mafias, but also originating from the Venezuelan national oil company PDVSA) involving the Banca Privada d'Andorra (BPA), revealed by a U.S. financial crime agency, undermined these efforts. Once again under pressure and wanting to show good faith in terms of tax transparency, the principality agreed with the EU in 2016 to lift its banking secrecy as of January1, 2018: as of that date, the names, addresses and tax data of European nationals with bank accounts in Andorra are transmitted to the governments of their home countries. However, this measure is qualified by agreements signed between the principality and various European countries (including France) on the avoidance of double taxation on companies, leaving the way clear for companies wishing to practice tax optimization in a country with rules that are, after all, more favorable than elsewhere in Europe. Following the BPA scandal, Andorra has also accepted negotiations for tax alignment with its European neighbors regarding the tobacco trade, which represents a large part of Andorran revenues.
It is in this socially tense context that the 2019 legislative election campaign is taking place: in the face of European fiscal pressure, sovereignist parties are emerging. In addition to growing euroscepticism, the issue of abortion, which is strictly forbidden in the country - regardless of the origin of the pregnancy - divides the population. The opposition's plan to legalize abortion prompted the Archbishop of Urgell - co-Prince of Andorra - to threaten to resign if such a law were passed. The ruling party, sensing a potential institutional debacle if the archbishop carried out his threats, calmed tempers by suggesting that it would provide assistance to abortion candidates, who would still have to perform abortions outside the country. Despite social discontent and the desire for change, the incumbent party Demòcrates per Andorra (Democrats for Andorra) retained power in the April 2019 legislative elections, this time without an absolute majority, and Xavier Espot Zamora succeeded Antoni Marti as head of government. Zamora's first flagship measure came in March 2020, when his government legalized same-sex marriage.
