Mises Wire

What We can Learn from Liechtenstein

If one mentions in a discussion that Liechtenstein’s political system could possibly serve as a model for Germany, one usually reaps scorn and ridicule. If you dig a little deeper to find out what they know about Liechtenstein, the result is usually: little to none.

The Principality of Liechtenstein has no common border with Germany, it is trapped between Switzerland and Austria as a landlocked country. The national territory covers only 160 square kilometers, making Liechtenstein the sixth smallest state in the world. The country has 37,000 inhabitants, 34 percent of whom are (mostly German speaking) foreigners. The capital is Vaduz, the only official language is German. Liechtenstein has been a sovereign state since the dissolution of the Holy Roman Empire of the German Nation in 1806.

The principality does not have its own currency, instead it uses the Swiss franc and forms a customs union with Switzerland. Unlike Switzerland, however, Liechtenstein has become a member of the European Economic Area (EEA) following a referendum. There is free movement of goods, services, capital and persons among the member states (all EU states, Norway, Iceland and Liechtenstein). However, Liechtenstein was able to restrict the free movement of persons to 64 new residence permits per year.

Contrary to popular belief, the Principality is not an operetta state that thrives on stamp sales and windy financial transactions. Rather, it is a highly industrialized country with a highly diversified economy, whose main value-added branch is the manufacturing industry, especially mechanical engineering. Numerous Swiss, Austrians and Germans commute to the principality to earn their living.

Despite its small size, Liechtenstein hosts market leaders such as Hilti (drilling machines) and Ivoclar (medical technology). About 40 percent of the employees work in the industrial sector, making Liechtenstein one of the most industrialized countries in the world! By way of comparison, less than 10 percent of employees work in the financial industry. With one company per nine inhabitants, Liechtenstein probably has the highest density of entrepreneurs in the world.

The Constitutional Reform of 2003

In 2003, after ten years of discussion, a referendum adopted a major constitutional reform that strengthened the rights of citizens, municipalities and monarchs at the expense of parliament and government. The reasons for this are instructive, as they shed light on fundamental problems of parliamentarism and democracy. Since the 1990s, Liechtenstein had developed a constitutional reality in which the politicians and parties that constituted the parliamentary majority and the government increasingly drew powers from the Constitution that were either clearly assigned to the Reigning Prince or whose assignment was unclear. In some cases, even laws were published without the constitutionally required signature of the Reigning Prince.

Prince Hans-Adam II did not agree. He justified his ultimately successful proposal for a constitutional amendment by saying that for practical reasons both sovereigns, the people and the Reigning Prince, would have to delegate the tasks of the state to smaller groups (politicians, parties, administration), which in practice would then acquire a disproportionate importance, and would transform themselves into “oligarchies”. These, however, tried to increase their own interests at the expense of the interests of all others. Due to internal conflicts of interest, they would increasingly be less able to make important but unpopular decisions.

It is the monarch’s task to ensure that democratic and constitutional institutions are not weakened by this oligarchy and that the interests of the state are placed before those of the party. In the long run, the monarch would only be able to carry out this task if he knew that the majority of the people would support him. People and monarchy, as the weaker elements, are the natural allies against the strongest element in the state, the oligarchy.

At the same time, he pointed out that he might also have to veto a majority. It should be clear that the majority is not always right and that it is the prince’s task to protect the rights of minorities and the weak and to defend the long-term welfare of the people and the country. But if the people don’t want this, then the people should have the last word, according to the principle of the right to self-determination, regardless of the wishes of the prince, and be able to express their distrust or abolish the monarchy altogether.

An Innovative Constitution

Liechtenstein is therefore not a constitutional monarchy in the conventional sense. Rather, it is a worldwide unique mixed system between direct democracy and parliamentary-constitutional hereditary monarchy. In addition to parliament, the people and the Reigning Prince have their own relevant rights of control and co-determination, which are not subject to the influence of the parties; the municipalities may also introduce their own legislative initiatives. In order to counter the danger of unrestricted majority rule through direct democracy, the Liechtenstein system has incorporated two safety valves: on the one hand, the prince’s right of veto even against the results of referendums, and on the other, the right of secession of each individual community.

An abuse of the right of veto by the Reigning Prince, in turn, is prevented by the possibility for citizens to vote against him or to abolish the monarchy as a whole (!). In his work The State in the Third Millennium, Prince Hans-Adam II points out that no monarchy is necessary for such a construction. A President directly elected by the people could assume the same task as the Prince in Liechtenstein.

The current National Constitution of Liechtenstein is thus one of the most innovative in the world as far as the limitation of power in democracy is concerned, and that is the all-decisive point.

In fact, Liechtenstein is the only country in the world to allow its communities to secede and thus grants self-determination by virtue of the Constitution. This is actually a primordial democratic process. The majority of a territory decides by referendum to become independent or to belong to another community. If secessions down to the municipal level were in principle permissible, as is the case in Liechtenstein, the government would have an incentive to pay greater attention to the interests of the regions from the outset.

Hans-Adam II has recognized that the granting of self-determination and thus secession rights can increase the quality of government action by virtue of competition, just as it does in the product and service market. The states must then enter into peaceful competition with each other in order to offer their customers the best possible service at the lowest price. On the words of Hans-Adam II:

The process of transforming the state from a demigod into a service company will only be possible if we move from indirect to direct democracy and break up the monopoly of the state with the right to self-determination at the municipal level.

A Small State Does not Mean Isolation

In Germany, not only the exclave of Büsingen but also various southern German municipalities would presumably have joined Switzerland long ago if the same legal situation had been in place. This in turn would have made politics much more cautious in its measures, because otherwise there would be the threat of further loss of state territory and citizens (= power).

We should therefore think about whether a world of a thousand Liechtensteins would not be a better world. Most decisions would be made at the local level and decentralized, serious mistakes would have limited effects, there would be numerous examples of what works and what does not. Due to the multitude of communities alone, there would be fruitful competition for “customers” instead of a state cartel, which on the one hand wants to milk the citizens as much as possible and on the other hand wants to exclude them from all decisions.

Europe’s recipe for success has always been diversity and the associated competition. This does not necessarily mean weakness. Even city states such as Venice and Genoa or rather marginal states such as Portugal and the Netherlands were able to develop great political and economic power. The creation of superior institutions, such as a common free trade or economic zone or a common defense, is always possible and, especially in the case of similar communities, also obvious. Think, for example, of the League of Cities of the Hanseatic League or the German Confederation, an alliance of 39 sovereign states that maintained common political and military institutions. Small states do not automatically mean isolation or provincialism, but in any case, self-government and subsidiarity. And that opens up opportunities that are lacking elsewhere.

Compared to Germany, small Liechtenstein is a prime example of system robustness or antifragility. An antifragile system is one that has fewer swings, but is stable over a much longer period of time and ultimately more successful. In contrast, fragile systems look good for a while, but then collapse catastrophically at regular intervals.

Until 1866, Liechtenstein and present-day Germany were united in the German Confederation. Just as the intellectual mainstream is currently striving for a European federal state, the creation of a unified German state was the measure of all things at the time. When it became clear after the Battle of Königgrätz that Prussia, which rejected the continuation of the German Confederation, would be the centre of this new state, the member states decided to abolish it. A single member voted against at that time: Liechtenstein.

What subsequently happened to Germany is well known: Wars of unification, colonialism, World War I, two million of its own dead, loss of a quarter of its territory, revolution, hyperinflation, currency reform with loss of almost all savings, National Socialist dictatorship, Second World War, Holocaust with extermination of Jewish fellow citizens and their culture, six and a half million of war dead, loss of another third of the national territory, almost all cities bombed, expulsion of twelve million Germans, division of the country into occupation zones, renewed currency reform with loss of almost all savings, socialist dictatorship in the eastern part, revolution there and renewed currency reform. In total, there have been no less than four system collapses since 1870. In Liechtenstein, on the other hand: zero.

Today, the Principality of Liechtenstein has a much higher per capita income than the Federal Republic of Germany, is a stable country without significant crime and without national debt. All this was achieved without a single war, without a single revolution, and without a single annexation to a great and powerful collective.

Translated by Tim Benkner. This article was originally published in German at Achse des Guten.

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