Academic journal article The European Journal of Comparative Economics

Safe Havens in Europe Switzerland and the Ten Dwarfs

Academic journal article The European Journal of Comparative Economics

Safe Havens in Europe Switzerland and the Ten Dwarfs

Article excerpt


Eleven safe havens exist in Europe providing offshore banking and low taxes. Ten of these states are very small while Switzerland is moderately small. All 11 countries are richer than their large neighbors. It is shown that causality is from small to safe haven to wealth, and that theoretically equilibriums are likely to exist where a certain regulation is substantially lower in a small country than in its big neighbor. This generates a large capital inflow to the safe havens. The pool of funds that may reach the safe havens is shown to be huge. It is far in excess of the absorptive capacity of the safe havens, but it still explains, why they are rich. Microstates offer a veil of anonymity to funds passing through, and Switzerland offers safe storage of funds.

JEL: E44, F33, F65

Keywords: Capital flight, offshore finance


This analysis took offfrom Christoffersen et al. (2013), which compares Denmark and Switzerland. It allows the case of Switzerland to be brief at present. I am grateful to the referees, to colleagues and to the participants in the Silvaplana Workshop for Political Economy and the Hamburg University seminar on Law and Economics, where previous versions have been presented. I want to thank Peter Bernholz, Michael Christensen, Reiner Eichenberger, Andreas Freytag, Peter Nannestad, Christoph Schaltegger and Heinrich Ursprung for fruitful discussions.

1. Introduction

This essay explains the many safe havens in Europe. No commonly accepted definition exists of an SH, safe haven, but the actual cases are well known. Table 1 (overleaf) lists Switzerland and 10 much smaller countries as the ESHs, the European Safe Havens.2 The various definitions may be summarized as: An SH is a country that makes substantial money by exporting a problematic SH-good to neighboring countries, where it is restricted or illegal. The SH-export takes place by keeping a restriction, r, lower than in the neighbors.3 The largest SH-product is offshore financial services, which protect funds from taxes levied in the land where the money are earned, but gambling and the sale of cheap booze may also be mentioned.

1.1 A preview of the content: Causality and offshore finance

The essay deals with two main points about the safe havens: (i) Why do they come about? This deals with causality. (ii) How do they fit into the financial structure of the continent? This contains a size-puzzle: The pool of offshore finance is far in excess of the absorptive capacity of the SHs. Two sections deals with each point:

The first two section deals with (i) and show that it is a tempting possibility for a small country to be an SH. Section 2 takes offfrom a survey of a few basic data for all European countries. The analysis proves the causal chain empirically: From small to safe haven to rich. Section 3 presents a theory to explain this causal chain. Equilibriums exist for the SH-regulation, where the small country keeps it 'too' low, while it's large neighbors do not to react even if they resent the SH-policy. It is also explained why dependencies are often 'allowed' to be safe havens.

The following two sections consider the size-puzzle: Section 4 looks at the size of the pool of funds seeking shelter by means of offshore finance. The uncertain estimates cited are all very large. The pool is a stock, but we also bring estimates of the flow of funds and on the annual accumulation of funds in the ESHs. It is much smaller than the inflow.

Section 5 deals with the effects of the SH-policies on the EHS economies. It shows that the inflow is far in excess of the absorptive capacity for finance in the ESHs. Thus, the microstates mainly provide short-run veils of anonymity for funds passing through, while Switzerland also provides long-run storage of funds either in the country itself or as a guarantor for funds invested abroad. It stresses the difference between the exchange rate regimes of the 10 dwarfs and Switzerland, which is about 4 times larger than the 10 small countries added together. …

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