Finance Watch

Lessons from history #11 – The Monaco crisis from 1962-1963 and the emancipation of tax havens

Financial self-defense
Reading Level: Regular
Reading Time: 9 MIN.

About the author

Fabien Hassan is an analyst for the 2° Investing Initiative, a Paris-based think tank working for the alignement of the financial sector with the objectives of emission reductions to mitigate climate change. Fabien holds a degree in Economics from the Ecole Normale Supérieure de la rue d’Ulm, in Paris. He also studied in Sciences-Po Paris, Princeton University, and the Free University of Berlin. Read his blog here.

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Wikimedia Commons


In the early 1960s, tensions between France and Monaco culminated into a blockade of the city-state ruled by Prince Rainier and Grace Kelly. The absurdity of the episode has provided inspirational material for filmmakers, advocates of fiscal reform, and observers of global finance. This article tries to explain the origins of the crisis, and compare the treatment of tax havens by bigger countries before and after the globalisation of capital flows.

A fight for human rights or fiscal privileges?

In 1963, Easter was a great relief for the small city of Monte Carlo. The day before, the French government officially decided to remove the blockade implemented six months before, in October 1962. French and Italian tourists were able to spend the Easter weekend in Monaco. Polemists stopped – for a while – demanding the exclusion of AS Monaco from the French football championship, and things went back to normal.

The story of how France considered the use of force against a country of 23,000 (Girardeau, 1962) is fascinating. It was picked up in 2014 by film director Olivier Dahan, who placed it at the centre of the plotline in ‘Grace de Monaco’, starring Nicole Kidman. Princess Grace Kelly is pictured as the symbol of the resistance of an oppressed people, subject to the mood changes of a dictatorial General de Gaulle.

Advocates of fiscal justice still refer to the Monaco crisis with nostalgia (Le Monde, 2013). So was Prince Rainier’s opposition to France a matter of sovereignty and independence against a greater power, or does the blockade reflect a time when France was ready to stand for its values of fiscal equity?

Real political tensions, a farce blockade

Despite the dramatic tone of Oliver Dahan’s movie, the reality of the blockade was quite ludicrous. In October 1962, at the peak of the Cuba missile crisis, the world came very close to a nuclear war between the USA and the USSR. In this context, on October 13, 1962, French newspaper Le Monde unsurprisingly described the blockade as having the “atmosphere of a massive prank”. Six French customs officials blocked the road, which created massive traffic jams on the coastal road to Nice. People were essentially free to cross the border, but the extra time did cause inconveniences. Monaco is only 2.02 km2. Monégasque citizens have to cross the border very often. For example, in 1962, public buses were parked on a parking lot in France at the end of the day to free some space.

In fact, the real blockade only lasted a few hours (Montebourg & Peillon, 2000). However, the degradation of the relationship with France had economic consequences. There was a small but thriving pharmaceutical activity in Monaco, with 350 employees. The press estimated that a third of them lost their jobs in November 1962 (Mourlane, 2005). Nevertheless, the State had enough resources to absorb the pressure for some time.

Beyond the ridicule, it is worth getting into the details of the story, as the interaction between France and Monaco in the 1960s may inform the debates on tax evasion in the 21st century.

Political tensions with France started in 1959, when Rainier decided to suspend the Constitution. Several diplomatic moves were aimed at getting US support, in the context of De Gaulle’s France being more and more anti-American.

In Monaco, residents have been exempted from direct taxation since 1869 (Principality of Monaco, 2010). After World War II, the tax exemptions became more aggressive and Monaco entered a period of prosperity (Montebourg & Peillon, 2000). With decolonisation, significant flows of capital had to be repatriated to Europe. Monaco greatly benefited from those inflows (Bézias, 2007).

In 1962, the crisis was triggered by a very technical provision on the nullity of share sales under certain conditions (Mourlane, 2005). The provision was introduced specifically to enable the state of Monaco to regain control on Radio Monte-Carlo (RMC) and Télé Monte-Carlo (TMC), two leading media outlets in France (Bézias, 2007). The French government owned the shares of the companies through various subsidiaries. This was a political matter: with the war in Algeria, media were closely controlled in France, so broadcasters from Monaco and Luxembourg (RTL) enjoyed more freedom and the right to air advertisement. The amusing fact is that the transmitters of RMC and TMC were located on a nearby hill… in France.

Rainier quickly abandoned his plans to control RMC. The concession did not calm a vexed French government, which moved on to demand direct taxation of exporting companies and French citizens residing in Monaco. Why was the Principality so reluctant to implement direct taxes?

The strategy of a micro-state

According to Prince Rainier in an interview to France Soir, “Direct taxation would harm the very roots of our sovereignty” (quoted by Mourlane, 2005). This is a surprising statement: historians have shown that modern states are built on their capacity to raise taxes and issue debt backed by future taxes. The circulation of liquid, reliable sovereign debt enables private financial markets to emerge, a decisive step toward economic development (North & Weingast, 1989). The demonstration works very well for seventeenth-century England, not so much for a micro-state such as Monaco.

On the contrary, as stated by Rainier, the sovereignty of a micro-state shows most when it diverges from the fiscal regime of its neighbours. Since there is no real border between Monaco and France, this creates a massive incentive for companies to locate their activities where taxes are lower.

Monaco is too small to host manufacturing activities, or even significant office space. Companies cannot locate activities there. The strategy for a micro-state has to focus on financial flows. Taxes on capital gains from individuals and corporations have to be very low in order to attract a critical mass. For the neighbouring power, such as France, this is only acceptable to the extent that it does not deprive the State of resources.

The strategy is different with medium-sized states. For instance, Ireland has very low corporate taxes to attract companies such as Dell and Google. According to the Irish press, Google has approximately 2,500 employees in Dublin, a small figure if compared to the size of the Irish economy, but that is already too much for Monaco.

The worst case, which provides the most room for fiscal optimisation, is obviously the combination of medium-sized states with low corporate taxes to locate activities, and micro-states with very low taxes on capital to locate profits.

The complicity of the great power

The crisis between France and Monaco came to a – temporary – end in 1963. The compromise is essentially still in force (the last substantial revision was in 2003 with a new bilateral tax agreement). French residents of Monaco do not benefit from the exemption anymore: they have to pay their income taxes to France. This is not trivial: despite a constant decline, the French population of Monaco still outnumbers Monégasque citizens (Principauté de Monaco, 2010). Similarly, corporations that earn more than 25% of their revenues outside Monaco are subject to direct corporate taxes. Today, those are still the two main exceptions to the principle of no direct taxation.

The compromise is exemplary of the relationship between big countries and “their” tax havens. France accepted and even encouraged the presence of a low-tax financial centre at its border. The only condition was the taxation of French citizens and corporations doing business in France. As long as foreigners from third countries came to Monaco and contributed to the economic and cultural dynamism of the French Riviera, tax justice was not an issue.

A well-known fact about tax havens is that nearly every major country used to have one “under control”: the Virgin Islands and Jersey for the United Kingdom, Delaware in the United States, Monaco and Andorra for France, Luxembourg for Germany and the European Union, Hong Kong for China, etc. This is what makes the fight against tax havens so complicated geopolitically.

Indeed, in the world of the 1960s, those major countries all had an interest in controlling a low-tax territory. This would attract financial flows, which in turn benefit the economy. International capital flows from developed countries were controlled, so tax evasion was limited.

Digitalisation, globalisation and the removal of capital controls completely changed that landscape. Tax havens were emancipated from their patron state. Now every big country is a net loser of tax revenues due to tax havens. But nobody wants to start by cleaning up their own tax haven. Exemplarity is not exactly the leading principle of international negotiations.

The other Monacos of the world

Is the case of Monaco too exceptional to be significant? Other states of comparable size have had a tremendous impact on international financial flows. The population of the British Virgin Islands is 25,000. Jersey is bigger, with almost 100,000. The Cayman Islands, often pinpointed as one of the most important offshore financial centres, only has a population of approximately 50,000. Just as Scotland has more sheep than people, small tax havens usually have more incorporated companies than their population.

By definition, hidden money is hidden from the state. So it is hard to evaluate the amount at stake. One original attempt is based on identifying inconsistencies between the official balances of payments of all states in the world, and attributing those inconsistencies to tax evasion. The result is an astonishing €5,800bn hidden in tax havens, resulting in a loss of €130bn of tax revenues every year (Zucman, 2003).

Zucman recommends direct commercial sanctions against non-cooperative states. This may seem too radical and unpractical (Chavagneux, 2013). There are also diplomatic ways, which abide by international law and sometimes prove efficient.

In 2009, Monaco signed a commitment to cooperate with OECD members. Hence, the country was removed from the list of “uncooperative tax havens” of the OECD. The list is now empty. This is ambivalent: it shows that international pressure can force every single country in the world to cooperate, it also shows that the OECD’s definition of tax havens is extremely narrow.

Moreover, tax havens are not necessarily small islands and micro-states. In 2013, the Tax Justice Network, an independent international network, published the Financial Secrecy Index, which ranks jurisdictions according to their secrecy and the scale of their activities. Interestingly, Switzerland was ranked first in 2013. That same year, the OECD boasted an agreement designed to put an end to bank secrecy.

Even more striking: Luxembourg and Germany, two founding members of the European Union, were ranked in the top 10. So any action against the opacity of international finance will have to come from those powerful states.

Hopes for the future: actions of the OECD and the European Union

There are two kinds of tax evasion. The first one is criminal, based on secret transfers of money and evident fraud. International cooperation agreements aim to tackle the problem of opacity and enable judges to request specific information. The other kind of tax evasion is much harder to fight: it is an abuse of tax optimisation, where companies and individuals transfer money offshore to escape tax. Usually, tax authorities have access to all the information, but they struggle to demonstrate any misdeeds.

With the help of specialised tax advisors, multinational corporations have built sophisticated schemes. Common features are the transfer of immaterial goods such as property rights to empty shells incorporated in low-tax countries. Profits from activities are then transferred to those entities as royalties for licencing rights. This principle can also be applied to material goods. Transfer pricing within groups have become a massive arm of tax evasion.

A single country will often struggle to prove that a scheme is illegal. Licencing rights are standard practice; only abuse can be sanctioned. Assessing the legality of such schemes requires a view of the global activities of a corporation. Furthermore, states are reluctant to punish nationally-headquartered firms, over which the level of control is the greatest, as this would harm their competitiveness.

Hence the interest of involving supranational organisations. In 2014, the European Commission launched an investigation into the transfer pricing agreements affecting the corporate taxation of Apple (Ireland), Starbucks (Netherlands) and Fiat (Luxembourg). With competition law as legal basis, the case represents a very significant shift: after decades of using competition law exclusively to remove regulation, the European Union is finally concerned about fair tax competition. Tax exemptions could be considered as “state aid”, just like subsidies. The qualification would trigger a legal regime designed to prevent states from creating artificial advantages for national companies to the detriment of competing Member States, in a customs union where goods cannot be stopped or taxed at the border. More information on the case is expected in Spring 2015.

Meanwhile, great expectations rely on the BEPS (Base Erosion and Profit Shifting) Action launched by the OECD and the G20 in 2013. BEPS refers to: “tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid”. This focus on legal strategies based on loopholes is much more radical than the fight against non-cooperative tax havens and money laundering. This is where the big money is.

For the OECD, “in an increasingly interconnected world, national tax laws have not always kept pace with global corporations, fluid movement of capital, and the rise of the digital economy, leaving gaps that can be exploited to generate double non-taxation. This undermines the fairness and integrity of tax systems”. The statement may seem obvious; but it represents a significant improvement and shows increased awareness of the shortfalls for governments.

In a multipolar, open economy without controls on capital flows, sending six army officers to the Monaco border would not make a difference, as it did in the 1960s. International cooperation has not worked well until now, but the pressure on public finances in Europe and the United States might force advanced economies to take steps and stop the leakage of capital to tax havens. Organising more OECD workshops on double-taxation is certainly not as romantic as trying to starve Princess Grace Kelly, but, as de Gaulle said in 1944, “The most noble principles in the world live only through action“.

Fabien Hassan


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  • Girardeau, E. (1962). La population de Monaco et les migrations. Population n°3, pp. 491-504.
  • Le Monde (2013). “Oui, la Principauté de Monaco est bien un paradis fiscal“, par Vincent Piolet. Available on that link.
  • Montebourg A., Peillon V. (2000). Rapport d’information par la mission d’information commune sur les obstacles au contrôle et à la répression de la délinquance financière et du blanchiment des capitaux en Europe. Tome I : Monographies. Volume 2 – La principauté de Monaco, Assemblée nationale française. Available on that link.
  • Mourlane, S. (2005). La crise franco-monégasque de 1962-1963. Recherches régionales Côte d’Azur et contrées limitrophes, 46(OCTNOV), 109-116.
  • North, D. C., Weingast B. R. (1989). Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England. The Journal of Economic History, 49, pp 803-832.
  • OCDE (2014). Projet OCDE/G20 sur l’érosion de la base d’imposition et le transfert de bénéfices. Exposé des actions 2014, 15p. Available on that link.
  • Principauté de Monaco (2010). Monaco en chiffres, édition 2010. Disponible sur, consulted March 2, 2015.
  • Zucman, G. (2013). La richesse cachée des nations. Enquête sur les paradis fiscaux. Le Seuil / République des Idées.
  • Chavagneux, C. (2013). « De la richesse cachée des nations : sur le livre de Gabriel Zucman », Blog Alternatives Economiques, available on that link, consulted March 31, 2015.
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