Andorra is one of only several countries to have engaged in non-inflationary growth without a currency or central bank of its own to dictate monetary policy or act as a lender of last resort, and has never seen sustained inflation, banking, or fiscal instability in its history. We argue that the Andorran monetary experience was one of institutional substitution whereby external monetary anchoring, conservative banking regulation, and enforced fiscal discipline performed the stability functions typically associated with a central bank. Historical and contemporary evidence is presented to highlight how the Andorran experience constitutes a conditional success of a plausible alternative to monetary sovereignty in a highly dependent economy. 

Introduction 

Central banks are generally regarded as important institutions because they control the money supply, anchor inflation expectations, act as lenders of last resort, and backstop fiscal authority in times of stress. Andorra is an outlier. It has never had a central bank, nor does it have a native currency implementing a conventional monetary policy such as interest rates. Nevertheless, it has maintained strong financial and economic performance. This paper will explain how Andorra is managed on a micro level without the presence of a central bank and if Andorra can be considered as an institution substitution case rather than an anomalous case. This stability has external anchoring, conservative banking regulation, and fiscal discipline, but not discretion in monetary policy. The paper divides into monetary substitution, banking regulation, fiscal discipline, and limits replication. 

Section I: Monetary Substitution and Stability Without Monetary Sovereignty 

Andorra has been one of the few examples of monetary stability without any monetary sovereignty, with no central bank of its own, no local currency, and no access to a central bank’s lender of last resort facilities. Andorra has avoided chronic inflation, currency crises and other forms of macroeconomic instability through a system of monetary substitution, in which credibility and external anchoring replace discretionary monetary policy. 

Andorra has never had its own currency. As Galabert Macià (2014, p. 251) summarizes: the Principality “has always been characterized by the absence of a central bank [and] the free movement of currency”. Foreign currencies were also used freely throughout the twentieth century. The absence of this institution occurred together with the emergence of a centralized and internationally oriented bank sector, and in time Andorra came to be seen as a regional financial center explicitly due to its lack of monetary capacity. In the late twentieth century, “total wealth under management in Andorra was 10 times greater than GDP”, stressing the financial deepening that was possible without imposing a monetary authority (Galabert Macià, 2014, p. 3). 

This informal arrangement was formalized in Andorra’s Monetary Agreement with the European Union in 2011. Although the euro was made an official currency there, this did not provide Andorra with currency sovereignty. According to the International Monetary Fund (IMF, 2022), after the creation of the euro area: “Andorran banks do not have direct access to a national central bank or to ECB refinancing facilities” (para. 2), so Andorra does not have its own monetary policy or access to emergency liquidity. Monetary policy is imported from the euro area. 

The lack of an ability to monetize deficits or respond to shocks through monetary expansion means that Andorra’s economy must adjust through real mechanisms. The IMF notes that Andorra’s post-COVID recovery occurred alongside “accommodative monetary conditions from the euro area” (IMF, 2022, para. 5). Given the impossibility of monetary accommodation, reliance upon an external economic arrangement is required to maintain relative stability. Hence, stability in this arrangement does not arise from internal flexibility but from the external credibility of a European monetary union. 

At the same time, monetary substitution is not costless. The IMF observes that, without a lender of last resort, a monetary substitution regime will be more exposed to crises and require stronger back-up via complementary institutions, including sound fiscal policies and solid banking regulation (IMF, 2022, para. 2). In other words, monetary substitution reallocates risk. 

Section II: Banking Regulation and Self-Insurance 

Andorra’s banking sector is subject to an unusual institutional constraint: there is no Andorran central bank, so the Andorran banking system cannot use European Central Bank refinancing facilities. This said, the banking sector is liquid, stable, and has a high level of capitalization. The result was that prudential regulation, and self-insurance would replace these customary monetary backstops. 

As Bibolov (2025) observes, “Andorra is a microstate with a large and unique banking sector, dominated by private banking activities.” At end 2022, the consolidated assets of Andorran banks amounted to €17.5 billion or 5.5 times GDP. The system is large, almost by definition, and raises systemic risk and the need for a lender of last resort in most other countries, but stability is provided through ex ante risk containment. 

Sector concentration reinforces this logic: “Only three banks operate currently in Andorra after several mergers” (Bibolov, 2025). In this case, concentration increases the importance of these institutions and their incentive to manage their balance sheets carefully, making prevention more important than resolution with little redundancy. 

Monetary constraints are also relevant: After joining the euro, “Andorra does not have a central bank”, and its banks “do not have direct access to a national central bank or to ECB refinancing facilities” (Bibolov, 2025; Ishikawa, 2024). In response, banks have maintained high capital and liquidity positions; Andorran banks have therefore “traditionally [held] solid capital buffers” (Bibolov, 2025) to compensate for the lack of safety nets. 

Similar prudential orientation appears to inform the system-wide liquidity policy. As per Ishikawa (2024), the system-wide liquidity coverage ratio amounts to 200 percent or double the requirement set by the regulator. Deposits represent “almost 90 percent of funding”, meaning Andorran banks are less reliant on volatile wholesale funding (Bibolov, 2025). The system is designed in such a way that intervention is not even needed, if such an event were to occur. 

Section III: Fiscal Discipline Under Hard Constraints 

Not having a central bank imposes hard constraints on governments; the government is unable to monetize the deficit and is forced to always keep the fiscal position sustainable. 

For much of its modern history, revenues were mainly from indirect taxes and banking secrecy. “The absence of direct taxes on income”; Andorran government revenues were based mainly onconsumption and tourism, which were particularly vulnerable to negative economic shocks (Vega, 2015, p. 199). Lacking monetary instruments to respond, the government was under pressure to stabilize its public finances. 

Thus, Andorra also initiated a total reform of the tax system, reintroducing a corporate tax and income tax for individuals for the first time (Vega, 2015, p. 199), which diversified revenue sources while maintaining low fiscal pressure. This change in the fiscal situation was reinforced by the special commitment with the OECD to comply with principles of fiscal transparency. 

The fiscal stability of Andorra is institutionalized through the fiscal framework, with external oversight. Stabilization of Andorra’s public finances has taken place through structural reform instead of through the financing of deficits or additional monetary accommodation, reinforcing the credibility at the cost of flexibility. 

Section IV: Limits, Path Dependence, and Non-Replicability 

However, the Andorran experience (though illustrative of the central bankless possibility) is not transferable. As Galabert Macià (2017) points out, the banking cluster in Andorra was born because of the specific and contingent shocks to history the country went through, not deliberate policy choices. However, without a monetary authority providing backing as a central bank does, the free movement of currencies became a competitive advantage (p. 36). 

In this sense, path dependence implies that large economies cannot achieve the historical state of neutrality, let alone a financial sector multiple times the GDP without a lender of last resort (LOLR). This makes Andorra a free-rider on euro area monetary policy, importing the stability without having to be a system-wide manager. 

Galabert Macià (2017) has argued that the model is now different even in Andorra: banks had to turn to wealth management and off-balance-sheet businesses, as after the 1980s the region experienced slow deposit growth. In any case, no stability is absolute. 

Conclusion 

Andorra illustrates that monetary sovereignty is not a condition for macroeconomic stability. Through external monetary anchoring, wise banking regulation and constraining fiscal discipline, Andorra substitutes institutional for discretionary control. However, this has proven conditional on the size of the setup, its history and the willingness of other actors to support it. Andorra is not a ready-made model but instead an extreme case that shows the difficulties of creating such a setup. 

References 

Bibolov, A. (2025). Andorra’s banking sector: Opportunities and risks. International Monetary Fund. 

Galabert Macià, M. (2014). Emergence and development of a financial cluster: The evolution of Andorra’s banking deposits in the long term, 1931–2007. Universitat de Barcelona. 

Galabert Macià, M. (2017). The life-cycle of the Andorran banking cluster, 1930–2007. Universitat de Barcelona. 

International Monetary Fund. (2022). Principality of Andorra: 2022 Article IV consultation—Staff report. IMF Country Report No. 22/XXX. 

Ishikawa, J. (2024). Principality of Andorra. International Monetary Fund. 

Vega, A. (2015). Fiscal reform and economic adjustment in Andorra. Journal of Economic Policy Reform, 18(2), 195–210.