COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS EU Relations with the Principality of Andorra, the Principality of Monaco and the Republic of San Marino Options for Closer Integration with the EU
Date: 2012-11-20
Institutions: European Commission
Subjects: Andorra, European Economic Area, European integration, Monaco, San Marino

EUROPEAN 
COMMISSION 

Brussels, 20.11.2012  
COM(2012) 680 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMITTEE OF THE REGIONS 

EU Relations with the Principality of Andorra, the Principality of Monaco and the 
Republic of San Marino 

Options for Closer Integration with the EU 

{SWD(2012) 388 final} 

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TABLE OF CONTENTS 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, 
THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE 
COMMITTEE OF THE REGIONS  

EU Relations with the Principality of Andorra, the Principality of Monaco and the Republic of 
San Marino 

1. 

1.1. 

1.2. 

2. 

INTRODUCTION........................................................................................................ 4 

EU Relations with Andorra, Monaco and San Marino at a Crossroads....................... 4 

The Specific Situations of the Small-Sized Countries ................................................. 5 

THE EU’S FRAGMENTED RELATIONS WITH THE SMALL-SIZED 
COUNTRIES ............................................................................................................... 6 

2.1. 

Common Features ........................................................................................................ 6 

2.1.1.  Monetary Agreements.................................................................................................. 6 

2.1.2.  Agreements on Savings Taxation................................................................................. 7 

2.1.3.  Anti-Fraud and Tax Information Exchange ................................................................. 7 

2.2. 

Andorra ........................................................................................................................ 7 

2.2.1.  Customs Union............................................................................................................. 7 

2.2.2.  Schengen ...................................................................................................................... 8 

2.2.3.  Bilateral Relations with Neighbours ............................................................................ 8 

2.2.4.  Andorra’s European Policy .......................................................................................... 8 

2.3. 

Monaco......................................................................................................................... 8 

2.3.1.  Part of the EU Customs Territory ................................................................................ 8 

2.3.2.  Schengen ...................................................................................................................... 9 

2.3.3.  Bilateral Relations with Neighbour.............................................................................. 9 

2.3.4.  Monaco’s European Policy .......................................................................................... 9 

2.4. 

San Marino ................................................................................................................... 9 

2.4.1.  Customs Union............................................................................................................. 9 

2.4.2.  Schengen .................................................................................................................... 10 

2.4.3.  Bilateral Relations with Neighbour............................................................................ 10 

2.4.4.  San Marino’s European Policy................................................................................... 10 

3. 

OBSTACLES TO INTERNAL MARKET ACCESS................................................ 10 

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3.1. 

3.2. 

3.3. 

4. 

4.1. 

4.2. 

4.3. 

5. 

5.1. 

5.2. 

5.3. 

5.4. 

5.5. 

6. 

6.1. 

6.2. 

Free Movement of Persons......................................................................................... 10 

Free Movement of Services and Freedom of Establishment for Companies............. 12 

Free Movement of Goods........................................................................................... 12 

UPHOLDING AND PROMOTING THE EU’S INTERESTS ................................. 13 

Greater economic and employment opportunities for EU citizens and companies ... 13 

Mutual Benefits through a Level Playing Field ......................................................... 14 

Cooperation in Support of Shared Objectives............................................................ 14 

POSSIBLE OPTIONS FOR CLOSER INTEGRATION .......................................... 15 

Option One: Status Quo ............................................................................................. 15 

Option Two: Sectoral Approach ................................................................................ 15 

Option Three: Framework Association Agreement ................................................... 16 

Option Four: Participation in the European Economic Area ..................................... 17 

Option Five: Membership of the EU.......................................................................... 17 

CONCLUSIONS........................................................................................................ 18 

Horizontal and Institutional Issues............................................................................. 18 

Recommendations ...................................................................................................... 18 

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COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMITTEE OF THE REGIONS 

EU Relations with the Principality of Andorra, the Principality of Monaco and the 
Republic of San Marino 

Options for Closer Integration with the EU 

1. 

INTRODUCTION 

1.1. 

EU relations with Andorra, Monaco and San Marino at a crossroads 

Western  Europe  comprises  a  number  of  independent  States  of  small  territorial  extension 
which are not members of the EU: the Principality of Andorra, the Republic of San Marino, 
the Principality of Monaco, the Principality of Liechtenstein and the Vatican City State1. The 
EU maintains relations with all of them as required by Article 8 TEU2.  

Relations  differ  in  terms  of  extent  and  institutional  framework  of  relations.  For  instance, 
Liechtenstein is a member of the European Free Trade Association (EFTA) and closely linked 
to  the  EU  through  the  Agreement  on  the  European  Economic  Area  (EEA),  which  gives  it 
access  to  the  EU's  internal  market.  It  also  joined  the  Schengen  area  in  December  2011.  In 
contrast,  EU  relations  with  Andorra,  Monaco  and  San  Marino  (hereafter,  “small-sized 
countries”)  are  governed  by  a  number  of  agreements,  covering  selective  areas  of  the  EU 
acquis and policies.  

In  December  2010,  the  Council  concluded  that  EU  relations  with  these  three  states  were 
“extensive  but  fragmented”3,  as  there  are  still  obstacles  to  an  unimpeded  movement  of 
persons,  goods  and  services  into  and  out  of  the  EU.  This  has  led  to  a  number  of  practical 
difficulties  for  EU  citizens  and  companies,  as  well  as  citizens  and  companies  of  the  small-
sized  countries.  Therefore,  the  Council  called  for  an  “analysis  of  the  possibilities  and 
modalities of their possible progressive integration into the internal market”.  

The Council adopted an initial report in June 2011 under the Hungarian Presidency. It invited 
the European External Action Service and the Commission to deepen their analysis, including 

1 

2 

3 

EU relations with the Vatican City State and the Principality of Liechtenstein are not addressed in this 
Communication. 
Article 8 TEU states that the EU “shall develop a special relationship with neighbouring countries, 
aiming to establish an area of prosperity and good neighbourliness, founded on the values of the Union 
and characterised by close and peaceful relations based on cooperation”. According to Declaration No.3 
on Article 8 of the Treaty on European Union, “the Union will take into account the particular situation 
of small-sized countries which maintain specific relations of proximity with it." 
Council Conclusions on EU Relations with EFTA countries of 14 December 2010. 

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exploring  “a  possible  new  institutional  framework  for  relations,  taking  into  account  the 
importance of a coherent approach for all three countries”4.  

All three small-sized countries have expressed the wish to enhance their relations with the 
EU, notwithstanding some differences of emphasis in terms of extent and scope. Andorra has 
expressed openness to consider various options short of EU accession, while voicing a certain 
preference  for  a  Framework  Association  Agreement.  Monaco  has  also  expressed  interest  to 
further discuss options for its closer integration into the internal market. Finally, San Marino 
has  expressed  openness  to  consider  a  wide  range  of  options  for  enhanced  European 
integration,  ranging  from  EEA  membership  to  a  multilateral  or  bilateral  Framework 
Association Agreement with the EU. All three countries wish to safeguard their specificities 
and identities in their relations with the EU.  

In light of the continued interest expressed by the small-sized countries5 in closer integration 
with the EU, this Communication reviews the EU’s relations with Andorra, Monaco and San 
Marino and makes some recommendations on how such integration could be achieved. With 
this  Communication,  the  Commission  is  seeking  views  on  these  recommendations,  on  the 
basis of which it will decide on the next steps in this process. 

1.2. 

The specific situations of the small-sized countries 

Andorra, Monaco and San Marino have a number of similarities. They are independent states 
of small territorial size and population, and all have an EU Member State or States as their 
only  neighbours6,  with  which  they  have  very  close  relations  based  on  shared  history  and 
political  and  cultural  affinities.  Financial  services  and  tourism  (often  in  combination  with 
retail services) are the bedrock of their economies, although there are some signs of economic 
diversification.  They  are  all  parliamentary  democracies  and  members  of  the  United  Nations 
(UN),  the  Council  of  Europe,  and  the  Organisation  for  Security  and  Cooperation  in  Europe 
(OSCE).  

However, there are also significant geographical and demographic differences between them.  

– 

– 

– 

Andorra  is  the  largest  country  by  territory  (468  km2)  and  population  (around 
78,100). It is far from the nearest big city and connected to neighbouring Spain and 
France by only two main roads.  

Monaco  shares  a  border  with  France  and  has  a  population  of  around  36,300.  Its 
territory covers 1.95 km2, making it the second smallest state in the world after the 
Vatican City State.  

San  Marino  is  situated  on  a  mountain-top  and  is  an  enclave  within  Italy.  It  covers 
61.2 km2, with a population of around 32,300.  

Other differences include their official languages and their constitutional, legal and political 
systems.  

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5 

6 

“EU  relations  with  the  Principality  of  Andorra,  the  Republic  of  San  Marino  and  the  Principality  of 
Monaco”  –  Report  from  the  Presidency  to  the  Council,  14  June  2011,  Council  document  11466/11, 
point 14. 
The  analysis  set  out  in  this  Communication  is  based  on  informal  exchanges  of  views  with  all  three 
small-sized countries at working level. 
Although Monaco has a port on the Mediterranean sea. 

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– 

– 

– 

2. 

Andorra is a co-Principality, with the President of France and the Bishop of Urgell 
(Spain) as co-Princes.  

Monaco is a constitutional monarchy and is closely integrated with France, based on 
numerous bilateral treaties.  

San Marino is a Republic and has a close relationship with Italy. 

THE  EU’S  FRAGMENTED  RELATIONS  WITH  THE  SMALL-SIZED 
COUNTRIES 

2.1. 

Common Features 

On the whole, the EU entertains very good relations with the small-sized countries. The EU 
is  by  far  their  largest  trading  and  investment  partner.  The  small-sized  countries  have  no 
official high-level political dialogue with the EU, but their diplomatic missions are accredited 
to the EU at Ambassador level and senior members of their governments occasionally travel 
to  Brussels  for  meetings  with  their  EU  counterparts7.  However,  no  EU  Delegation  is 
accredited to any of the small-sized countries8. The EU is represented in each country by one 
of its Member States9. 

Concerning  the  legal  framework  with  these  countries,  bilateral  trade  in  goods  between  the 
EU  and  the  three  small-sized  countries  is  governed  by  customs  union  agreements:  Monaco 
has such an agreement with France and is part of the customs territory of the EU; whereas San 
Marino and Andorra both have a customs union agreement with the EU. Furthermore, the EU 
has monetary agreements and savings taxation agreements in place with all three small-sized 
countries.  In  addition,  the  Commission  has  proposed  to  negotiate  Anti-Fraud  and  Tax 
Information Exchange Agreements with them10. 

2.1.1.  Monetary Agreements 

The  EU  now  has  Monetary  Agreements11  in  place  with  each  of  the  small-sized  countries, 
which  allow  them  to  use  the  euro  as  legal  tender  and  mint  euro  coins  up  to  a  specified 
maximum  value.  In  exchange,  the  small-sized  countries  have  committed  to  incorporate 
gradually  relevant  EU  acquis12  into  their  internal  legislation,  covering:  euro  banknotes  and 
coins; banking and financial law; prevention of money laundering; fraud and counterfeiting; 
and  the  sharing  of  statistical  information.  The  small-sized  countries  have  accepted  the 
exclusive  competence  of  the  Court  of  Justice  of  the  EU  for  the  settlement  of  any  disputes 
between the parties in relation to the agreements.  

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8 
9 

10 

11 

12 

For  instance,  the  Foreign  Ministers  of  Andorra  and  San  Marino  visited  Brussels  in,  respectively, 
January 2012 and July 2012.  
By way of comparison, the EU Delegation in Bern is accredited to neighbouring Liechtenstein. 
In Andorra and Monaco, this is on a six-monthly rotating basis. Italy, as the only EU Member State to 
have an embassy in San Marino, represents the EU there. 
Commission Communication on “Concrete ways to reinforce the fight against tax fraud and tax evasion 
including in relation to third countries”, COM(2012)351 final, Brussels, 27 June 2012. 
Monetary  Agreement  between  the  European  Union  and  the  Principality  of  Andorra  (OJ  C  369, 
17.12.2011, p. 1); Monetary Agreement between the European Union and the Principality of Monaco 
(OJ C 310, 13.10.2012, p. 1); Monetary Agreement between the European Union and the Republic of 
San Marino (OJ C 121, 26.4.2012, p. 5). 
As set out in the Annex to each Agreement. 

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2.1.2.  Agreements on Savings Taxation 

The EU has Agreements on Savings Taxation13 with the three small-sized countries, which 
provide  for  measures  equivalent  to  those  laid  down  in  Directive  2003/48/EC  on  taxation  of 
savings income in the form of interest payments14. Within this framework, savings income in 
the form of interest payments made in these States to beneficial owners who are individuals 
identified as residents of a Member State of the EU have to be subject to a withholding tax 
levied by paying agents established on their territory, whose revenue is mostly transferred to 
the Member States of residence of the individual concerned. 

Consultations  held  in  2009  with  the  competent  authorities  of  Andorra,  Monaco  and  San 
Marino confirmed the countries’ availability to amend their Agreements with the EU in line 
with  the  outcome  of  the  Savings  directive  review.  Once  an  authorisation  to  negotiate  is 
adopted by the Council, formal negotiations to update the Agreements will be initiated.  

2.1.3.  Anti-Fraud and Tax Information Exchange 

Following a recommendation from the Commission, the Council authorised the Commission 
to  negotiate  Anti-Fraud  and  Tax  Information  Exchange  Agreements  with  Andorra, 
Monaco and San Marino15, on the basis of the experience gained in the framework of similar 
negotiations  with  Liechtenstein,  taking  into  account  international  developments  in  this  area. 
The Commission is envisaging two-pillar agreements, including not only anti-fraud measures 
but also comprehensive administrative tax cooperation.  

2.2. 

Andorra 

2.2.1.  Customs union 

The  EU  has  concluded  an  Agreement  with  Andorra  establishing  a  customs  union16  for 
industrial  goods.  The  Agreement  provides  that  Andorran  agricultural  products  entering  the 
EU are free from import duties; whereas Andorra is entitled to levy import duties on imports 
of agricultural products from the EU. The Agreement works well and in 2011 a Protocol was 
concluded extending it to customs security measures.  

In addition, a Cooperation Agreement17 provides a framework for cooperation in a number 
of  areas,  notably  regional  policy  in  the  Pyrenees.  In  1997  the  EU  and  Andorra  concluded  a 
Veterinary Protocol with the aim of maintaining the traditional flow of live animal trade and 

13 

14 
15 
16 

17 

Agreement between the European Community and the Principality of Andorra providing for measures 
equivalent  to  those  laid  down  in  Council  Directive  2003/48/EC  on  taxation  of  savings  income  in  the 
form of interest payments (OJ L 359, 4.12.2004, p. 33); Agreement between the European Community 
and  the  Principality  of  Monaco  providing  for  measures  equivalent  to  those  laid  down  in  Council 
Directive 2003/48/EC (OJ L 19, 21.1.2005, p. 55); Agreement between the European Community and 
the Republic of San Marino providing for measures equivalent to those laid down in Council Directive 
2003/48/EC  on  taxation  of  savings  income  in  the  form  of  interest  payments.  Memorandum  of 
Understanding (OJ L 381, 28.12.2004, p. 33). 
OJ L 157, 26.6.2003, p.38 
Economic and Financial Affairs Council of 19 January 2010 (Council document 5400/10) 
Agreement in the form of an Exchange of Letters between the European Economic Community and the 
Principality of Andorra of 28 June 1990 (OJ L374, 31.12.1990, p. 16); the agreement entered into force 
on 1 January 1991. 
Cooperation Agreement between the European Community and the Principality of Andorra (OJ L 135, 
28.5.2005, p. 14). 

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animal  products  while  guaranteeing  compliance  with  EU  standards18.  Accordingly,  Andorra 
has taken over the acquis concerning general food law and hygiene and framework legislation 
for animal disease control.  

2.2.2. 

Schengen 

Andorra  is  not  part  of  the  Schengen  area.  Border  controls  are  carried  out  at  the  borders 
between  Andorra  and  its  neighbours  France  and  Spain.  However,  it  coordinates  its  visa 
requirements with the Schengen area and accepts Schengen visas. According to a pragmatic 
approach taken by the Schengen member states, at the external borders of the EU Andorran 
nationals are allowed to undergo passport controls at the counters for citizens of the EU and 
EFTA Member States. 

2.2.3.  Bilateral Relations with Neighbours 

Andorra  maintains  privileged  relations  with  France  and  Spain,  as  well  as  with  Portugal, 
through  agreements  in  several  areas  such  as  the  free  movement  of  persons,  education  and 
justice and home affairs. 

2.2.4.  Andorra’s European policy 

Andorra has shown a strong interest in, and commitment to, enhancing its integration with 
the EU.  

In 2010, the Andorran government produced a non-paper announcing its desire for increased 
cooperation.  In  2011,  Andorra  submitted  a  memorandum  to  the  EU,  detailing  the  areas  in 
which it perceived obstacles to accessing the internal market. In June 2012, Andorra adopted 
a revised law to open up further its economy to investment.  

Andorra seeks deeper relations with the EU by negotiating a new agreement that takes into 
account that Andorra is geographically located within the EU, as well as the specificities of 
Andorra,  the  possibility  to  apply  transitional  periods  in  certain  areas,  including  the  free 
movement of persons, as well as Andorran participation in EU programmes and agencies. 

2.3.  Monaco 

2.3.1.  Part of the EU customs territory 

Monaco has a customs agreement with France; as a consequence, Monaco is part of the EU 
customs territory19. 

In addition, Monaco and the EU have concluded an Agreement on the application of certain 
Community acts on the territory of the Principality of Monaco20. Its purpose is to facilitate 
the  sale  of  Monégasque  medicines  for  human  and  veterinary  use,  cosmetic  products  and 

18 

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20 

Protocol  on  veterinary  matters  supplementary  to  the  agreement  in  the  form  of  an  exchange  of  letters 
between the European Economic Community and the Principality of Andorra, OJ L 148, 6.6.1997, p.16 
Art.  3(2)  of  Council  Regulation  (EEC)  No  2913/92  of  12  October  1992  establishing  the  Community 
Customs Code (OJ L302, 19.10.1992, p.1). 
Agreement  between  the  European  Community  and  the  Principality  of  Monaco  on  the  application  of 
certain Community acts on the territory of the Principality of Monaco (OJ L 332, 19.12.2003, p. 42).  

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medical devices on the EU market. The Agreement provides for the application of the relevant 
acquis in this area to the territory of Monaco.  

2.3.2. 

Schengen 

Monaco is not a Contracting Party to the Schengen Convention. However, by virtue of two 
bilateral agreements with France21, its territory is within the external borders of the Schengen 
area; consequently, EU and Monaco nationals can travel freely without a visa throughout the 
whole  of  the  Schengen  area,  including  Monaco.  The  agreements  provide  for  the  necessary 
security safeguards and the establishment of controls at Monaco’s external borders, which are 
carried  out  by  the  French  authorities  at  the  authorised  external  border  crossing  points 
Monaco-Heliport  and  Monaco-Port.  In  addition,  Monégasque  residence  permits  are 
equivalent to Schengen visas. 

2.3.3.  Bilateral Relations with Neighbour 

Monaco has a number of economic agreements with France, which have, in certain cases, 
the  effect  that  Monaco  adopts  and  applies  the  same  rules  as  the  EU  Member  States.  For 
example,  when  France  adopts  internal  legislation  transposing  EU  directives  in  certain  areas 
covered  by  bilateral  Agreements  with  Monaco,  the  Principality  directly  applies  the  French 
legislation in these areas. However, this does not give Monaco automatic access to the EU’s 
internal market in these areas in the absence of an agreement with the EU. Moreover, there 
are no mechanisms for the EU to monitor implementation or pursue any infringement. 

2.3.4.  Monaco’s European policy 

Monaco has expressed an interest in obtaining greater access to the EU internal market in 
specific areas, including as regards the free movement of persons and goods.  

In  2012,  Monaco  submitted  a  memorandum  to  the  EU  on  this  topic,  detailing  the  areas  in 
which it perceived obstacles to accessing the internal market.  

Monaco is open to discuss further the possibility of concluding a comprehensive agreement 
with the EU on access to the internal market. Any agreement would need to take into account 
Monaco’s close relationship with France and its political and geographical specificities.  

2.4. 

San Marino 

2.4.1.  Customs union 

The EU and San Marino have concluded a Cooperation and Customs Union Agreement22, 
which  establishes  a  customs  union  covering  all  chapters  of  the  Harmonised  System,  i.e. 

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22 

Two  agreements  in  the  form  of  exchanges  of  letters  between  Monaco  and  France,  signed  the  15 
December 1997, adapted the section of the Convention on Good Neighbourly Relations of 18 May 1963 
on the entry, stay and establishment of foreigners in Monaco to the provisions of the Convention on the 
Implementation of the Schengen Agreement. 
Agreement on Cooperation and Customs Union between the European Economic Community and the 
Republic of San Marino (OJ L84, 28.3.2002, p. 43). This agreement was signed on 16 December 1991, 
but  only  entered  into  force  on  1  April  2002;  it  was  supplemented  in  March  2010  by  an  Omnibus 
Decision adopted by the EC-San Marino Joint Committee, covering customs measures, and veterinary 
and phytosanitary matters (OJ L156, 23.6.2010, p. 13). 

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including agricultural products23. This Agreement further provides for non-discrimination as 
regards  conditions  of  employment  and  cooperation  in  various  fields  such  as  environmental 
protection, tourism and culture.  

2.4.2. 

Schengen 

San Marino is not part of the Schengen area, but there are no border controls between Italy 
and San Marino. San Marino is not associated to the implementation of other elements of the 
Schengen acquis, such as police and judicial cooperation. 

2.4.3.  Bilateral Relations with Neighbour 

San Marino has concluded several bilateral agreements with Italy, including one on the free 
movement of persons24 allowing San Marino nationals to work and reside in Italy. 

2.4.4. 

San Marino’s European policy 

San Marino has shown a strong interest in, and commitment to, enhancing its integration 
with the EU25.  

In  2011,  San  Marino  submitted  a  memorandum  to  the  EU,  detailing  the  areas  in  which  it 
perceived obstacles to accessing the internal market.  

San Marino has expressed openness to consider various options for closer integration into the 
EU.  San  Marino  seeks  deeper  relations  with  the  EU  by  negotiating  a  new  agreement  that 
takes  into  account  that  San  Marino  is  geographically  located  within  the  EU,  as  well  as  the 
country's specificities. 

3. 

OBSTACLES TO INTERNAL MARKET ACCESS 

Citizens  and  companies  of  all  three  small-sized  countries  have  limited  access  to  the  EU’s 
internal  market  (see  the  accompanying  Staff  Working  Paper  for  details).  The  most 
problematic  areas  are  the  free  movement  of  persons  and  services,  and  the  freedom  of 
establishment.  Goods  originating  in  the  small-sized  countries  also  encounter  obstacles 
regarding the free movement of goods in so far as EU standards and regulations may prevent 
these goods from being sold on the EU market. EU citizens and businesses would also benefit 
from  greater  integration  with  the  small-sized  countries.  For  example,  EU  citizens  currently 
require a permit to work and/or reside in the small-sized countries.  

3.1. 

Free Movement of Persons 

The small-sized  States have relations of close proximity with their neighbours.  Historically, 
there  have  been  flows  of  persons  and  goods  from  and  through  their  territory.  Yet,  despite 
having  free  movement  of  persons  agreements  with  neighbouring  countries,  the  small-sized 

23 
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25 

Chapters 1-24 of the Harmonised System. 
Bilateral  Agreement  on  Amity  and  Good  Neighbourhood  of  31  March  1939  (law  of  6  June  1939, 
no.1320 (1)). 
There is a lively internal debate within San Marino on EU membership. In 2010 a referendum initiative 
was launched on whether the government should submit an application for membership of the EU. The 
San Marino Constitutional Court has recently ruled that the referendum is admissible but it is not yet 
clear when it will take place. 

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countries have no equivalent agreement with the EU providing for the free movement of their 
nationals in the EU. This often presents an obstacle to their citizens taking up employment or 
study opportunities, starting a business or investing.  

For  stays  over  three  months,  a  residence  permit  is  required.  This  is  granted  on  the  basis  of 
strict  criteria,  such  as  the  availability  of  sufficient  economic  means  and  accommodation. 
Currently,  the  conditions  for  obtaining  a  permit  vary,  depending  on  the  Member  State  and 
type  of  employment26.  The  complexity  of  procedures  for  a  residence  permit  is  seen  as  an 
obstacle to employment in EU Member States. It is difficult to obtain from business a prior 
declaration  of  employment,  which  is  necessary  in  order  to  apply  for  a  stay  permit.  The 
agreements with Andorra and San Marino provide as regards rights of workers only for non-
discrimination with respect to the conditions of employment27.  

In addition to the requirements for residence and work permits, the small-sized countries have 
raised a number of additional problems in the area of free movement of persons, in particular 
the lack of the following rights which are granted to citizens of the EU28:  

• 

• 

• 

• 

• 

26 

27 

28 

29 
30 
31 

32 

The right to stay in the EU after the end of economic activity;  

The right of residence and pursuit of an economic activity for family members; 

Free movement of persons for the purposes of education and research29; 

Opportunities  to  access  EU  programmes,  including  research  funding  and  student 
exchanges30; 

Social  security  coordination31  and 
qualifications32. 

the  mutual  recognition  of  professional 

Immigration is a competence shared between the EU and its Member States. Admission of third-country 
nationals is decided at national level whereas some rights and conditions are harmonised at EU level. 
Article 5 of the Cooperation Agreement with Andorra, and Article 20 of the Cooperation and Customs 
Union Agreement with San Marino.  
Unless specified otherwise, provided by Directive 2004/38/EC of the European Parliament and of the 
Council of 29 April 2004 on the right of citizens of the Union and their family members to move and 
reside freely within the territory of the Member States (OJ L158, 30.4.2004, p. 77). 
Under the conditions referred to in Article 7, Directive 2004/38/EC. 
Article 18 TFEU. 
Within the EU, the relevant legislation is Regulation 883/2004 on the Coordination of Social Security 
Systems.  The  social  security  systems  of  the  three  countries  are  not  coordinated  with  the  security 
systems  of  the  Member  States;  however,  as  the  case  may  be,  nationals  of  the  three  states  can  benefit 
from the coordination between the legislation of Member States (Regulation (EU) No 1231/2010 of the 
European Parliament an of the Council of 24 November 2010 extending Regulation (EC) No 883/2004 
and Regulation (EC) No 987/2009 to nationals of third countries who are not already covered by these 
Regulations solely on the ground of their nationality (OJ L344, 29.12.2010, p. 1 ).  
Within the EU, Directive 2005/36/EC of the European Parliament and of the Council of 7 September 
2005 on the recognition of professional qualifications (OJ L255, 30.9.2005, p. 22) confers on persons 
having acquired their professional qualifications in a Member State the right, under the conditions laid 
down in the Directive, to have access to the same profession and pursue it in another Member State with 
the same rights as nationals. 

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3.2. 

Free Movement of Services and Freedom of Establishment for Companies 

The  small-sized  countries  face  significant  obstacles  in  the  area  of  the  free  movement  of 
services and of establishment. These freedoms are not provided for in any of the agreements 
concluded with the EU. In particular, the companies established in the small-sized countries 
do not have the right to provide directly services in the Union. 

There are no restrictions on the creation of a subsidiary in a EU Member State by companies 
from the small-sized countries which wants to conduct a business activity or to invest in the 
Union.  But  the  establishment  in  the  Union  of  a  branch  may  be  the  subject  of  restrictions. 
Indeed,  there  is  no  right  of  establishment  for  third  country  legal  persons  (as  for  natural 
persons).  

Once established as a subsidiary in one Member State, the entity in question is free to provide 
services  in  all  other  Member  States  in  conformity  with  EU  and  national  law,  without 
discrimination33.  However,  in  the  case  of  companies  based  in  the  small-sized  countries, 
establishment  in  the  EU  may  increase  their  costs  due  to  the  need  for  an  economic  presence 
and  associated  administrative  procedures.  A  presence  in  the  EU  may  also  be  necessary  to 
meet  the  requirements  of  EU  legislation  on  consumer  protection  (for  instance,  after-sales 
customer service based in the EU). These constraints may particularly discourage small and 
micro-enterprises from carrying out business in the EU34. 

3.3. 

Free Movement of Goods 

Bilateral trade in goods between the EU and the three small-sized countries is facilitated by 
customs  union  agreements:  Monaco  has  a  custom  agreement  with  France  and  is  part  of  the 
customs  territory  of  the  EU,  whereas  San  Marino  and  Andorra  both  have  customs  union 
agreements with the EU. Nevertheless, the small-sized countries face market access obstacles 
in the form of technical barriers to trade. In order to be placed on the EU market, goods from 
these  countries  must  meet  the  EU’s  internal  market  standards  and  rules,  such  as  those  on 
product safety and consumer protection.  

Companies based in the small-sized countries may face obstacles to selling their goods in the 
EU, even if the small-sized country of primary establishment has unilaterally taken over the 
relevant  EU  acquis  -  the  conclusion  of  an  agreement  with  the  EU  is  in  most  cases  still 
necessary, notably to confirm that the legislation and its implementation meet EU standards. 
What is more, even where a small-sized country has an agreement with the EU, it needs to be 
updated to keep pace with the evolution of EU legislation.  

Given  that  Andorra  and  San  Marino  are  third  countries,  standard  customs  procedures, 
including a declaration, apply. These formalities may occasionally cause delays. 

33 

34 

Although, as for EU nationals and companies, depending on the kind of service this may be subject to 
certain safeguards, such as pro forma registration with a professional body. 
As regards natural persons, nationals of the small-sized countries need a permit to reside and work (be it 
as  a  worker  or  a  self-employed  person)  in  an  EU  Member  State  (see  section  on  free  movement  of 
persons). In practice, immigration law may therefore constitute a barrier to the provision of services by 
companies or persons established in the small-sized countries.  

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4. 

UPHOLDING AND PROMOTING THE EU’S INTERESTS 

The  previous  section  outlined  the  difficulties  encountered  by  citizens  and  companies  of  the 
three small-sized countries in accessing the EU's internal market. While in many respects the 
interests of these countries and the EU coincide and both sides stand to gain from mutual co-
operation, there are, however, some areas where the EU encounters problems that need to be 
addressed in the relationship.  

4.1. 

Greater economic and employment opportunities for EU citizens and companies 

The European Council recently highlighted the “heightened tensions” that are slowing down 
economic  recovery  across  Europe,  including  the  sovereign  debt  crisis,  financial  sector 
weakness and persistent low growth35. In response, it adopted a “Compact for Growth and 
Jobs”, encompassing action to be taken by the Member States and the EU with the aim of re-
launching growth, investment and employment. In particular, the Compact stresses the need to 
mobilise all levers, instruments and policies to that end at “every level of governance” in the 
EU36.  The  October  2012  European  Council  called  for  swift,  determined  and  result-oriented 
action to ensure the full and rapid implementation of the Compact37. 

With a combined population of around 150 000 and high average GDP-per-capita levels, the 
small-sized  countries  make  a  substantial  contribution  to  the  economy  in  their  respective 
regions and beyond. For example, Andorra is a major shopping and tourist destination in the 
Pyrenees, attracting around 8 million visitors a year; similarly, San Marino is a popular tourist 
destination  in  Italy,  with  over  2  million  visitors  a  year.  Monaco  is  a  major  provider  of 
employment in its region, with 45,000 cross-border workers commuting there on a daily basis 
from neighbouring France and nearby Italy. 

However,  EU  citizens  wishing  to  work  in  these  countries  as  employees  or  establish 
themselves as self-employed independents continue to face significant barriers, mainly in the 
form  of  work  and  residence  permit  requirements.  Moreover,  the  small-sized  countries  have 
restrictions on inward investment. EU citizens and companies would stand to benefit from a 
lifting of these restrictions. 

All three countries have major financial services industries and are a source of investment into 
the  EU:  taken  together,  Andorra,  Monaco  and  San  Marino  are  seat  to  over  50  banks, 
managing over 100 billion euros in client assets. Moreover, they have increasingly sought to 
diversify  their  economies  and  foster  high  value-added  industries38.  However,  the  obstacles 
these  countries  face  in  accessing  the  EU  internal  market  indicate  that  they  hold  unfulfilled 
potential as motors  of growth,  investment, innovation  and  employment  from  which  the  EU 
could benefit.  

Breaking down barriers to trade and economic activity between the EU and the small-sized 
countries  could  contribute,  among  other  activities,  to  attaining  the  objectives  of  the  Europe 

35 
36 

37 
38 

European Council Conclusions, Brussels, 29 June 2012, EUCO 76/12. 
Tax  policy also  figures  prominently  in  the  Compact:  “Rapid  agreement  must  be  reached  on  the 
negotiating  directives  for  savings  taxation  agreements  with  third  countries”.  The  latter  includes  the 
small-sized countries. 
European Council Conclusions, Brussels, 19 October 2012, EUCO 156/12. 
For example, San Marino and Monaco are both producers of cosmetics; and Andorra and Monaco are 
home to dental implant manufacturers. 

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2020  Strategy39  and  the  Compact  for  Growth  and  Jobs  in  neighbouring  regions  of  the  EU. 
This  would  also  be  consistent  with  the  EU’s  trade  policy,  as  set  out  by  the  Commission’s 
2010  Communication  on  Trade,  Growth  and  World  Affairs.  Moreover,  there  is  significant 
evidence  that  the  extension  of  the  internal  market  enhances  economic  growth  for  all  its 
participants.  Lifting  obstacles  to  EU  trade  with  the  small-sized  countries  could  further 
contribute to boosting economic growth in the internal market. 

4.2.  Mutual benefits through a level playing field 

The backbone of the EU's internal market are common rules and standards and a thorough 
policy  on  enforcement  and  governance.  In  principle,  both  the  EU  and  the  small-sized 
countries should benefit from the extension of the EU’s internal market acquis to them as this 
would ensure a level playing field for both businesses and persons. The EU has an interest in 
encouraging neighbouring states to adopt a legal framework compatible with that of the EU. 
In  this  connection,  the  importance  of  the  correct  transposition  and  enforcement  of  the 
acquis  as  a  pre-requisite  for  the  good  functioning  of  the  internal  market  cannot  be 
underestimated.  A  common  legal  framework  would  facilitate  the  addressing  of  shared 
challenges, ranging from consumer protection to environmental concerns. 

4.3. 

Cooperation in support of shared objectives 

There is potential to enhance cooperation with the small-sized countries in support of a wide 
range of shared objectives in the political, economic, environmental and cultural domains (see 
the accompanying  Staff Working Paper for details). In the area of regional policy, the  EU-
Andorra  Cooperation  Agreement  has  facilitated  cooperation  between  Spain,  France  and 
Andorra in the context of the EU Regional Policy’s Operational Programme of cross-border 
cooperation in the Pyrenees40. There is potential to deepen this cooperation, which could lead 
to benefits for people living throughout the region.  

Both  sides  have  much  to  gain  through  cooperation  on  matters  of  mutual  concern,  such  as 
transparency  and  exchange  of  information  in  the  area  of  taxation  and  the  fight  against 
crime, including tax fraud41, tax evasion and money-laundering. It is important to protect the 
licit economy against criminal infiltration and corruption and therefore take vigorous action to 
develop an efficient system to trace, freeze and confiscate criminal assets. Law enforcement 
and  judicial  cooperation  facilitating  asset  confiscation  will  hamper  criminal  activities  and 
deter it by showing that crime does not pay. 

In  the  field  of  environmental  protection,  closer  cooperation  between  the  EU  and  the  small-
sized  countries  could  yield  tangible  benefits.  For  example,  Monaco  has  taken  international 
initiatives to preserve maritime ecosystems and biodiversity, and is active on other maritime 
issues  of  interest  to  the  EU.  It  would  be  worth  exploring  whether  there  is  scope  for  more 
regular consultations in this area.  

Regarding foreign and security policy, there is no agreement with the small-sized countries 
on their alignment to EU positions and declarations, but they do align of their own accord on 

39 

40 
41 

Communication from the Commission: “Europe 2020 - A strategy for smart, sustainable and inclusive 
growth”, Brussels, 03.03.2010, COM(2010) 2020 final. 
2007-2013 budget: EUR 168 Million. 
Commission Communication on “Concrete ways to reinforce the fight against tax fraud and tax evasion 
including in relation to third countries”, COM(2012)351 final, Brussels, 27 June 2012. 

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a  case-by-case  basis.  Furthermore,  there  are  contacts  between  several  EU  Delegations  to 
international  organisations  and  the  small-sized  countries.  At  the  UN  in  New  York,  the  EU 
Delegation  meets  with  the  small-sized  countries,  which  are  part  of  the  "Friends  of  the  EU" 
group,  on  a  monthly  basis.  Cooperation  in  this  area  could  be  developed  further.  The  small-
sized countries sent a positive signal in this regard by voting in favour of the EU’s proposed 
UN  General  Assembly  Resolution  on  enhanced  observer  status  at  the  UN  in  2010.  An 
agreement with the small-sized countries could provide for more systematic cooperation and 
exchange of information in major international organisations. The Andorran Chairmanship of 
the Committee of Ministers of the Council of Europe (9 November 2012-16 May 2013) may 
provide an early opportunity to explore ways to enhance cooperation between the EU and the 
small-sized countries on upholding and strengthening democracy and human rights in Europe.  

5. 

POSSIBLE OPTIONS FOR CLOSER INTEGRATION 

As  shown  by  the  above  considerations,  it  is  both  possible  and  desirable  to  aim  for  a  higher 
degree of integration of the small-sized countries into the internal market.  

Closer integration would ensure the greatest possible freedom of movement of citizens and 
businesses between the small-sized countries and the EU, in particular through a clearer and 
safer legal environment. In turn, this would help reinforce the appropriate foundations for 
economic growth and employment creation in parts of the EU as well as for the small-sized 
countries. This applies especially in EU neighbouring regions, where the small-sized countries 
already offer employment to thousands of EU citizens, including cross-border workers. This 
dynamic could be boosted further through greater access to the internal market. Furthermore, 
this  approach  would  support  the  economic  diversification  of  these  countries  and  foster 
abandonment of banking secrecy and tax haven status. This would engender greatly increased 
tax revenues to EU Member State treasuries and strengthen the legal framework against illicit 
financial activities. 

In any event, the EU should take account of the specificities of the small-sized countries in 
developing  its  policy.  These  countries  are  all  located  in  the  heart  of  Europe,  maintain  close 
relations of proximity with the EU, and have very close ties with their neighbours. From the 
EU's perspective, it is therefore appropriate to examine ways to integrate them more closely 
into  the  internal  market.  This  section  evaluates  the  options  available  to  the  EU  to  achieve 
these aims, ranging from the least to the most ambitious.  

5.1. 

Option One: Status quo 

This  option  would  continue  the  current  approach,  without  the  conclusion  of  any  new 
agreements related to the internal market. The result of this approach would be that the small-
sized  countries’  access  to  the  internal  market  would  continue  to  be  very  limited. 
Consequently,  the  choice  of  this  option  might  have  repercussions  for  their  overall  relations 
with  the  EU.  Their  willingness  to  negotiate  new  agreements  in  areas  of  interest  to  the  EU 
might be negatively affected. The existing agreements do not avoid the creation for them of 
an administrative burden incommensurate with its benefits for the EU, but would perpetuate 
legal uncertainty for citizens and economic operators in several areas.  

5.2. 

Option Two: Sectoral Approach 

This  option  would  consist  of  negotiating  Sectoral  Agreements  for  access  to  parts  of  the 
internal market, such as in the area of free movement of persons or services. To achieve full 

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integration  of  the  small-sized  countries,  separate  agreements  could  be  concluded  with  each 
country on different policy areas, such as: 

• 

• 

• 

• 

Free movement of persons; 

Freedom of establishment and Free movement of services; (or possibly persons and 
services together) 

Customs Union and Free movement of goods; 

Flanking measures, horizontal policies and other areas of cooperation. 

These  agreements  would  need  to  be  complemented  by  provisions  on  shared  values  and 
institutions to underpin the relationship and ensure the smooth functioning of the agreements. 

This  approach  would  therefore  require  negotiation  and  conclusion  of  up  to  18  separate 
agreements with the three countries (three for each policy area). This approach might allow 
the tailoring of the  provisions  of  the  agreements to each country’s specific  needs and  could 
offer  some  flexibility.  In  particular,  a  staged  approach  would  allow  for  the  small-sized 
countries’ progressive integration into mutually-agreed pillars of the internal market.  

However, the drawbacks of this approach are several. First, it is not in the EU's interest to 
negotiate and conclude such a large number of agreements, as the negotiating effort required 
would  be  multiplied  in  comparison  with  a  single  agreement.  Second,  an  approach  based  on 
sectoral agreements to meet the most pressing concerns of the small-sized countries would not 
provide  comprehensive  solutions  to  the  problems  they  face  and  would  be  poorly  adapted  to 
address challenges that might arise in the future. Moreover, if each small-sized country opted 
for market access in different policy areas, it would result in different arrangements for each 
country,  leading to  an incoherent web of unconnected agreements that would  be difficult to 
manage. The EU’s experience in its relations with other major partners has demonstrated that 
the  disadvantages  of  the  sectoral  approach  include  unmanageable  complexity  and  legal 
uncertainty42. 

5.3. 

Option Three: Framework Association Agreement 

A Framework Association Agreement could offer the small-sized countries a high degree of 
integration, including partial or full access to the EU’s internal market, its flanking measures 
and horizontal  policies.  It  could also provide for participation in  other areas of EU  activity. 
The Association Agreement would set out the underlying values, principles and institutional 
foundations  of  the  relationship.  The  Agreement  could  be  a  single  multilateral  agreement 
between  the  EU  and  the  three  small-sized  countries,  possibly  following  the  European 
Economic  Area  (EEA)  model.  The  conclusion  of  a  bilateral  treaty  with  each  small-sized 
country  would  theoretically  be  possible  but  not  desirable  due  to  the  added  complexity  and 
tendency for unnecessary differentiation, as mentioned in sub-section 5.2. above. This option 
would  offer  the  additional  advantage  to  the  three  small-sized  countries  of  regulating  their 
mutual relations. 

It would be necessary to draw up an appropriate institutional framework for this option. If 
feasible, a solution that built on the credibility and efficiency of existing structures would be 

42 

Council conclusions of December 2010 on the EU’s relations with EFTA countries. 

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preferable.  Special  governance  arrangements  could  be  defined,  which  might  include,  for 
example,  mechanisms  for  the  consultation  of  the  small-sized  countries  on  proposals  for  EU 
legislation  that  were  of  particular  relevance  for  them  (“decision-shaping”)  as  well  as  their 
participation  as  observers  in  EU  programmes  and  agencies.  In  any  case,  for  a  Framework 
Association Agreement to be viable, a satisfactory solution would have to be found to ensure 
that the relevant parts of the acquis are made applicable in those countries, that the acquis is 
actually  implemented  and  enforced  by  the  small-sized  countries  or  authorities  entrusted  by 
them with that task, and that the application of the acquis is monitored and, as the case may 
be, enforced vis-à-vis those countries 43. Overall, if a suitable institutional framework can be 
worked out, this is a viable option that should be explored further. 

5.4. 

Option Four: Participation in the European Economic Area  

This option would provide for full integration into the internal market on the same basis as the 
current non-EU countries of the European Economic Area (EEA). It has several advantages, 
including  the  straightforwardness  and  reliability  of  using  an  existing  and  proven  treaty  and 
institutional  framework.  However,  given  that  the  European  Economic  Area  Agreement  was 
concluded between two pre-existing trade and economic areas (the EU and EFTA), it would 
in principle be necessary for the small-sized countries first to become a member of either one 
in order to join the EEA44.  

Membership of the EU is considered below, which leaves accession via EFTA. The EU would 
need  to  discuss  with  the  existing  members  Iceland,  Liechtenstein,  Norway  and  Switzerland, 
the  possibility  of  enlarging  EFTA  to  the  small-sized  countries.  This  option  would  have  the 
added advantage of boosting the EFTA-EEA membership, which would dwindle to only two 
countries (Norway and Liechtenstein) if Iceland were to join the EU. The enlargement of the 
EEA would involve re-negotiating the EEA Agreement, not least to provide for an adaptation 
of the EEA- EFTA institutions. The precise legal construction would need to be examined in 
more  detail  if  this  option  were  retained.  Overall,  this  is  a  viable  option  that  should  be 
explored further. 

5.5. 

Option Five: Membership of the EU  

This option would give the small-sized countries the most comprehensive access to the EU's 
internal market, programmes and activities. Although no small-sized country has yet applied 
for  membership,  they  could  do  so  under  Art.  49  TEU:  any  European  state  that  respects  the 
EU’s values and is committed to promoting them may apply to become a member of the EU. 

The  renewed  consensus  on  enlargement  requires  to  take  into  account  the  EU's  integration 
capacity  and  to  ensure  the  effective  functioning  of  its  institutions  and  development  of  its 
policies. A possible membership application would face two major difficulties: first, the EU 
institutions are currently not adapted to the accession of such small-sized countries. In order 
to  ensure  adequate  democratic  representation  of  all  citizens  and  the  functioning  of  the 
institutions  even  after  the  accession  of  countries  with  populations  of  only  a  fraction  of  the 
smallest  current  Member  States,  important  changes  to  the  European  Treaties  and  the 

43 

44 

The important role of monitoring and enforcement of the acquis in those countries could be assumed by 
the  Commission  and  the  Court  of  Justice  of  the  European  Union;  the  EEA  EFTA  institutions  (EFTA 
Surveillance Authority and EFTA Court); or an equivalent supra-national authority. The options would 
need to be discussed and the preferred option agreed with the small-sized countries. 
Article 128 of the EEA Agreement. 

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institutional setup of the EU would be required. Such changes are unlikely to be agreed within 
a  short  timeframe  and  would  require  important  negotiations  within  the  EU.  Second,  the 
limited administrative capacity of the small-sized countries will have a significant impact on 
their ability to implement the EU acquis and to fulfil all obligations as EU Member States. 

6. 

CONCLUSIONS 

6.1. 

Horizontal and institutional issues 

In the event of full integration, in order to ensure the homogeneity of the internal market and 
legal  certainty  for  economic  operators  and  citizens,  any  agreement  with  the  small-sized 
countries would need to address four horizontal issues related to: (i) the dynamic adaptation 
of  the  agreement  to  the  evolving  acquis;  (ii)  the  homogeneous  interpretation  of  the 
agreements;  (iii)  independent  surveillance  and  judicial  enforcement;  (iv)  and  dispute 
settlement.  In  this  respect,  the  EU  could  draw  on  the  successful  experience  of  the  EEA 
Agreement in this respect. However, any agreement should take into account the specificities 
and particular identities of the small-sized countries, in line with the Declaration on Article 
8 TEU. To safeguard these principles, it may be necessary to offer the small-sized countries 
transitional periods and/or safeguard clauses. 

6.2. 

Recommendations 

The options presented in this Communication, if any were to be pursued further by the EU, 
would  need  to  be  discussed  in  detail  with  the  governments  of  Andorra,  Monaco  and  San 
Marino, in full respect of their sovereignty and independence.  

In  principle,  options  three  to  five  would  address  the  key  problems  faced  by  the  small-sized 
countries. Option one (status quo) would provide no solution and is therefore not a favoured 
option.  The  EU’s  experience  of  the  sectoral  approach  has  conclusively  demonstrated  its 
drawbacks. For this reason, and as it would provide only partial solutions, option two is not 
the preferred option, but it is not ruled out entirely at this stage. Option five remains a long-
term  possibility  but  is  not  retained  here.  The  small-sized  countries  have  not  submitted  an 
application for EU membership, and future accession would not provide any solutions in the 
short-to-medium term.  

the  potential 

In contrast, options three (Framework Association Agreement) and four (participation in 
the  EEA)  have 
the  right  balance  of  flexibility  and 
comprehensiveness  to  address  the  small-sized  countries’  concerns  while  meeting  the 
requirements of the EU. These options are therefore the preferred ones, although they merit 
further  reflection  and  examination,  including  on  their  possible implementation.  If  it  were  to 
prove  impossible  to  move  forward  with  these,  then  other  options,  in  particular  option  two, 
could be given further consideration.  

to  safeguard 

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