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* Royals say will withdraw from politics if not supported
* Political stability critical for banking industry
By Emma Thomasson
VADUZ, June 11 It isn't easy being a campaigner for more democracy in the tiny principality of Liechtenstein. Everybody knows everybody in this arch-conservative state and the subjects of the last monarchy in Europe with any real power don't like rocking the boat.
Activists who want to end the monarchy's right to veto popular referendums say they have received threatening letters and seen far-right vandals deface campaign posters with Nazi slogans like "Heil Fatherland" and "Democrats are the death of the people".
Given the charged atmosphere in this state of just 36,000, few dare to speak out against billionaire Prince Hans-Adam von und zu Liechtenstein, whose family has ruled the 160-sq-km (62-sq-mile) principality since 1699 and is credited with turning a rural backwater into a wealthy banking centre.
But democracy campaigners still managed to gather just enough signatures to call a referendum on the prince's veto right - set for July 1 - by canvasing support in private and assuring voters that their names would be kept secret.
"People are worried about being seen as against the prince," Sigvard Wohlwend, a communications consultant who is a spokesman for the campaign, told Reuters in a cafe in the pedestrianised main street of the sleepy capital Vaduz.
Wohlwend said most people don't want to reopen deep divisions over the monarchy that were triggered by a constitutional crisis in 2003.
"Today I argue with a politician and tomorrow I play football with him and I'm probably also related to him somehow. That's village life," said Wohlwend, who greeted several passersby during the course of the interview.
An attempt to canvas support at his son's soccer match did not go down well, he said.
While the prince has far-reaching executive powers beyond the veto right, he rarely has to use them. All he needs to do to strike fear into the hearts of his subjects is to threaten to quit the country which carries his name, undermining stability and affluence for all.
"God, Prince, Fatherland" bumper stickers are popular around Vaduz and 1,200 opponents of the referendum had their names printed in the national newspaper.
"If you speak to young and old it is clear for all that this initiative will be rejected," said one senior banker, who sported the gold crown lapel pin of the pro-Prince camp but did not want his name used in this article.
"The princely house is a stabilising factor for our country because it thinks for generations and not just for four years."
It's an argument that carries particular weight at a time when the country's powerful financial industry is trying to sell political stability as the main reason to bank in Liechtenstein after it came under pressure to stop sheltering tax dodgers.
MOST POWERFUL MONARCH IN WEST
Wilfried Marxer, director of the Liechtenstein Institute - a largely government-funded research body - said it was hard to have a rational debate about the monarchy.
"It is a very controversial issue. The topic of the position of the monarch in Liechtenstein is not so much rational as emotional. People don't want conflict," he said. "If there is a lack of consensus between the people it is difficult for a society as small as Liechtenstein."
The July vote is only on the prince's right to veto the results of popular referendums; he would retain the right to veto decisions made by parliament.
The campaign was triggered last year after Crown Prince Alois said he would block the legalisation of abortion in the first 12 weeks of pregnancy if his people approved it in a referendum, held in September after a years-long debate.
Alois has run day-to-day affairs in Europe's fourth smallest state since Hans-Adam returned to managing his family's fabulous wealth after winning a referendum to increase the monarchy's powers with 64 percent of the vote in 2003.
In the end, the father of four, whose wife Sophie runs a charity that supports women who have unwanted pregnancies, did not have to resort to the veto because the proposal was rejected by 52 percent of the largely Catholic population.
"Just by commenting, the prince can move 10 or 20 percent of the population of Liechtenstein in one direction or the other. By threatening his veto, he can avoid having to use it," said Wohlwend.
"There is no other head of state who has these powers. He is the most powerful monarch in the Western hemisphere - and will remain the most powerful monarch after a 'Yes' in the popular vote," he said.
Alois, 44, who lives in a fortified castle that clings to steep forested slopes above Vaduz, has said his family would withdraw from political life if it loses the vote.
"The princely house will not serve as a fig leaf for policies it no longer supports," Alois said in a speech at the opening of parliament in March. The prince declined to speak to Reuters for this article.
Hans-Adam managed to head off an attempt to limit his powers a decade ago with a similar threat, suggesting his family could move to Vienna where their ancestors lived until 1938 if their subjects no longer wanted them.
"There is a small group of politically ambitious individuals for whom the monarchy has long been a thorn in the side. First they want to weaken the monarchy and then completely abolish it," Hans-Adam, 67, said in February.
"Unfortunately in the 20th century, there have been enough examples of monarchies being removed by revolutions and replaced by bloody dictators," he told the Liechtensteiner Vaterland newspaper in his annual birthday interview.
BANKING BEHEMOTH UNDER PRESSURE
Vaduz is an odd mixture of modernity and tradition. The quaint postcard shops and cafes that you would expect in any small Alpine town are interspersed with boxy city office buildings, the largest belonging to banks like LLB and LGT.
In a reminder of the not-too-distant past of this country sandwiched in the Alps between Austria and Switzerland, visitors can also still catch the smell of manure in the centre of Vaduz and see the odd tractor chugging through the streets.
Gesturing up the hill to the 13th-century royal castle, Wohlwend doubted Hans-Adam would ever really quit Vaduz.
"Why should he give up his enormous privileges?" he said. "He can direct policies that benefit the princely family and its interests. He pays no taxes. He saves millions of francs a year in wealth taxes."
After the Liechtenstein royal family lost vast tracts of land and castles in eastern Europe at the end of World War Two, they reinvented their country as a tax haven, attracting offshore companies and the savings of wealthy foreigners.
That helped LGT, owned by the royal family, become hugely profitable, making the Liechtenstein monarchy the wealthiest in Europe, worth 6-7 billion Swiss francs ($6.25-7.3 billion), according to the 2011 rich list in the Swiss magazine Bilanz.
LGT, the country's biggest bank with 87 billion francs under management, is run by Alois' brother Max and offers clients the possibility to invest in a "Princely Portfolio", using the same broad diversification strategy as the monarchy.
The family also owns several palaces and tracts of forest and vineyards in Austria, as well as a valuable art collection.
The booming financial sector - the tiny nation has 17 banks and 107 wealth management companies - also helped make Liechtenstein's citizens among the world's wealthiest, with national output per person seen over $141,000 in 2012.
The dominance of banking has pushed up property prices: there were no houses for sale under 2 million francs in the window of one Vaduz real estate agent, which also advertised a villa near the princely castle for 5.5 million.
But the industry has been in crisis since 2008 when bank data leaked by a former LGT employee revealed hundreds of rich Germans had hidden assets in the country, forcing Liechtenstein to promise to clamp down on tax dodgers from abroad.
The U.S. Department of Justice is also investigating the second biggest bank LLB for allegedly helping rich Americans to avoid paying tax, one of at least 11 banks - mostly Swiss - targeted in the probe.
The Swiss and Liechtenstein governments are trying to get the investigation dropped in return for the likely payment of heavy fines and the transfer of thousands of client names. LLB has said it is working with U.S. authorities to reach a settlement.
The tax issue, compounded by rocky markets and a rise in the Swiss franc - Liechtenstein's official currency since 1924 - slashed assets managed in the country from a 2007 peak of 153 billion francs to 109 billion at the end of 2011.
'LIECHTENSTEIN SPRING' UNLIKELY
As the tide of foreign money has turned, the government has been forced to make unprecedented budget cuts, reinforcing support for a stable status-quo.
"We have never had real revolutionary times. The prince is seen as a protector rather than an exploiter," said Marxer of the Liechtenstein Institute. "People see more advantages than disadvantages from the princely house to risk it withdrawing from politics or leaving the country."
In February, ratings agency Standard & Poor's confirmed its 'AAA' rating for Liechtenstein, saying "stable and conservative policies have resulted in a strong history of managing political and economic challenges which we expect to continue."
Prime Minister Klaus Tschuetscher, who went to school with Prince Alois and meets him every couple of weeks to discuss official business, said the veto dispute could be resolved by limiting when the royals are allowed to speak out on key topics.
"The debate should be around when the princely house should express itself on referendums. I personally believe it should be after the people have expressed their will so that there is really free volition," he told Reuters.
"The princely house is as integral to Liechtenstein as is the Rhine which makes the border to Switzerland, and the Swiss franc," he said.
"The people of Liechtenstein know what they get from the princely house and the princely house knows what it gets from Liechtenstein. It is such a symbiotic relationship that nobody will give that up easily."
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