How to run python macros in LibreOffice?

Question

When I go to Tools -> Macros -> Organize Macros -> Python I get this dialog:

Answer 1

I also struggled to get a clear start, so I documented my setup and the things I learned here. If you work through that, you will see that you can place your python script in any folder as long as you link to it correctly.

EDIT: The old URL-only answer now points to a dead link. That page can still be found on the Internet Archive Wayback Machine or this GitHub Gist.