Austria - Rejoining the East

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

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November 26, 2002

Harry Potter would have surely enrolled. A school for wizardry has just opened in Austria in the forbidding mountains around Klagenfurt. The apprentices will be granted a sorcerer's diploma upon completion of their studies. This is a wise move. Austria may need all the witchcraft it can master in the next few years.

Chancellor's Wolfgang Schoessel's conservative People's Party convincingly won the elections on Sunday with more than 42 percent of all votes cast. In the process, it trounced Jorg Haider's much decried far right outfit, the misnamed Freedom Party, which lost a staggering two thirds of all its supporters. Schoessel may now feel that, thus humbled, the Freedom Party may constitute a more reliable and less erratic partner in a future coalition government.

The first signs are not encouraging, though. Haider resigned from the governorship of the province of Carinthia and then retracted his resignation, all in the space of 24 hours. In yet another xenophobic outpouring, he accused the European Union (EU) for his political near death experience. This contrasts sharply with Schoessel's staunch pro-European stance. Austria is the most avid proponent of EU enlargement.

Austria is uneasily located at the heart of Europe, flanked by Italy and Germany on the one side and by Slovakia, the Czech Republic, Hungary and Slovenia on the other. It is a natural bridge between prosperous Brussels and impoverished Tirana, between a towering Germany and a cowering Serbia, between the Balkan and the central Europe. In its former incarnation as the Habsburg Empire, Austria ruled all these regions.

It still virtually controls the critical Danube route - the riparian exit for many of the landlocked countries of southeastern Europe. Its neutrality, its EU membership, banking secrecy, business tradition, affluence (average annual income per capita is c. $26,000), multilingualism, plurality of cultures and stable currency made it the natural hub for multinationals eyeing the territories of the former Soviet bloc. Novartis Generics, for instance, is a subsidiary of the Swiss pharmaceuticals giant Novartis. But it is headquartered in Austria. It has just concluded the purchase of the Slovenian generic drugs company, Lek.

Vienna hosts many international organizations, such as the Organization for Security and Cooperation in Europe (OSCE), the International Atomic Agency and OPEC - the Organization of Petroleum exporting Countries. It is also the pivot of Europe's organized crime and espionage. Albanian drug dealers mix well with Ukrainian and Moldovan human traffickers and Russian KGB agents turned weapons smugglers.

Austria is schizophrenic - staid and inertial at home, it is an aggressive risk-taker abroad. For four decades, everything - from wage increases to the most inconsequential governmental sinecure - was determined by the two big parties in the infamous "Proporz" system.

A carefully balanced arrangement of partisan monopolies and cartels stifled the economy. Local commercial radio was first introduced only 6 years ago and a private national television channel - only in 2000. The banks set rates and fees in the monthly meetings of the Lombard Club, castigated by the European Union as a pernicious trust. Disgruntled citizens blamed this cozy, bureaucracy-laden, atmosphere of greed and cronyism for the signal failure to cope with the floods that ravaged the country a few months ago.

The Schoessel government pursued privatization, deregulation and budget discipline. This business-friendly attitude sustained the economy in a difficult global recessionary environment. Companies in virtually all sectors of the economy - from Telekom Austria to Erste Bank - beat analyst expectations and disclosed robust profit figures, rising equity and declining debts.

Gross domestic product (GDP) is expected, by the Economist Intelligence Unit, to grow by more than 2 percent next year. Inflation averages less than 2 percent and the budget deficit - 0.1 percent of GDP last year - is likely to reach a manageable 1.5 percent. Imports will grow by 1 percent and exports by double that. When much postponed tax reforms kick in in 2004, the economy is expected to revive.

The bulk of Austria's $400 million in overseas development aid goes to eastern Europe. It is a founding and funding member of the $33 million Southeast Europe Enterprise Development (SEED) initiative, led by the World Bank's International Finance Corporation (IFC) and intended to foster the formation of small and medium size enterprises in the region.

Austrian companies make it a point to participate in every trade fair and talk shop in the Balkan and in Mitteleuropa alongside firms from Macedonia, Bulgaria, Albania, Croatia, Bosnia-Herzegovina, Hungary, Slovenia and Romania. Austria initiated the Central European Initiative - the largest regional cooperation effort involving Austria, Italy, Hungary, Yugoslavia, the Czech Republic, Poland, Bosnia-Herzegovina, Croatia, Slovenia, Slovakia, Macedonia, Belarus, Bulgaria, Ukraine, Romania, Albania, and Moldova. A flurry of memoranda of understanding, pledges, contracts, and programs usually follows these encounters.

In a 1998 study titled "Austria's Foreign Direct Investment in Central and Eastern Europe: 'Supply Based' or 'Market Driven'?", written by Wilfried Altzinger of Vienna University of Economics and Business Administration, the author concludes:

"Since 1989 Austria's investment activities in Central and Eastern Europe has intensified. Investments are concentrated in adjacent countries. Geographical proximity and close historical and cultural ties have enabled even small and medium-sized Austrian enterprises to achieve a 'first mover advantage'. Investments have been performed to a large extent in industries that are typically not connected with outsourcing activities (trade, finance and insurance, construction).

Market-driven factors and strategic considerations are the ultimate objective of these investments. Only a few sectors, in particular a so-called 'core' industrial sector (metal products, mechanical products, electrical and electronic equipment), indicate that low labour costs are of importance. Trade and sales data of the affiliates  support the dominance of the local market. Whilst on average 66% of the affiliates output was sold locally this share was only 39% for the 'core' industrial sector. This sector indicates particular patterns of relocation. Nevertheless, until now this part of Austria's FDI has only been of minor importance."

Austria recently signed with the governments of the region a memorandum of understanding on co-operation in the field of renewable energy resources. It is involved in the E75 motorway project which links the country to Greece through Macedonia. Despite the fact that Russia's debt to Austria of more than $3.5 billion is long overdue, bilateral trade is expanding briskly. Austria is a member of the Danube Cooperation Process centered around the economic and environmental issues of the 13 riparian signatories.

Croatia opened last June a trade chamber in Graz. The Croatian banking sector is completely Austrianized. Austria's energy company, OMV, is bidding for Croatia's energy behemoth, INA. Even destitute Albania signed a trade cooperation agreement with Austria, replete with specific projects of infrastructure, telecommunications, food and tourism.

Austrian exports amount to half of its GDP. Around 50 percent of Austria's trade is still with Germany, Italy and the United States. But Hungary has overtaken Switzerland with 4 percent of all of Austria's exports. Trade with central and eastern Europe is growing by leaps and bounds while lethargic Germany's share declines, though, at this stage, imperceptibly.

Many Austrian companies - especially in the financial sector - are actually central European. Erste Bank - Austria's largest network of savings houses - retains 3 people outside Austria, in places like the Czech Republic and Croatia, for every 1 employed at home. It also derives most of its net operating profit from its central and southeastern European subsidiaries. Margins in over-branched Austria are razor-thin.

Austrian banks act as both retail outlets and investment banks. Bank Austria, for instance, purchased stakes in Croatia's Splitska Banka and Bulgaria's fourth largest financial institution, Biochim. It is bidding for Romanian and Albanian banks. But it also lent aggressively to Bulgaria's second mobile phone operator, GloBul. Meinl Bank will advise the Macedonian government in its privatization of the debt-laden and inefficient electricity utility. Raifeissen Zentralbank Austria is heavily involved in lending related to fossil fuels in Romania and elsewhere.

It is here that the danger lies. Austria's financial sector is over-exposed to central, eastern and southeastern Europe in the same way that American banks were exposed to Latin America in the 1980's. The hype of EU enlargement coupled with the almost-religious belief in the process of transition from communist drabness to middle class riches have blinded Austrian banks to serious cultural obstacles, reactionary social forces and corrupt vested interests in the region. Tellingly, Austria is not a member of GRECO - the Council of Europe's Group of States against Corruption.

Should eastern Europe implode, mutual guarantee pacts among Austrian financial institutions ensure that a run on a single member or the bankruptcy of a single bank will cascade throughout the financial system. Austrian banks maintain inadequate tier 1 capital ratios - 6 percent compared to 8-12 percent in other countries in the West. Their domestic businesses are often loss leaders. They are ill-equipped for a meltdown.

High financial gearing in the banking sector means that any government intervention is likely to result in a nationalization of the banks. Industrial cross-shareholding within financial-industrial complexes might entangle the government in a process of reverse privatization. Austria would do well to sprint less vigorously where others fear to tread.

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