Austria: Island of Stability? – Part Two
As Europe's economic prospects darken, Austria seems unaffected, safe in the eye of the storm. Four economists explain.
The worldwide failure of banks and financial markets in 2008 led to the deepest economic crisis since the 1930s. In 2009, EU GDP dropped by more than 4% in real terms. By 2011, it still stood about 1% below its pre-crisis level.
Austria fared a little better during these years. By the end of 2011, Austrian GDP stood 1.3% above its 2008 level. Rates of unemployment (4% of the labour force) and youth unemployment (7%) are the lowest in the EU, far below the Union’s averages of 9.5% and 21.4%.
However, the total number of job seekers is still 50,000 (or 0.5%) higher than it was in 2008. Therefore, tackling unemployment remains a major political task.
Still, it could have been worse. Successful labour market development in economic downturns is one characteristic of the Austrian economy, chiefly by tightening the labour supply: Reducing employees’ working hours, rather than laying them off, maintains the long-term benefits of a stable employment relation when the economy picks up again.
Reductions in overtime and holiday accounts, programmes of educational leave, and shortened working hours helped dampen unemployment, especially in manufacturing. Guaranteed vocational training for young jobseekers helped to keep youth unemployment low.
In addition, stabilising demand was important for returning to economic growth. The single most important factor was the welfare state: During recessions, it steadies consumption because, confident that their basic needs are covered, Austrians use their savings to continue spending. Constant consumer demand and reduced savings in downturns, and increased savings in boom years are characteristic of the Austrian economy. Both help keep output and employment levels up.
In addition, higher wage increases, low inflation, a reduction of income tax rates, and higher transfers to families and pensioners in 2009 proved beneficial. That year, per capita wages after tax actually increased by nearly 3% in real terms compared to 2008.
Still, the financial crisis imposed huge costs on Austria, not only in terms of an increase in joblessness, but also in terms of rising public debt: The stock of public debt jumped from 62% to 72% of GDP because of the downturn.
Public debt levels are currently too high. High public debt causes unproductive interest expenditures. Therefore, debt reduction is a necessity. However, successful debt reduction crucially depends on sound economic development.
Here, there are at least three hopeful indicators. First, Austria has a very productive and competitive manufacturing industry, accounting for the country’s favourable trade balance. Second, Austria benefits from a well-educated workforce, and stable industrial relations within the social-partnership system, enabling long-term planning for companies.
And third, high per capita income and the huge wealth of private households provide favourable financing conditions for both private and public investments. Private wealth in Austria is nearly six times higher than public debt, although the distribution of income and wealth is increasingly uneven.
Currently, high volatility in financial markets and austerity policies across all EU member states are leading us into a new recession. This poses enormous problems for the Austrian economy. More than one third of total demand in Austria comes from abroad. The bulk of this stems from other EU countries. Without recovery in those countries this demand is sure to dampen.
But the most striking risk still lies with the financial sector. Banks all over the world are still struggling to stabilise their balance sheets. Given the high degree of uncertainty and distrust between banks, the exposure of Austrian banks to risk in Eastern Europe remains a major concern.
Yet Austria’s economy and economic policy have proven well equipped to provide stability in times of crisis. With its adaptable and stable institutions, Austria should perform well in the period of economic headwinds that lies before us.
Markus Marterbauer is the head of the economics department, and Sepp Zuckerstätter is a senior economist at the Austrian Chamber of Labour (AK).