The Austrian Miracle

What's the secret of Austria's singular success, while the rest of Europe's economies founder?

Miguel Villagran/Getty Images
Miguel Villagran/Getty Images

VIENNA — Walking through the beautiful and bustling streets of central Vienna, one finds it hard to imagine that elsewhere in Europe thousands of demonstrators are taking to other streets to protest crippling unemployment and the imposition of punishing austerity measures. This is particularly true in Greece and Spain, where one in four people is out of a job, and one in two of those under 25. For the European Union’s 27 countries, the unemployment rate is now 10.6 percent — and it’s even higher for the eurozone countries, at 11.6 percent. Worse, the trend is negative: Both rates have "risen significantly" according to Eurostat, from 9.8 percent and 10.3 percent, respectively, the previous year. 

In Austria, however, the rate is just 4.4 percent, up slightly from a year ago but persistently the EU’s lowest unemployment level. This is also a country whose tourism industry seems recession-proof and whose capital city of Vienna is repeatedly ranked No. 1 on Mercer’s Quality of Living index. It’s an enviable record, to be sure, and one that seems counterintuitive in the context of a slumping global economy, regionwide pressures, and a common currency on the verge of collapse.

What is Austria’s secret?

The answer lies in a system of economic and employment policies built on a central commitment to social market economics, where individual and corporate prosperity depend on general prosperity in a tapestry of interdependent interests. These assumptions are played out, at least in part, through a "social partnership" system of representatives from labor, industry, government, and often academia, in which job security, wages, pensions, unemployment insurance, and other workplace standards, as well as related legal and policy questions, are discussed and negotiated, leading to recommendations to Parliament and the respective ministries.

At the same time, Austria has a productive and highly competitive manufacturing sector, which accounts for the country’s favorable trade balance. In a country with generally good secondary schools and effectively free higher education, the economy enjoys a well-educated workforce and stable relations between management and labor within the social-partnership system that allow for long-term planning. Austria also has an excellent medical system, ranked among the world’s best, and a varied and flexible national health-care system supported by all participants.

Austria is a wealthy country, both publicly and privately, with comfortable levels of household income (31,125 euros median) and a sustained and relatively high level of private savings, with private wealth nearly six times higher than public debt. Although the distribution of income and wealth is increasingly uneven by Austrian standards, it is still relatively narrow, and the high levels of private wealth lubricate the pipelines of both private and public investing.

Austrians are also big savers, stashing away things like commemorative gold coins from the Austrian Mint. And though individuals and households are saving somewhat less than before (7.5 percent of annual income in 2011, compared with 8.3 percent in 2010), it doesn’t appear to be affecting consumption. Statistics Austria reports that household disposable income increased 2.6 percent for the same period, and household consumption, up 3.5 percent, by even more.

The single most important factor here is the role of a generous welfare state, which "steadies consumption" during recessions, said economists Markus Marterbauer and Sepp Zuckerstätter of the Austrian Chamber of Labor. "Confident that their basic needs are covered, Austrians use their savings to continue spending," said Marterbauer and Zuckerstätter in a 2011 interview with the Vienna Review. "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."

A commitment to job creation and to support of the working class has a long history in Austria. Originating in the First Republic after World War I, it was a pillar of the socialist-led "Red" Vienna of 1919 to 1934, when social services, housing, and jobs dominated the public agenda. Jobs were provided through extensive construction and public works projects, as well as through the staffing of kindergartens, after-school care, and youth clubs, along with public recreation, spa holidays, and free health care — all financed by a range of taxes on luxuries. Rents in the extensive, new public housing were kept low — at 4 percent of household income, and even that could be postponed in case of illness or unemployment. What people earned, they kept.

Ironically, full employment was also a central feature of National Socialism, and by the Anschluss in 1938, there were jobs going begging in Germany — less surprising when you remember that Jews and women were increasingly forced out — making the Austrian labor force an important resource to the Third Reich. During the recovery years following World War II, Austria channeled Marshall Plan money largely into the monopolistic public sector and state-owned industries, which along with government became the bedrock of public employment.

But it was during the reform years of the great Chancellor Bruno Kreisky (1970-1983) that a great many of the laws and policies that have come to characterize modern Austria were laid down. For Kreisky, committed to reforging a sense of social solidarity in a country still in denial from the disaster of National Socialism, economic policy was subservient to economic needs, and he consistently pushed to ensure full employment: "Hundreds of thousands unemployed matter more than a few billion schillings of debt," Kreisky said on more than one occasion.

Public spending and investment in a range of industrial projects were thus made high priority during his administration. And because 50 percent of Austrian industry remained in state hands, nearly all people in Austria had the chance to complete their education and expect to find a well-paid, stable job — with a good pension at the end. In addition, the provision of free public education, recreation and sports facilities, subsidized rents, public transit, and national health care meant that modest salaries went a long way, allowing Austrian industry to stay competitive while providing guaranteed jobs.

Since the beginning of the 2008 financial crisis, Austria has controlled unemployment through a series of initiatives — including shortened working hours, enhanced education and job training, income tax cuts, and reduced public transit costs — that have combined to preserve jobs, develop skills, and free up consumer spending. In addition, according to Franz Nauschnigg, head of the European Affairs and International Financial Organizations Division of the Austrian National Bank (ÖNB), Austria’s low budget deficit going into the crisis made possible a series of direct countercyclical measures, including large infrastructure projects like Vienna’s new Central Railway Station, cash handouts to people trading in old cars, and a 100 billion euro loan package to Austrian banks to increase their capital base and enable them to resume lending.

In the early years of the crisis, there was also a lot of hand-wringing among rating agencies and other international analysts about Austrian banks’ substantial vulnerability to the teetering markets in Central and South Eastern Europe (CESEE). That these fears were never realized was due to what was dubbed the "Vienna Initiative," described by the ÖNB’s Nauschnigg as in intervention by which "a group of Western and Eastern European banking supervisors, joined by the IMF and the European Bank for Reconstruction and Development, successfully lobbied the private sector to maintain its exposure in CESEE countries, preventing the panic-selling of bonds and currencies that would have driven up interest rates and made a default more likely." It was a model of international cooperation that could well serve as a paradigm solution for the larger problems that face the EU today.

At the peak of the crisis in 2009, some 66,000 workers were shifted to shortened working hours in Austria, particularly within the auto industry and its suppliers, according to Johannes Kopf, head of the Austrian Employment Service (Arbeitsmarktservice, or AMS), in a recent interview with the Austrian daily Der Standard. This number is now less than 2,000; however, he sees this as "a short-term bridge for a very deep crisis, not something we can use for years to bridge a gap," when it becomes "too expensive for the companies." After that, other solutions need to be found.

Austria has also invested heavily in job training both for the unemployed and for youth entering the job market. With a budget of some 1 billion euros (a budget Kopf readily admits is "enviable"), the AMS is able to offer individual counseling and monitoring on a weekly basis for job seekers as well as usually two extended training courses in appropriate skill areas, including technology and languages, to improve job prospects. So though the unemployment rate overall is up slightly from last year (from 4 percent to 4.4 percent), there are also 45,000 more people working, meaning more people have entered the workforce, which is generally seen as a sign of confidence in the economy.

And perhaps most dramatic is the AMS guarantee of a guaranteed paid training internship (Lehrstelle) for all youth. Thus any young person who doesn’t find an internship on his or her own or through the AMS is able to do the equivalent training. "We invest massive support into these education and training issues," says Kopf. "We have managed it, that after a year, half of these young people have already switched to the private sector where they can do a second training year." Expensive, he says, but worth it. And similar support is available for the long-term unemployed.

"I prefer to have four people who have been unemployed for three months each, than one person for a year," Kopf says.

Back on the streets of Vienna, people are still sitting outside where the sun takes the edge off the autumn chill, meeting and talking together. On a late-October Friday afternoon, in fact, the Kaffeehäuser were already filling up; people had switched from coffee to wine, and conversation was lively.

"Doesn’t anyone do any work in this town?" an American friend asked, eying the scene with amazement and envy. "Don’t be fooled," I smiled. Along with their unabashed love of leisure, Austrians are paying very close attention to business. Because that’s what it takes to make it turn out like this — for themselves, and for everybody else. Which to an Austrian, is how it should be.

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