Austria - Rejoining the East
By Sam Vaknin
Author of "Malignant Self Love - Narcissism Revisited"

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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AUTHOR BIO (must be included with the article)

Sam Vaknin ( http://samvak.tripod.com ) is the author of Malignant Self
Love - Narcissism Revisited and After the Rain - How the West Lost the East.
He served as a columnist for Global Politician, Central Europe Review,
PopMatters, Bellaonline, and eBookWeb, a United Press International (UPI)
Senior Business Correspondent, and the editor of mental health and Central
East Europe categories in The Open Directory and Suite101.

Until recently, he served as the Economic Advisor to the Government of
Macedonia.

Visit Sam's Web site at http://samvak.tripod.com