Austria: Powerful Link to Central and Eastern Europe PDF Report Option >

Vienna, one of the prime centers of European culture, houses the Naturhistorisches Museum or the Museum of Natural History, opened to the public in 1889. The main building of the museum is a magnificent palace, displaying artifacts over 250 years old.

Barely 1% of the area of the U.S., Austria has emerged after World War II as a significant European economic power, becoming a member of the European Union (EU) in 1995. Sharing its borders with eight countries in Europe, Austria is attractively located, poised to leverage the rapidly growing markets in Central and Eastern Europe. This predominantly mountainous region is also one of the most forested, with almost half its area covered with timberland. While the magnificent, towering Alps stretch along the western and southern regions of Austria, covering almost 75% of its area, they flatten into lowlands in the eastern part, forming a part of the Danube river basin. Here, the city of Vienna is located. Recognized as the cultural and intellectual bedrock of Europe, the city gave the world the musical maestro, Mozart, the psychoanalytical pioneer, Sigmund Freud, as well as Symbolist painter, Gustav Klimt.

History

A nation born of strife

While little is known about the original inhabitants of Austria, annals trace back the history of the country to 700 B.C., when the country was predominantly occupied by Celtic tribes. During this era the expanse of the region included Hungary , Slovenia, parts of contemporary Germany, as well as Switzerland. After the invasion by the Romans in 15 BC, all these regions melded into the Roman Empire. In fact Vienna, then referred to as Vindobona, was one of the first strategically located Roman military posts. From 166 AD onwards, the provincial frontiers of the region came increasingly under the attack of Germanic tribes. After the fall of the Roman Empire in the fourth century, the frontiers completely broke down, and were invaded by various Germanic tribes like the Goths, Lombards, Vandals, and Huns. Subsequently, the Slavs, Avars, and Bavarians occupied the east and southeastern parts of the region, primarily in Hungary. By the sixth century, the Germans invaded and occupied the northwestern part of the area.

Internal strife among the Germans during the eighth century left them open to attack, and the Franks captured Bavaria, the southeastern province of Germany. By the end of the eighth century the Frankish leader Charlemagne expanded his empire further east to Austria, renaming it Österreich or eastern country. However, invasions from the east continued until 955 AD when the German king Otto I re-instated his supremacy in the region, by defeating the Magyars, a nomadic tribe that was migrating from the east. Otto I also revived Austria as a strategic outpost against aggression from the east, a move that for the first time led to the emergence of Austria as a distinct political entity. He died in 973 AD and was succeeded by his son, Otto II. In 976, after the Bavarian rising, the eastern region comprised of the core territory of Austria was given by Otto II to Leopold I of Babenberg as a reward for his loyalty. Between 976 AD and 1246 AD the Babenbergs ruled Austria, first as administrators under the supremacy of the duke of Bavaria, and subsequently as the more powerful dukes. When Duke Frederick II of the Babenbergs died in battle in 1246 AD without leaving an heir, a power struggle ensued for control over the strategic and economically attractive region of Austria.

King Ottokar II of Bohemia (currently the Czech Republic) was elected duke in 1253 AD, and to strengthen his position, he married the sister of the last Babenberg. His reign was opposed by the Holy Roman emperor Rudolf I of Habsburg, and he eventually succumbed in a battle in 1278. Thereafter, from 1282-1918, Austria remained under the rule of the Habsburgs. In the medieval era, politically Austria came into power due to the expansion of the Habsburg Empire and several advantageous marriage alliances. Commercially, the country became a stronghold, as trade with neighboring regions in Europe increased.

However, in the latter half of the 19^th century, the empire started weakening as nationalistic fervor increased among the ethnically diverse population of Germans, Czechs, Romanians, Hungarians, and Serbians. The trigger for the disintegration of the empire, as well as the commencement of World War I, was the 1914 assassination of the heir to the Austro-Hungarian Empire, Archduke Francis Ferdinand, by a Serbian nationalist in Sarajevo. While the Austro-Hungarian forces suffered major defeats in the war, internal conflicts further debilitated the empire, which was riddled with war-related shortages of food and other necessities. War miseries, further exacerbated by internal strife and struggles, culminated in the inevitable disintegration of the empire and the birth of Austria and Hungary as independent republics.

The new Austrian constitution created a federal state, a bicameral legislature and democratic voting. The nascent republic battled poverty and economic distress, but was aided by American, British, and Swedish organizations. However, the political fabric of the country remained fragile, with Austrian Nazism perpetuating instability in the region. In 1936, Adolf Hitler annexed the Austrian region, openly acknowledging it as a German state. With the 1939 outbreak of World War II, the Germans systematically exploited Austrian resources in order to fulfill their war ambitions. After the war, the U.S., France, the U.K., and the erstwhile U.S.S.R. continued to occupy Austria, though the Austrian government was given the authority to legislate and to administer laws in the country. After prolonged negotiations, the Austrians regained sovereignty in May 1955, resulting in the reestablishment of the Austrian republic.

Post World War II, Austria has been governed by numerous political coalitions, but four have emerged that have gained a foothold: The Freedom Party, the Social Democrats, the People’s Party, and the Alliance for the Future of Austria. The Freedom Party of Austria (FPÖ) is a populist party widely known as a far-right party. The Austrian People’s Party (ÖVP) is a more traditional conservative party; while the Alliance for the Future of Austria (BZÖ), once led by Jörg Haider, is a far right, populist party which broke away from the Freedom Party. It participated in the government until January 2007. The Social Democratic Party (SPÖ) is a traditional social-democratic party, alternating in power post-war with the People's Party. Since January 2007, it has joined forces with the ÖVP.

Since 2004, Heinz Fischer, a member of the Social Democratic Party, has been holding the largely ceremonial role of president, while Chancellor Alfred Gusenbauer's reign as Chancellor abruptly came to an end in July 2008, when the People's Party broke their alliance with Social Democrats. Elections were held in September 2008, and while Social Democrats emerged again as the strongest party, they along with the People’s Party, lost considerable ground to the far-right parties, which managed to garner 29% of the votes. Sadly, Joerg Haider, leader of the far-right Alliance for the Future of Austria, was killed in a car crash in October.

Culture

The heart of European culture

European classical music, fostering work by maestros such as Wolfgang Amadeus Mozart, Joseph Haydn, Franz Schubert, Anton Bruckner, Johann Strauss, Sr., Johann Strauss, Jr. and Gustav Mahler. Even Beethoven, the eminent German composer spent a substantial part of his life in Vienna. Gustav Klimt, Oskar Kokoschka, and Egon Schiele are some prominent Austrian painters, while Friedensreich Hundertwasser has been the most renowned Austrian artist, architect, and sculptor of contemporary times. Some of Austria’s literary geniuses include writers like Arthur Schnitzler, Stefan Zweig, Thomas Bernhard, Franz Kafka, and Robert Musil, as well as poets such as Georg Trakl, Franz Werfel, and Franz Grillparzer. Austria continues to make a mark in the contemporary literary arena touting famous playwrights and novelists Elfriede Jelinek and writer Peter Handke, both Nobel Prize winners.

The legacy of long Habsburg reign is reflected in Austria’s multi-ethnic demographic. Although ethnic Austrians constitute more than 90% of the population, minorities in the region include Croats, Hungarians, Slovenes, Czechs, as well as Italians, Serbs, Romanians, and Turks. The predominant language spoken is German, while Christianity is the most widely practised religion.

Austrian cuisine is a mix of these ethnic flavors, including delicacies from the Hungarian, Czech, Jewish, Italian and Bavarian cultures. Some delectable fare includes the traditional Austrian veal cutlet, Wiener Schnitzel, as well as tempting desserts like Apfelstrudel, a unique kind of apple pastry.

Economy

Genesis of a global economic power

Though fairly inconspicuous in terms of its geographical area, Austria has made a phenomenal ascent onto the global economic stage, post World War II. This erstwhile impoverished economy, whose resources were thoroughly sapped during the Nazi occupation, has since then climbed to a lofty perch, becoming the 25th largest in the world.

After gaining independence from Allied occupation in 1955, the Austrian economy took rapid strides towards cementing its place among the developed economies of Europe. This was achieved through two catalytic milestones: Gaining membership of the EU in 1995, and the subsequent adoption of the euro as its currency in 2002.

As a key player in developed Europe and a member of the EU since 1995, Austria has capitalized on the bloc’s eastward expansion in 2004, benefiting from investments in Emerging Eastern Europe. The country’s favorable geographical location has made it a magnet for global companies who use it as a base for their Central and Eastern European operations.

While the reconstruction of the economy in 1946 began with widespread nationalization of Austria’s manufacturing, transportation, and financial services core industries, the government has been making concerted efforts to encourage private enterprise since the late 1980s and the early 1990s. During this time, the private sector was given a boost through the strategic sale of shares of nationalized companies to private businesses.

The Austrian economy averaged consistent healthy growth rates of above 4% through the 1950s and 1960s, the critical phase of its rebuilding. While GDP growth moderated to 3.7% in the 1970s, and 2.1% in the 1980s, the economy benefited from EU integration, rebounding to 3.6% in 1998, and 3.7% in 2000. Growth registered a robust 3.4% in 2006, and 3.1% in 2007, and is expected to taper to 2.2% in 2008 due to the global slowdown and the subsequent drop in EU growth rates. The economy is expecting a decline in its exports as well as domestic demand.

Austria’s macroeconomic stability can be judged from its steady inflation rates. Inflation averaged about 2% during the 2000-07 period, and stood at 2.2% for 2007. However, the recent upsurge in global food and oil prices has caused inflation to peak to an annualized 3.8% in July 2008. Subsequently, inflation has moderated, with global as well as domestic demand sputtering out.

The country has also been performing impressively on the employment front compared to many of its peers in developed Europe. Recording an employment growth rate of 1.9% in 2007, Austria has bettered the Euro-zone average of 1.8%. As well, the proportion of employed persons from the working-age population stands at 71.4%, significantly higher than the Euro-zone average of 65.7%. Investors smile upon the country, perceived as one of the most stable and secure, and equipped with an efficient legal system, and hence a low crime rate. Foreign investors are lured to Austria, as the government offers wide-ranging subsidies especially for small and medium enterprises, new ventures and start-ups, as well as research and development.

This conducive business climate is also reflected in various noteworthy global rankings. The country is ranked 25^th on the ease of doing business by the World Bank in 2008, and it has secured the 14^th rank worldwide on the Global Competitiveness Index 2008-09. The economy’s 12^th rank on the Corruption Perceptions Index 2008, also underscores the favorable business environment offered. A formidable economic force to reckon with in the EU, Austria has benefited substantially from the EU’s expansion to the east. The country is one of the largest investors in neighboring Emerging Eastern Europe as well as in southeastern Europe. Moderate rates of corporate as well as individual taxes also ensure a stable, business friendly tax system.

The country traditionally has had a strong labor movement. Based on a social partnership system established in the 1950s, the labor force has enjoyed amicable relations with industry. The “Parity Commission” forms the nucleus of this system, which has earned global acclaim. It is comprised of representatives of the government as well as the prominent interest groups in the country. As such, labor relations in the country have been based upon the principles of co-operation and negotiation, rather than confrontation.

On a firm footing

Austria is primarily a services-oriented economy. The sector contributes a whopping 67% to GDP, while industry constitutes 31%, and agriculture contributes 2%.

Offering world-class infrastructure and logistics facilities, Austria has emerged as an export hub for global companies wanting to access the emerging markets of Eastern Europe. About 1000 global multinationals in the chemicals sector operate from Austria in order to serve Eastern European markets.

Importantly, Austria is adjacent to the rapidly expanding markets of Central and Eastern Europe. Linked by a vast network of modern highways and air routes, the capital of Vienna is barely 165 miles from Budapest and 186 miles from Prague. Experienced freight forwarding companies thrive on Austria’s favorable geographical location. Austria’s excellent infrastructure facilities, coupled with an understanding of Central and East European know-how, all make the country an attractive location for global companies who are eager to tap the markets of the enlarged EU region.

Accounting for 11% of the country’s industrial production, chemicals and plastics are among the foremost industries in Austria. A massive 70% of total production is exported. About 1000 global multinationals in the chemicals sector operate from Austria in order to serve Eastern European markets. As well, the country has a flourishing pharmaceutical and biotech sector, which serves as a base for many international majors who use the country to coordinate their Eastern European operations.

The mechanical and plant engineering sector enjoys a global reputation. Contributing 11.8% of Austria’s total industrial output, the sector exports 76% of its production. With a high level of innovation and research, the country boasts of the world’s fastest paper packaging machine. Austrian firms excel in boiler construction and the production of hi tech special and custom machinery. Leveraging Austria’s solid research and development base is the rapidly growing automotive sector. The country attracts over 1000 manufacturers and component suppliers from across the globe, who use the region as a base to run their Eastern European operations.

The electrical and electronics industry is also a boon for the country. Exporting two-thirds of its products, the industry is a magnet for global electronic giants, who have set up their R & D centers in the country. In fact, this sector accounts for 43% of all industrial R & D investments. In addition, the country is a pioneer in mechatronics, a high-growth sector, which is a blend of machine construction, electronics, and information technology. These systems have tremendous potential for application in engine management, as well as safety and infotainment functions in automobiles.

Austria’s flourishing telecommunications sector is growing at an average of 20% annually, fostered by the opening up of the telecommunications market across the EU since 1998. A critical driver for the economy, this sector has consistently seen substantial investments. The government’s liberal interconnection and licensing regulations facilitate the entry of new players in this sector.

The existence of highly specialized small and medium companies, along with a vibrant R & D environment has resulted in the development of Austria as an information technology (IT) hub for the numerous global majors operating in the country. The venture capital industry is also prominent in the country. With the growth in the European venture capital market blazing above 20%, the industry holds tremendous potential for Austria, which enjoys a superior R & D base. Those benefiting from venture capital funding are the information and communications technology, chemical products, and industrial products sectors.

Austria is also home to a resilient and thriving financial sector, which has witnessed improved cost efficiency, as well as impressive profitability in 2007. Heralding the much-needed diversification in the financial services sector, banks have expanded into the emerging markets of Central and Eastern Europe (CESE), as well as the Commonwealth of Independent States (CIS).

Austria’s tourism sector also contributes substantially to the economy’s revenues. The unique blend of a rich cultural heritage, pristine alpine beauty, and unblemished landscapes, has vaulted Austria into one of Europe’s top tourist destinations. Adding a feather to its the cap, Austria was recognized in the 2008 Travel and Tourism Competitiveness Report as having one of the most attractive environments globally for development of the travel and tourism industry. In fact, Austria ranks second only to Switzerland in the tourism competitiveness rankings.

Tackling trepidations

With inflation being the foremost issue of concern, the economy has to guard against a probable wage-price spiral, given the high labor demand. The wages so far have been experiencing moderate increases thanks to the embedded social partnership system that forms the cornerstone of the country’s industrial relations. Wage increases could be a serious threat to the country’s external competitiveness.

Also looming large, are the pressures arising from an aging population, and ensuing expenditures on health care and pensions. Though the country has done well to curtail its deficit to 0.5% of GDP in 2007 down from 3.7% of GDP in 2004, it would be a real challenge for the economy to deliver a balanced budget by 2010, the targeted date.

With increased exposure to the overheated CESE and CIS economies, prudent regulation and supervision is crucial for Austria’s rapidly evolving and diversifying financial sector. With globalization, the fundamental weaknesses in some of these highly leveraged economies could pose a serious threat to the Austrian banking system. In order to calm the nerves of investors and depositors, the Austrian government issued a unilateral guarantee for all deposits, in unison with several other European governments. The government also nationalized the eighth biggest bank in the country, which specialized in the funding of local communities. What’s more, the Austrian Parliament approved a €100 billion ($134 billion) bailout package to bring about stability in the country’s banking sector, which had been suffering under the ripple effects of the global financial crisis.

Austria symbolizes the rare combination of natural beauty and cultural wealth coupled with a robust economy. With the eastward expansion of the EU, Austria is poised for continued growth.

Conscious efforts have been made to enhance labor market flexibility in Austria. The regulation of working hours has been relaxed, and inflows of certain categories of skilled workers from new EU member states have been fostered. Yet, the agenda still remains unfinished. Making the labor market more inclusive is the current challenge, particularly the integration of non-core groups like the mothers of young children, and older, unskilled, as well as immigrant workers. In order to foster fiscal sustainability, pension reforms have to be implemented, and subsidies and benefits for older jobless workers and part-time older workers, have to be phased out as well.

Edelweiss forever

Blossom of snow may you bloom and grow
Bloom and grow forever
Edelweiss, Edelweiss
Bless my homeland forever.

The song immortalized in Rodgers and Hammerstein’s celebrated musical Sound of Music (1965), is a fitting tribute to Austria. Triumphing over Nazi occupation, Austria today has blossomed into a formidable global economy that has tapped its skilled and industrious workforce, and leveraged its proximity to the booming economies of Central and Eastern Europe. Austria is poised, indeed, to bloom and grow.