The End of Austria's Social Partnership?

Few changes of government in Europe attract sensational journalism of the type that Austria's October 1999 elections - which brought Jörg Haider's Freedom Party into government - did. Two years later, with the EU sanctions imposed after the government's formation now lifted, it is time to assess the impact of this government on Austria's economy, the field where the ruling coalition's pre-election rhetoric promised the biggest changes.

To understand what Austria's government is doing, it is necessary to understand where Austria has been. Austria's economy performed solidly throughout the 1990s, roughly in line with EU and Euro Area averages. Yet, due to Austria's accession to the EU in 1995 and the country's trade and investment in reshaping neighboring economies in Eastern Europe, many Austrians expected higher growth.

Two factors incited Austria's lower than expected economic dynamics: delayed fiscal consolidation and lagging structural reforms. Efforts at fiscal consolidation in the 1990s were usually followed by wider structural deficits, and although market reforms were discussed, few were implemented. Both problems contributed to the breakdown of the long-ruling coalition government of Social Democrats and Conservatives (the Volkspartei).

The Conservative and Freedom Party coalition formed after the 1999 elections confronted a difficult job. Although the program of the coalition partners shared many points, a contradiction existed concerning Europe. By introducing more flexibility in product and labor markets and by committing itself to overhaul public sector management, the Conservatives hoped that Austria would increase its competitiveness and thus achieve higher growth.