Austria
Recent Developments and Issues

This report describes recent developments and issues in Austria. The report discusses the structural features of the Austrian labor market. Two features—the relative importance of foreign labor supply, and the comparatively low labor force participation of certain groups—are analyzed in detail. The historical structure of the Austrian balance of payments is discussed, and the developments in 1994 are analyzed. The report also examines the Austrian tourism industry and its underlying problems. Developments in public finances are also elaborated.

Abstract

This report describes recent developments and issues in Austria. The report discusses the structural features of the Austrian labor market. Two features—the relative importance of foreign labor supply, and the comparatively low labor force participation of certain groups—are analyzed in detail. The historical structure of the Austrian balance of payments is discussed, and the developments in 1994 are analyzed. The report also examines the Austrian tourism industry and its underlying problems. Developments in public finances are also elaborated.

APPENDIX I: Basic Data

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Sources: Ministry of Finance; Austrian National Bank; Austrian Institute for Economic Research (WIFO); Austrian Central Statistical Office.

Preliminary.

WIFO projections.

Change as percent of previous year’s GDP.

The first series shows registered unemployment in percent of the dependent labor force. The second series, based on survey data, corresponds to ILO definitions.

Implicit price deflator for trade in goods.

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Preliminary.

WIFO projections.

End of period.

1990-100.

I. The Labor Market in Austria

In this note a number of recent developments and structural features of the Austrian labor market are discussed. Two features, in particular, will receive special attention: the relative importance of foreign labor supply, and the comparatively low labor force participation of certain groups.

1. Unemployment 1/

As in most other industrial countries, unemployment in Austria has increased over the past two decades. While fluctuations in the unemployment rate reflect mainly the impact of the business cycle, the underlying upward trend—as shown by the data in Chart I-1—is clear, suggesting that with every cyclical downturn structural unemployment has tended to increase. However, this worsening labor market performance was even more pronounced elsewhere and Austria’s overall unemployment rate, currently less than 4 ½ percent of the labor force, remains significantly below that in other OECD countries in Europe (with the exceptions of Luxembourg and Switzerland).

CHART I-1.
CHART I-1.

Austria Unemployment Rates: An International and Temporal Comparison

Citation: IMF Staff Country Reports 1995, 062; 10.5089/9781451802221.002.A001

Sources: OECD, Economic Outlook, December 1994.

Unemployment increased only moderately in Austria during the most recent recession of 1992-93, in large measure because of rapid deceleration in labor supply growth. Conversely, the current economic upturn has so far had only a modest impact on employment, and official forecasts suggest that the (survey-based) unemployment rate will remain close to around 4 ¼ percent, at least in the short term. Several factors underlie this forecast. First, there is the expectation of renewed growth in the labor force, as economic conditions improve further. Second, the need for fiscal adjustment is likely to lead to some reductions in public sector employment. 2/ Third, growing competitive pressures deriving from the recent opening of Eastern Europe necessitate a significant reallocation of labor across economic sectors. Some temporary dislocations are unavoidable, especially since Austria still has one of the largest manufacturing sectors (relative to GDP) among industrial countries, and the presence of an extensive regulatory framework, including barriers to market entry in some cases, hinders jobs growth in the services sector.

2. Structural features

Besides a relatively low overall unemployment rate, there are a number of structural features of the Austrian labor market which compare favorably with developments in other countries. More specifically, unemployment is fairly evenly distributed across various categories of people and regional differences are not very pronounced. To illustrate the latter point, last year’s official (registered) unemployment rate of 6.5 percent represents the average of a relatively narrow range of unemployment rates in Austria’s nine provinces (Länder), with a maximum of 8.1 percent in Carinthia and a minimum of 4 percent in Salzburg. Also, the data in Table I-1 show that differences in unemployment rates between men and women, and—perhaps more surprisingly—between foreign workers and nationals have been relatively minor over the past decade. Furthermore, youth unemployment in Austria remains very low when viewed from an international perspective. 1/

Table I-1.

Austria: Labor Market Indicators

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Sources: Austrian Institute of Economic Research, Statistische Űbersichten; OECD, Labour Force Statistics.

In percent of total unemployment.

In percent of dependent employment.

A number of other structural features, however, present a less favorable picture. First, unemployment duration has tended to rise concomitant with the gradual upward trend in the overall unemployment rate. While the rising share of the long term unemployed (in total unemployment) levelled off in 1993 (Table I-1), this can be attributed to the recession in that year which caused a relatively sharp jump in overall unemployment. In 1994, however, the authorities devolved most of the federal employment agency’s activities to agencies at local levels; this reform has the potential for enhanced administrative efficiency, should allow for a more focused and effective mediation and job placement and, it is hoped, will contribute in due course to a decline in (long term) structural unemployment.

Second, the incidence of part-time employment remains very limited in Austria and, as in most other European countries, is largely a female phenomenon. As shown in Chart I-2, the share of part-time employment in total employment is considerably lower than in Germany, France, the United Kingdom, the Benelux, and especially the Scandinavian countries. To some extent this can be considered a reflection of inflexible labor market conditions and excessive regulations, particularly in the services sectors, which have hindered the development of part-time jobs. Indeed, official policy in the past emphasized full-time working. However, there are some indications that attitudes may be changing. For example, the Austrian salaried employees union has recently spoken out in support of part-time working (in conjunction with improved employment conditions). Also, the government’s monopoly on employment mediation and job placement services has recently been broken and, since July 1994, private employment agencies have been allowed to operate.1/

Chart I-2.
Chart I-2.

Austria Part-time Employment as a Proportion of Total Employment, 1992

Citation: IMF Staff Country Reports 1995, 062; 10.5089/9781451802221.002.A001

Sources: OECD, Employment Outlook, July 1994.

3. Labor force participation

Austria’s low unemployment rate has not coincided with a relatively high employment level. While the overall labor force participation rate is close to the level in Germany and to the OECD average, it remains significantly below levels in Northern European countries (Chart I-3). Certain segments of the population, specifically women and older persons, display comparatively high non-employment rates.

Chart I-3.
Chart I-3.

Austria Labor Force Participation Rates

Citation: IMF Staff Country Reports 1995, 062; 10.5089/9781451802221.002.A001

Sources: OECD, Economic Outlook; and Ministry of Labor and Social Affairs, Die Oesterreichische Arbeitsmarktpolitik, 1994.

—In the case of women, opinions differ about the extent to which low labor force participation reflects voluntary cultural factors or rather the low availability of part-time work as discussed above. In recent years, however, there has been a clear upward trend in female participation (Chart I-3), which underlies the slight increase in the overall participation rate.

—A striking feature of the Austrian labor market is the very high non-employment rate of older persons (age group 55-64) which, at around 76 percent, is the second highest in the OECD (after Belgium) and significantly above both the OECD-Europe average of about 60 percent and the overall OECD average of about 52 percent. 2/

Over the years, strong incentives in the benefits transfer system have facilitated early retirement and regulations governing invalidity pensions have not been applied in a stringent manner. 3/ As a result, the average retirement age has fallen to about 58 years for men and 57 for women (compared to 62 and 60 respectively in 1970), while the number of disability pensioners has risen strongly to a level that is proportionately close to that of the Netherlands (widely recognized as the “leader” among industrial countries in this area). However, attempts are being made to counter this trend, and the 1995 budget package includes measures to effectively raise the retirement age for civil servants by 1 year and to tighten procedures for obtaining disability pensions. Also, following a recent court decision, the lower statutory retirement age for women (60) will be raised to that of men (65), but this change cannot be applied to persons already in the labor force so that its (gradual) impact on labor force participation will not be noticed for several decades.

4. Foreign labor

Given its geographic location Austria has traditionally acted as a major transit country for many asylum seekers, and it has also been able to attract a large number of migrant workers. Over the past decade, the increase in population can be attributed mainly to the growing number of foreign residents (as a result of immigration as well as the excess of births over deaths of foreign residents). Moreover, the modest increase in Austrian nationals was more than fully accounted for by naturalizations of former immigrants (Table 1-2). The share of foreign workers in the dependent labor force has risen to over 9 percent in 1994, compared with about 5 percent in the mid-eighties (Chart I-4).

Table 1-2.

Austria: Annual Changes in Population

(In thousands of persons)

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Source: Austrian Institute of Economic Research, SOPEMI Report on Labour Migration, November 1994.

Including naturalizations

Chart I-4.
Chart I-4.

Austria Employment and Unemployment of Foreign Workers

(In percent)

Citation: IMF Staff Country Reports 1995, 062; 10.5089/9781451802221.002.A001

Source: Federal Ministry of Labor and Social Affairs

In recent years legislation concerning the inflow of foreign labor has been made considerably more restrictive. The reformed asylum legislation which took effect in 1992 has resulted in a severe reduction in the number of asylum seekers. Also, a ceiling on the share of foreign workers in the labor force has been established, based upon regional quotas (which allow for differences among various regions). These quotas are adjusted from time to time and are set by the regional governments and the social partners in cooperation with the federal ministry of labor and social affairs. While regulations governing immigration and initial work permits (including “first” issues and “re-entries”) have been tightened, at the same time efforts are being made to facilitate the integration of foreigners with long residence in Austria, as evidenced by the rapid growth of “permanent” licenses (subject to renewal after 5 years) and work entitlements. 1/ These measures should increase the allocative efficiency of the labor market as they have the effect of “freeing” a growing share of foreign workers from specific employers and promoting labor mobility (at least within regional boundaries).

In the past, the fairly elastic supply of migrant workers had contributed to low unemployment by reducing the responsiveness of unemployment to economic downturns. This explains partly why hysteresis effects have been comparatively small in Austria. However, this feature of the labor market is likely to fade away, given the introduction of a tighter migration system. With a reduced (foreign) labor supply response to cyclical variations, the economy could reach capacity constraints earlier than was the case in the past, which strengthens the need for measures that promote flexibility (e.g., part-time work) and increased labor market participation of the indigenous population.

5. Conclusions

For many years Austria’s labor market performance has been comparatively good, as reflected in a low overall unemployment rate and a fairly even distribution of unemployment among various groups and regions of the country. At the same time, the relatively low labor force participation of certain groups, which derives in part from the low availability of part-time jobs (particularly in the case of women) and the relative generosity of early retirement and disability benefits, has acted as a constraint on the economy’s growth potential.

Like in most other industrial countries, structural unemployment has tended to increase over time and the share of the long term unemployed has risen. The opening of eastern Europe and the growing integration with EU partner countries are creating a more competitive environment which promises significant real income gains over the medium term. However, these developments also necessitate major resource shifts, and require flexible labor market conditions if further increases in structural unemployment are to be avoided. The recent shift of the labor exchange services from the federal to local levels may in due course contribute to a decline in structural unemployment, but other measures such as expanded retraining programs and lower payroll taxes for workers most vulnerable to structural change could also be helpful.

In the past, cyclical unemployment has been relatively low, in part because of the buffering role that migration has played. The recent introduction of a more restrictive immigration regime will in all probability eliminate this feature of the labor market and thus increases the need for more flexible domestic labor market conditions, including the need for measures that promote greater labor force participation (especially of potential early retirees) and that facilitate part time work.

II. Balance of Payments: Structural Features and Recent Developments

1. Introduction

In 1994, the current account of the balance of payments worsened significantly, with the deficit increasing to 1.0 percent of GDP from 0.4 percent of GDP in the previous year. The deterioration in the current account can be attributed to an array of factors, including cyclical developments in Austria and its major trading partners, the appreciation of the schilling, and structural problems in the tourism industry. Traditionally, surpluses on tourism flows have offset deficits on the trade account, reflecting Austria’s comparative disadvantage in trade in goods versus its comparative advantage in trade in services. However, recently cyclical factors and the effects of the strengthening of the schilling have exacerbated underlying problems in the tourism sector and cast some doubt on the potential of the tourism balance to continue to countervail a trade deficit of around 5 percent of GDP.

The remainder of the chapter is structured as follows. Section 2 describes the historical structure of the Austrian balance of payments while section 3 highlights developments in 1994. Section 4 analyzes the Austrian tourism industry and its underlying problems and section 5 concludes.

2. The structure of the Austrian balance of payments

a. Current account

The Austrian current account has traditionally been in broad balance, with surpluses on travel, transit trade, and other services offsetting deficits on the trade account and on investment income (Table A18). Between 1974 and 1993, the deficit on the trade balance averaged 5.9 percent of GDP, with the export and import ratios averaging 24.2 percent and 30.1 percent, respectively (Chart II-1). Over the same period, the surplus on tourism stood at 3.7 percent of GDP on average. Overall, the current account deficit averaged 0.7 percent of GDP, with the deficit on goods and services contributing 0.5 percentage point and the deficit on transfers contributing 0.2 percentage point (Chart II-2). However, these statistics mask Austria’s improved position since the early 1980s: while the current account deficit averaged 2.0 percent of GDP between 1974 and 1981, it showed a surplus of 0.1 percent of GDP on average between 1982 and 1993. Also, it is noteworthy that since 1982, Austria has recorded the smallest fluctuation in the current account balance (in terms of GDP) of all European OECD countries.

CHART II-1.
CHART II-1.

Austria Trade Balance

(In percent of GDP)

Citation: IMF Staff Country Reports 1995, 062; 10.5089/9781451802221.002.A001

Source: Austrian National Bank.
CHART II-2.
CHART II-2.

Austria Current Account Balance

(In percent of GDP)

Citation: IMF Staff Country Reports 1995, 062; 10.5089/9781451802221.002.A001

Source: Austrian National Bank

Austrian trade is geographically heavily concentrated, with Germany accounting for about 40 percent of Austrian exports and imports; for comparison, Austria’s second largest market, Italy, has a share of approximately 8 percent of Austrian merchandise trade. Switzerland, France, the United Kingdom, and the United States are other important trading partners. Furthermore, with the opening of eastern Europe, trade links with in particular Hungary, Slovakia, the Czech Republic, Slovenia, Croatia, and Poland have been revitalized. Also, Austria has recently begun to pay more attention to more distant export markets in North America, the Middle East, and Asia.

The commodity composition of trade has shifted over time, with exports of raw materials decreasing in importance: whereas in 1960, 19 percent of Austrian exports consisted of raw materials, their current share is approximately only 5 percent. Meanwhile, exports of manufactured goods have become more important, with a current share of around 75 percent of total exports compared with a share of 46 percent in 1960; within manufactured goods, exports of investment goods have become particularly predominant.

b. Capital account

The capital account has traditionally been characterized by small net inflows: between 1975 and 1993, the capital account surplus averaged 1.2 percent of GDP (Chart II-3). Net direct investment inflows, in particular from Germany, have been important while the balance on portfolio capital has tended to be negative. Lately, the opening of east European markets has contributed to exports of direct investment capital while the turbulence in currency markets in the early 1990s generated net inflows of portfolio and short-term capital (Table A19).

CHART II-3.
CHART II-3.

Austria Capital Account

(In percent of GDP)

Citation: IMF Staff Country Reports 1995, 062; 10.5089/9781451802221.002.A001

Source: Austrian National Bank.

3. Developments in 1994

a. Current account

In 1994, the current account deficit amounted to $22 billion or 1.0 percent of GDP compared with a deficit of $8 billion or 0.4 percent of GDP in 1993. The deterioration in the current account balance can be attributed to conjectural developments, exchange rate movements, as well as structural changes in aggregate demand and underlying problems in the tourism sector.

As was the case in 1993, economic developments in Austria in 1994 were more favorable than in other European countries, contributing to a more rapid growth in imports than exports. In particular, the comparatively high increase in disposable income in Austria at a time of subdued growth of disposable income in Germany had a significant impact on the travel balance. Simultaneously, the upswing in investment demand occurred earlier than is normal at this point in the business cycle on account of the scheduled halving of the investment tax credit in April 1994, thus contributing to a large increase in imports of investment goods during the first quarter of 1994. On the other hand, the effects on trade flows of the significant real appreciation of the schilling in the wake of the EMS crisis of 1992 and 1993 (Chart II-4) tended to taper off, although the appreciation continued to have an adverse effect on the travel account.

CHART II-4.

Austria Exchange Rates

Citation: IMF Staff Country Reports 1995, 062; 10.5089/9781451802221.002.A001

Sources: IMF, International Financial Statistics.1/ Relative normalized unit labor costs in manufacturing, adjusted for exchange rate changes (1990=100).2/ Trade weighted 17 countries (1990=100).

Apart from these cyclical and one-off factors whose effects can be expected to diminish in coming years, a number of structural issues remain which should be the focus of medium-term economic policy. These include most notably the development of relative prices and other structural problems in the tourism sector as well as the effect on the transfers balance of Austria’s entry into the European Union. While a trade deficit of around 5 percent of GDP (4.6 percent of GDP in 1993 and 5.2 percent of GDP in 1994) in itself poses little problems for economic policy, structural weaknesses in tourism and the transfers balance imply that in the future the deficit on the trade balance will have to be more modest if the goal of a balanced current account is to be achieved, ceteris paribus.

(1) Trade balance

The trade deficit amounted to $116 billion in 1994, an increase of $19 billion relative to 1993. Although exports performed well as a result of the onset of the recovery in Europe, rising by 9.7 percent, imports grew even more strongly (by 11.3 percent). A decisive part of the deterioration in the trade balance can be attributed to negative volume effects due to relative cyclical conditions; the terms of trade remained largely unchanged, with both export and import prices increasing by half a percentage point year-on-year in the first three quarters of 1994. In addition, apart from the reduction in the investment tax credit which further contributed to the increase in the trade deficit, there was a steep increase in the last quarter of 1994 in imports of products on which tariffs were due to go up at the beginning of 1995 as a result of EU membership.

The worsening of the trade balance with Germany was particularly significant due to the weak development of German disposable income. Furthermore, in contrast to the typical pattern during the 1980s and the early 1990s, when Austrian labor costs fell relative to those in Germany, unit labor costs in Austrian industry developed less favorably than German labor costs in 1994 (Chart II-5). Consequently, the trade deficit with Germany widened by 8.7 percent in 1994 to $56 billion while Germany’s share of Austrian merchandise exports declined to 38 percent.

CHART II-5.
CHART II-5.

Austria Competitiveness Indicators

(1983 = 100)

Citation: IMF Staff Country Reports 1995, 062; 10.5089/9781451802221.002.A001

Source: IMF, International Financial Statistics.1/ Based on relative unit labor costs in manufacturing.

Trade continued to be heavily biased toward Europe, with the European Union receiving almost 63 percent of Austria’s exports while supplying close to 66 percent of its imports (Table II-1); altogether, the trade deficit with the European Union increased by 13.5 percent in nominal terms to $92 billion. However, developments outside western Europe were more positive; exports to eastern Europe, including the Former Soviet Union, rose by more than 17 percent while imports grew by almost 24 percent. The share of Austrian exports to this region widened to more than 13 percent; in fact, since 1993, Hungary is Austria’s fifth most important export market. Furthermore, Austria’s trade position relative both the United States and Japan improved with exports growing faster than imports; in particular, the U.S. share of Austrian exports rose to 3.5 percent in 1994, an increase of more than 30 percent since 1992.

Table II-1.

Austria: Most Important Trading Partners, Merchandise Exports and Imports

(Percent of total)

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Source: Austrian National Bank.

Including Liechtenstein.

Exports of manufactured goods registered the largest absolute rise ($29 billion) (Table II-2). At the beginning of 1994, when the European recovery was at an early stage, exports of raw materials and semi-finished products grew at a rapid rate; among finished goods, machinery and transportation equipment showed the greatest increases. In contrast, exports of finished consumption goods grew relatively slowly, primarily due to the weak development of income in Germany. Overall, the deterioration in the trade balance in 1994 was concentrated in machinery and transportation equipment as well as in ready-to-use consumer goods. The development of imports in part mirrored that of exports, with manufactured goods registering the largest nominal increase. While imports of capital goods soared at the beginning of the year, imports of consumer goods were boosted by a sharp increase in car imports from non-EU countries at the end of the year, ahead of Austria’s EU access.

Table II-2.

Austria: Merchandise Trade According to Foreign Trade Statistics, 1994

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Source: Austrian National Bank.
(2) Tourism balance

In 1994, the surplus on tourism services fell sharply to $44 billion compared with $61 bill ion in 1993, the third contraction in a row. The deterioration in the tourism balance can be attributed to developments in both exports and imports. Expenditures of Austrians abroad increased by 10.9 percent; meanwhile, the number of overnight stays in Austria by Austrians remained nearly constant around 30 million. Income earned from foreigners visiting Austria fell by 4.6 percent to $150 billion, while the total number of overnight stays in Austria by foreigners fell by 4.8 percent (to 92 million), with a reduction in both the number of arrivals and the average duration of stay.

Economic developments in Germany have an especially important influence on exports of tourism services as German citizens account for close to 60 percent of total tourism receipts and approximately two-thirds of overnight stays by foreigners in Austria (Tables II-3 and II-4). In 1994, Austria’s share of German tourism demand fell sharply, reflecting the deterioration in Austria’s competitive position especially relative to other European countries whose currencies depreciated sharply in the recent past; overnight stays in Austria by German tourists declined by 4.6 percent despite an 8 percent increase in expenditures of German tourists on trips abroad. While German real private disposable income recorded a slight increase in 1994, Austrian tourism relies primarily upon the mid- and low-income groups in Germany whose relative income position probably deteriorated as a result of wage restraint, increases in various taxes, and the reduction in some social benefits. Also, as the summer season tends to be more sensitive to changes in relative prices than the winter (skiing) season, the weakening competitive position of the Austrian tourist sector had an especially negative impact on the development of tourism receipts during the summer months of 1994; while total overnight stays dropped by 3 percent in the 1993/94 winter season, they plummeted by 7 percent in the 1994 summer season.

Table II-3.

Austria: Most Important Trading Partners, Travel Services, 1993

(Percent of total)

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Source: Austrian National Bank.

Including Liechtenstein.

Table II-4.

Austria: Foreign Tourist Bednights, 1994

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Source: Austrian National Bank.

Cyclical and exchange rate developments also had an important effect on the evolution of imports of tourism services in 1994. The recovery of the Austrian economy in combination with the 1994 tax reform was reflected in a relatively sharp increase in real disposable income which significantly boosted the consumption of tourism services. In particular, given the appreciation of the schilling against some other European currencies, the consumption of tourism services abroad rose sharply. While tourism expenditures by Austrians within Austria were largely unchanged in real terms, real expenditures by Austrians travelling abroad increased by 7.7 percent in 1994. An essential component of Austrian travel expenditures are purchases of goods during trips abroad; outlays on such direct imports of merchandise amounted to an unprecedented $26 billion in 1994, with the favorite shopping destinations being Italy, Germany, and Hungary.

While the deterioration in the Austrian current account and tourism balance in 1994 to a large extent can be attributed to cyclical and one-off factors that should pose little problem in the medium term, structural factors remain that tend to magnify the cyclical sensitivity of the tourism industry and that might depress the demand for and the supply of Austrian tourism services in the longer run. This issue is explored further in section 4.

(3) Other services

The balance on investment income has been improving steadily since 1991. In 1994, the deficit declined to $10 billion as interest payments to other countries fell due to lower interest rates; the decline in interest expenditures was, however, in part offset by an increase in transfers of profits abroad.

Transit trade has traditionally played a significant role in Austrian foreign trade. However, with the eastern European countries being transformed into market economies, transit trade is becoming less important; in 1994, the surplus on transit trade declined slightly to less than 0.5 percent of GDP.

b. Capital account

The capital account closed 1994 with net capital imports of $32 billion, of which $11 billion were net imports of long-term capital and the remainder net imports of short-term capital. Foreign direct investment rose to $15 billion compared with $11 billion in 1993, with the increase mainly due to foreign investment in one single important Austrian company. Austrian direct investment abroad fell to $14 billion, compared with $17 billion a year earlier (Chart II-6). A breakdown by regions shows the continuation of Austrian direct investment in eastern Europe, in particular in Hungary and the Czech Republic.

CHART II-6.
CHART II-6.

Austria Long-term Capital

(In percent of GDP)

Citation: IMF Staff Country Reports 1995, 062; 10.5089/9781451802221.002.A001

Source: Austrian National Bank.

Nonresidents’ purchases of Austrian fixed-interest securities fell to $35 billion in 1994, compared with $106 billion in 1993, as the positive long-term bond yield differential vis-à-vis Germany declined. 1/ Meanwhile, nonresidents’ acquisitions of stocks and investment certificates rose by $1 billion to $15 billion, reflecting the privatization of some nationalized industries. Austrian residents’ total purchases of foreign securities amounted to $47 billion, substantially higher than the $20 billion reported for 1993.

c. Foreign exchange reserves

Total transactions, including reserve creation and valuation changes, led to a rise in official reserves of $6 billion to approximately $218 billion in 1994; in 1993, official reserves had risen by $34 billion. Foreign exchange reserves reached a record high of $190 billion in February 1994 but subsequently declined to end the year around $174 billion.

4. Structural imbalances in the Austrian tourism sector

In Austria, the tourism sector accounts, directly and indirectly, for about 14 percent of total national output and employment, making Austria the most “tourist-intensive” country in the OECD; Austria accounts for 5.5 percent of OECD tourism receipts compared with a 1 percent share of GDP. 2/ However, tourism services in Austria are expensive relative to tourism services in competing destinations and since 1975 its market share has been declining. The price elasticity of demand for Austrian tourism services is quite high, with empirical estimates suggesting a loss of 1 percent of the market share of international travel for each 1.5 percent relative increase in the cost of Austrian tourism services. 3/ Furthermore, in contrast to the manufacturing industry, an appreciation of the schilling can less easily be offset through productivity gains in the tourism sector. Looking ahead, with the opening of the eastern European countries, Austria is bound to face strong competition for the lower end of the tourism market.

a. Structural imbalances

Despite tourism’s importance for the Austrian economy, the industry’s structural imbalances have traditionally not received the same attention as, e.g., the agriculture and manufacturing sectors. Lately, however, the Austrian tourism sector and its underlying problems have been examined in a number of studies by, inter alia, the Austrian National Bank, the Institute for Advanced Studies (IAS), and the OECD. 1/ The IAS study identifies a number of structural weaknesses in the Austrian tourism industry and proposes several measures to improve on the situation. In particular, the following imbalances are noted:

  • (i) A high dependence, in particular in the summer season, on the cyclical performance of the most important “export markets,” i.e., Germany, the Netherlands, and Italy.

  • (ii) A marked concentration of tourism demand in a few months of the year, with approximately one-third of overnight stays concentrated in July and August, and approximately one-fifth in January and February. This contributes inter alia to high seasonal unemployment as well as alternating phases of over-strained capacity during peak periods and excess capacity during the off-season: in 1993, the average capacity utilization in this sector was around 30 percent while the average unemployment was 18.5 percent.

  • (iii) A highly unbalanced regional distribution, with more than 65 percent of overnight stays during the winter season concentrated in Salzburg and Tirol, and approximately two-thirds of all overnight stays concentrated in Salzburg, Tirol, and Carinthia.

Austria is the second favored nation for German tourists. In 1994, German and Dutch tourists accounted for 67.2 percent and 8.7 percent, respectively, of all overnight stays of foreign tourists, a unique concentration in an international comparison (Table II-4). The tourism sector’s high dependence on German demand is aggravated by the fact that, according to the OECD, the average German visitor to Austria spends 40 percent less per diem compared with non-German foreign tourists. 2/ Moreover, as expenditures of German tourists on European travel destinations are expected to grow one-third more slowly compared with expenditures by guests of other nationalities, the Austrian tourism market is projected to grow one percentage point more slowly per year compared with the total for the OECD countries combined. 3/

The heavy concentration in time and space seems to be greater than in France, Italy, and Switzerland, Austria’s neighboring competitors; in fact, the expansion of the traditional winter tourism (Alpine skiing), the primary tourist growth sector of recent years, is now reaching its limits due to this tight concentration. In the words of the IAS study, “a continuation of this expansion would entail serious long-term damages of social, economic, and ecologic nature.” 1/ Meanwhile, the summer tourism (hiking) is in danger of suffering further setbacks unless the market position is improved or new customers attracted, e.g., eastern European tourists or health resort tourists. However, an increase in tourism receipts from eastern Europe could only in part offset the current decline in receipts from western Europe.

Apart from the aforementioned imbalances in the supply of and the demand for Austrian tourism services, there are also weaknesses regarding the industry’s overall financial soundness as well as the working conditions for tourism employees. Poor equity capitalization and excessive indebtedness of many Austrian tourism operations present obstacles for the development of the overall industry: tourism is the most heavily indebted industry in Austria, with a negative net value for the industry as a whole. 2/

The hotel and catering industry counts among those sectors with the worst working conditions in Austria, implying a flight of qualified personnel into other sectors over the longer term which further reduces quality standards. In general, the tourism sector is characterized by high unemployment rates; massive seasonal employment fluctuations; a simultaneous increase in the number of unemployed persons and the number of unfilled positions; increased employment of foreign workers—the share of foreign workers in the tourism sector increased from 17 percent in 1988 to 31 percent in 1993 compared with an increase from 5 percent to 9 percent in the whole economy; and relatively few workers over the age of 30. 3/ The persistence of a relatively high rate of unemployment despite a clear increase in the number of unfilled job vacancies is attributed to inadequate (regional) mobility of workers, structural bottlenecks, and a lack of attractiveness (low qualification requirements, low wage) of the positions offered.

According to the IAS, the existing training system in the hotel and catering industry is far from satisfactory, with trainees and apprentices often placed in unqualified work or work alien to their occupation; despite the importance of tourism for the Austrian economy, there is no training system comparable to that of Switzerland.

The IAS study also argues that the federal and regional promotion of the tourism sector is in urgent need of reform. Overlaps and interlocks arising as a result of the rigid promotion policy are sources of jurisdictional conflicts, with different levels of authorities promoting the tourism industry without informing each other or coordinating their promotion activities.

In its 1995 annual review, the OECD addresses two further problems in the tourism industry, namely: (iv) adverse relative price trends, and (v) changing tastes and greater ease of foreign travel.

Apart from the appreciation of the schilling since the European currency realignments in the fall of 1992 and the subsequent worsening in Austria’s competitive situation, Austrian price levels and inflation rates in the services sectors are also relatively high. In fact, according to the OECD, about three-quarters of recent market share losses may be traced to adverse relative price movements.

Also, while today’s traveller tends to seek greater “adventure” and learning experiences, the prevalence of cheaper air fares and package tours have at the same time enabled tourists to seek such experiences in new destinations abroad. A survey conducted by the Austrian National Bank in 1994 confirmed the increase in long-distance travelling abroad by Austrians, with expenditures on overseas travel recording the strongest increase, expanding by two-thirds to $20 billion within only two years. 1/

b. Proposed measures

The IAS study puts forward a number of recommendations as part of a medium-term program to revitalize the Austrian tourism industry. The recommendations are geared toward achieving a greater dispersion in supply and a diversification in demand as well as adapting the industry to changing tastes through greater innovation. The most important suggestions are:

  • Quality improvements. In order to reduce the burden on the environment, the aim is to raise “unit values” while minimizing volume growth by focusing new investments on a small number of star hotels and by upgrading restaurants and other tourism support services. The current dependence on “mass tourism,” with low value added, is generally regarded as unsustainable for a high-cost/high-wage country like Austria. 2/

  • Diversification of demand. The recent decline in overnight stays as well as in tourism income have highlighted Austrian tourism’s dependence on economic developments in regionally limited areas. The suggested goal is to reduce the dependence ratio on German tourists from two-thirds to one-half over the medium term through, e.g., intensified marketing efforts in dynamic regions such as the Far East.

  • Reducing seasonal and regional concentration. The objective should be to move to year-round tourism, as in France, Italy, and Switzerland, by stimulating more winter city-tourism and by developing more conference, educational, and cultural tourism. 1/ 2/

  • Diversification of the supply of tourism services. In addition to the main activities, the goal should be to increase the number of options through, e.g., a broadening of cultural activities, and the promotion of health and convalescent tourism.

  • Improvement and modernization of the training system. In order to improve the training system, the study suggests better language training and better schooling, with greater use of computers and improved methods for food preparation. The study also emphasizes the importance of broader occupational possibilities and encourages “awareness-building” among tourism employees.

  • Reform of promotion activities. The report underscores the need of an improved institutional coordination of the various promotion activities of the federal government, the länder, and the chambers of commerce through, e.g., the concentration of all activities within the scope of one single institution. Also, promotion activities should encourage the accumulation of equity capital rather than support indebtedness through credit subsidies and guarantees.

  • Land consolidation of insolvent operations. Low capitalization and overindebtedness present a severe burden for the development of the tourism sector as a whole and hinder the construction of higher-quality establishments. In order to promote a more sustainable development of the industry, the IAS study advocates the termination of practices that artificially keep non-competitive enterprises in the market.

The IAS report also suggests that enterprises should contribute to the revitalization of the sector, for example through improved working conditions and a broadening of the trade union base. Better working conditions and less utilization of nonunionized labor are seen as crucial in order to avoid a decline in the reputation of the sector.

5. Conclusion

This chapter has discussed recent developments in the Austrian balance of payments—in particular the deterioration in the current account in 1994—as well as structural imbalances in the tourism sector. The increase in the current account deficit can be attributed to several factors, including the upswing in the Austrian economy, the weak development of German disposable income, the appreciation of the schilling, and underlying problems in tourism. While cyclical and one-off factors should pose little difficulty for the Austrian current account in the medium term, the imbalances in the tourism industry tend to suggest that the tourism balance will be less able in the future to offset deficits in the trade balance.

III. Public Finances: Developments and Prospects

1. Background 1/

During the period 1987-92, progress with fiscal consolidation was made as reflected in a steady reduction in deficits at both the federal and the general government level (Table III-1). On a national accounts basis, the general government deficit fell by over 2 1/4 percentage points to reach 2 percent of GDP in 1992. 2/ This development was facilitated by the strong economic upswing of the late 1980s and early 1990s and reflected essentially a decline of similar magnitude in the federal deficit; the lower levels of government maintained a moderate consolidated surplus which averaged slightly less than 1 percent of GDP and, on balance, was little changed over the period. 3/ The lower public sector borrowing allowed the public debt ratio to stabilize below 59 percent of GDP in the early 1990s.

Table III-1.

Developments in the Public Finances

(In percent of GDP)

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Sources: Data provided by the authorities; and staff calculations.

National accounts basis.

Definition conforming to the Maastricht Treaty.

In 1993 fiscal developments were affected by the cyclical downturn in economic activity. Lower tax receipts and higher expenditure on unemployment compensation contributed to a pronounced increase in the deficit of the federal government to 4 ¾ percent of GDP. Despite slightly increased surpluses at lower levels of government, which reflected the typical pro-cyclical fiscal response of the provincial and local authorities to a deterioration in revenue performance, the general government deficit also rose, to over 4 percent of GDP. Besides cyclical factors, the widening deficit reflected increased social spending, particularly greater-than -anticipated use of more generous provisions for maternity leave. 1/ As a result, the fiscal improvement of previous years was largely undone and the structural deficit of general government rose anew to about 2 ¾ percent of GDP.

In 1994, the economy experienced a significant recovery. Real GDP growth, at 2.7 percent, was twice as high as projected in the budget and well above the growth rate for potential output (estimated at between 2 1/4 percent and 2 ½ percent of GDP). Despite this unexpected favorable development, the fiscal outcome in 1994 was broadly as anticipated. The general government deficit remained close to 4 percent of GDP, slightly higher than the 3.8 percent projected earlier, and the structural deficit tended to worsen further. For the federal government, the deficit on an administrative basis was significantly higher than expected (4.7 percent compared with 3.6 percent of GDP), but on a cash basis the outturn was very close to the original budget. 1/

The fiscal slippage in 1994 reflected mainly revenue shortfalls, although higher then anticipated transfers to social security funds also contributed to it. Revenue from wage taxes, taxes on other income and profits, as well as the withholding tax was $13 billion lower than projected. This reflected in large part estimation errors and a higher-than-expected cyclical reaction of revenue to low profits in the 1993 recession—the Austrian tax system typically reacts slowly to economic developments—rather than any unanticipated effect of the 1994 major tax reforms on revenue collections. 2/ Indeed, the structural deficit at the federal level remained virtually unchanged (Table III-1). On the expenditure side, transfers to social security funds and pension payments again exceeded the projections in the budget, by around $8 billion (⅓ of 1 percent of GDP), but the excess was mostly offset by a reduction in public investments.

2. Prospects for 1995 and the medium-term

In the short term the fiscal position is expected to worsen mainly because of higher-than-expected payments related to EU membership. 3/ In 1995, the total net transfers of general government to the EU are estimated at about $26 billion (around 1 percent of GDP), and domestic adjustment payments represent an additional budgetary burden of about $12.5 billion or close to half a percent of GDP. Furthermore, a non-recurring loss of tax revenue of about $12 billion is expected to result from the need to harmonize VAT collection lags to those of the EU, and capital transfers to the European Investment Bank will increase the public debt by $2 billion. On a national accounts basis, the total budgetary impact of these costs is estimated to exceed 1 ½ percent of GDP for general government and 1 percent of GDP for the federal government. 4/ Assuming unchanged policies, the Austrian Institute for Economic Research (WIFO) had forecast prior to the introduction of the 1995 budget that the general government deficit would rise to 5.4 percent of GDP in 1995.

Given this prospect, the federal government proposed in December 1994 a medium-term fiscal consolidation program with a view to satisfy the Maastricht convergence criteria for entry into EMU, to strengthen the external account, and to create some fiscal leeway to cope with future recessions and other shocks. In its original form the program was based on expenditure cuts, particularly in the areas of personnel and pension payments as well as social transfers. However, the program met severe political opposition and the government has indicated its intention to modify its contents, in particular by scaling down some of the proposed cuts in social expenditures, introducing some tax revenue measures and increasing proceeds from privatization. 1/ In the meantime, the 1995 federal budget was approved by Parliament in April. The budget aims to contain the federal deficit (on an administrative basis) to $102 billion, somewhat below the 1994 outturn. However, this is partly to be achieved through asset sales and a drawdown on accumulated cash reserves. Thus, on a national accounts basis, both the federal and the general government deficit are officially projected to rise to 5 percent of GDP and 4.5 percent of GDP, respectively.

The main measures in the 1995 budget were as follows:

  • —Controls on civil service expenditures would be tightened in order to lower overtime and other supplementary payments to civil servants by 10 percent. Also, pension contributions by civil servants were raised by 1 ½ percent as of May 1, 1995. These measures were estimated to lower the deficit by $6 ½ billion.

  • —Family benefits were reduced by $100 per child per month, and it was announced that fees for formerly free busing and books for school children would be introduced. These measures were estimated to lower expenditure by $2 ½ billion. (Table III-2)

  • —Measures would be introduced to make access to extended maternity leave more difficult; to scrutinize claims for unemployment and welfare benefits more closely; and to scale back special unemployment benefit (family and hardship) supplements, as well as benefits for higher-income workers. These measures were expected to yield $2 ½ billion in savings.

  • —Pension contributions of self-employed and farmers were raised, to allow the liability of the central government to the pension scheme to be lowered. Budget savings from-such measures are estimated at $1 ½ billion per year.

  • —More restrictive rules on early retirement of civil servants were announced which should lead to a rise in their average retirement age.

  • —The mineral oil tax was raised by $1.10 per liter for petrol and $0.60 per liter for gasoil, resulting in $5 ½ billion additional tax revenues (the consumer price index rising by ¼ percentage point as a result).

  • —The investment allowance was lowered from 15 percent to 9 percent.

  • —Finally, in order to offset the $12 billion loss in VAT receipts on imports from other EU countries, the government announced its intention to sell its equity in 2 commercial banks and some other enterprises. It was estimated that these asset sales would yield $13 billion.

Table III-2.

Consolidation Package of the Federal Government

(In billions of schillings)

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Source: WIFO

On a national accounts basis.

The staff’s baseline scenario is presented in Table III-3. The scenario allows for the effects of the 1995 budget measures and the reduction (from 1996 on) of net transfers to the EU. However, it does not make any allowance for additional consolidation measures that the government has expressed its intention to introduce in coming years. To that extent, it may be interpreted as erring on the side of pessimism. The scenario indicates that in 1995 the negative budgetary impact of EU membership will only partially be offset by the government’s consolidation package and the effects of the projected narrowing of the cyclical output gap. The general government financial deficit is thus projected to rise to 4 ¾ percent of GDP, with its structural component widening by over 1 percentage point to about 4 percent of GDP. In subsequent years, the financial deficit is projected to decline significantly. Nevertheless, on this scenario the structural deficit will still remain about ½ a percentage point of GDP higher than it was in 1994. An important implication of this scenario is that the public debt ratio will continue to rise steadily to reach 66.5 percent of GDP by 1998. The scenario also suggests that measures already taken may compensate for the EU membership costs at the federal level, but would not offset the projected deterioration in the consolidated structural surplus of lower levels of government. 1/

Table III-3.

Medium-Term Fiscal Prospects: Staff Baseline Scenario

(In percent of GDP, unless otherwise noted)

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Source: Data provided by the authorities; and staff calculations.

Definition conforming to the Maastricht Treaty.

In percent; interest payments divided by the average stock of debt.

percentage changes.

percentage deviation of actual from potential GDP.

The broad outlines of an alternative scenario, incorporating the effects of additional reductions in primary expenditures of the federal government by ½ a percent of GDP each year in 1996-98, are presented in Table III-4. Under this scenario, the general government deficit would fall markedly, to about 2 percent of GDP by 1998, while the gross public debt ratio would peak in 1996 and decline perceptibly thereafter. However, even under this scenario substantial asset sales would be needed for Austria to comply strictly with the debt criterion of the Maastricht Treaty.

Table III-4.

Alternative Scenario: Fiscal Adjustment 1/2/

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Source: Data provided by the authorities; and staff calculations.

Reduction in non-interest expenditure of federal government by ½ percent of GDP each year in 1996-98.

Same macroeconomic assumptions as in baseline scenario.

Definition conforming to the Maastricht Treaty.

3. Conclusion

During the economic boom years of the late 1980s only modest progress was achieved with fiscal adjustment in Austria. Subsequently, the introduction of new social spending programs in 1992-93 and of tax reductions in 1994, coupled with the cyclical impact of the 1993 recession, has led to a significant widening of the fiscal deficit. The latter threatens to increase further in 1995, despite the strong upturn in economic activity, mainly due to the impact of budgetary costs associated with EU accession.

The government has begun to take new consolidation measures aimed at reducing the general government deficit below 3 percent of GDP by 1998. These have improved somewhat the medium-term fiscal outlook. Nevertheless, additional measures—equal to about 1 ½ percent of GDP cumulatively over the next three years–are likely to be needed if a significant reduction in the public debt to GDP ratio (towards the 60 percent EMU convergence norm) is to be achieved.

ANNEX: Contributions to the EU Budget and Related Costs

The authorities’ estimates of these costs are shown in Table III-5. There are three key elements.

Table III-5.

EU Membership Costs for General and Federal Government

(In billions of schillings)

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Source: Ministry of Finance.

On a national accounts basis.

—Austria’s gross contributions to the EU budget are expected to exceed 1 percent of GDP every year through 1998; the federal government has agreed to pay three quarters of this total. While EU payments to Austria will increase significantly from 1996 onwards, gross contributions will also tend to rise and Austria’s net contributions will remain close to 1 percent of GDP.

—During the membership negotiations with the EU, Austria did not succeed to obtain a transitional period for adjusting its relatively high agricultural prices to the lower levels prevailing in the EU. Instead, an agreement was reached which allows for compensatory payments to be made to farmers and the food industry to ease their adjustment to the EU regime. The net cost of these payments to the federal budget is estimated at about half a percent of GDP in 1995 but will decline sharply in 1996; the program is planned to be phased out by 1998.

—Austria used to collect VAT on imports, including imports from other EU countries, faster than is generally the practice in the EU. This will no longer be possible, implying that collection lags on VAT on imports from other EU countries will lengthen by 2 months. This non-recurring revenue loss is estimated at about $12 billion (½ percent of GDP) in 1995. Under the existing distribution key for VAT receipts between different levels of government, about $8.5 billion will be borne by the federal government and $3.5 billion by the länder. While this loss of revenue has no direct impact on the 1995 budget deficit, on a national accounts basis, it will increase the public debt.

IV. The Hard Currency Policy Revisited

Against the background of accession to the European Union and to the European Monetary System, a number of authors recently have analyzed the Austrian exchange rate strategy anew in a European integration context. The purpose of this note is to review and summarize some of their main findings and conclusions. 1/

1. Evolution of the hard currency policy

The policy evolved gradually over time through trial and error, and by virtue of a pragmatic judgement about policy needs. The decisive breakthrough for its acceptance occurred in 1979, after the second oil price shock, when the focus of economic policy discussion in Austria shifted again to the control of inflationary pressures. Since late 1980, the bilateral peg against the deutsche mark has remained unaltered with virtually no fluctuations, and real wage moderation has been one of the central features of a policy that sought to maintain consistency between the hard currency framework and economic fundamentals.

The policy was pursued within a framework that was increasingly characterized by the gradual liberalization of international capital movements and domestic financial markets. Domestic credit ceilings were abolished in 1981 and, over the course of the past decade, repos have become the major instrument for domestic liquidity management. In the second half of the eighties foreign exchange controls were progressively removed and full liberalization was achieved in November 1991. New stock market and capital market legislation in 1989 and 1991 deregulated the capital market, and the two tax reforms of 1989 and 1994, reducing corporate tax rates and abolishing certain property taxes, aimed at improving Austria’s attractiveness for domestic and foreign investors.

2. Success of the hard currency policy

From a political perspective, it may seem surprising that a hard currency policy has attracted a winning coalition in Austria, given the strong position of organized labor, the existence of large basic industries, and the relatively weak presence of banks and multinationals. However, the Austrian system of social partnership (SSP) has shown a remarkable ability to co-opt sectoral interests and to give potential opposition a stake in macroeconomic outcomes. 1/ It involves producer group coordination, centralized bargaining, and consensus policies, which allow for the internalization of the macro-benefits of stabilization policies by compensating distributional losers in the short run and phasing out vulnerable groups over the long run through promoting structural adjustment. While Austrian corporatism or SSP has made the hard currency policy politically feasible, the latter in turn may have strengthened the system of social partnership by creating an additional bargaining disincentive at the central level for inflationary wage settlements and by encouraging coordination beyond incomes policy to wider issues of cost structure and workplace flexibility.

From an economic perspective, the hard currency policy relied both on (1) the optimum currency area (OCA) arguments for a small open economy and (2) the benefits of an easy-to-understand nominal exchange rate rule for the “stabilization of positive expectations” (affecting prices, wages, investment decisions, export receipts, and foreign exchange and financial markets). An analysis of the various OCA criteria (i.e., openness and direction of trade, correlation or symmetry of shocks, and factor mobility) suggests that Austria has been well situated for monetary union with Germany, but more so in the past decade than at the start of this policy in the late seventies. 2/3/ It is clear that the relationship between the hard currency policy and the convergence of economic fundamentals and of policy has worked both ways. Thus, the exchange rate constraint has accelerated the evolution of features of an optimum currency area through the influence on expectations relevant for wage-setting and through the pressure on the government for structural measures.

3. Implications for European Monetary Integration

Froats’s analysis of the political prerequisites for a hard currency policy supports the contention that successful monetary integration does not depend on policy-maker credibility per se, nor on inflationary convergence at a specific moment in time, but rather on the long-term-capacity of domestic institutions to adjust to an external nominal anchor. He argues that the ability of an economy to overcome sectoral resistance to economic adjustment is deeply embedded in wage-setting institutions and in the political system of interest intermediation. The implications for EMU are that long-run real convergence must precede monetary integration, and that success is possible among “core” states that have a sufficient domestic institutional basis to adjust to a fixed and nominally appreciated exchange rate. 1/ This contrasts with a “monetarist” or fast-track strategy for EMU, which holds that a stronger commitment to integrate policy instruments (through unlimited central bank cooperation and the imminent prospect of a single currency) would be sufficient to stabilize expectations in foreign exchange markets and among domestic price-setters.

The lesson Gnan draws from the Austrian experience is that strict similarity of the participating economies is not required for monetary union to work well in practice, provided labor markets and real wages are sufficiently flexible. However, the absence of the nominal exchange rate instrument involves a learning process for both the social partners and government policy makers. He also stresses the importance of credibility of monetary policy, which needs to be earned and thus requires time. Countries desiring to participate in EMU should face this challenge sooner rather than later. Once the decision to enter EMU has been taken, full commitment will be essential if disappointment is to be avoided.

Appendix I

Table A1.

Austria: Aggregate Demand

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Source: Austrian Institute of Economic Research.

At constant (1983) prices.

Preliminary.

Change as a percentage of GDP in the previous year.

Table A2.

Austria: Contribution to Growth 1/

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Source: Austrian Institute of Economic Research.

Change as a percentage of GDP in the previous year.

Preliminary.

Table A3.

Austria: National Income and Its Distribution

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Source: Austrian Institute of Economic Research.