2011 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Austria

Increasing integration to the East has benefited the Austrian economy, but also created vulnerabilities that came to a head with the global financial crisis. The crisis has highlighted old challenges and created new ones that need to be addressed. The banking sector’s return to more normal levels of profitability creates the conditions for a further build-up of high-quality capital and exit from government support. Policies to foster labor market participation by low-skill workers and human capital accumulation would increase long-term growth.


Increasing integration to the East has benefited the Austrian economy, but also created vulnerabilities that came to a head with the global financial crisis. The crisis has highlighted old challenges and created new ones that need to be addressed. The banking sector’s return to more normal levels of profitability creates the conditions for a further build-up of high-quality capital and exit from government support. Policies to foster labor market participation by low-skill workers and human capital accumulation would increase long-term growth.

I. Context

1. With economic growth back on track, policy discussions focused on addressing vulnerabilities in the public finances and the banking sector, as well as strategies to strengthen long-term growth. While Austria’s fiscal position compares favorably with other members of the euro area, the public finances worsened sharply during the crisis and, going forward, face pressures from population aging and health care costs, as well as risks from the large cross-border financial sector exposure. With increased market scrutiny of sovereign debt risk in advanced countries, staff argued that Austria needs to bring the public debt down more rapidly than envisaged under current consolidation plans, while the authorities thought that current plans were sufficient. In the financial sector, there was agreement that the challenges going forward are to increase the size and quality of private capital, improve liquidity management, take advantage of ongoing bank restructuring to address overcapacity in the Austrian market, and reduce risks from future foreign expansion through supervisory and regulatory reforms. Discussions also addressed structural reforms in labor markets and education.

2. Austria is a federation and the current federal government is a coalition of the two largest political parties. The current government coalition, in office since 2008, comprises the Social Democratic Party and the center-right Austrian People’s Party. Also, in Austria’s federal structure considerable political power resides with the nine federal states. Thus, decision-making often requires building a consensus across different levels of government and political parties. The next federal elections are scheduled for 2013.

II. Background-Eastward Expansion, Crisis, and Recovery

3. In the past decades, increasing integration to the East has benefited the Austrian economy, but also created vulnerabilities that came to a head with the global financial crisis. After the fall of the ‘iron curtain,’ Austria’s economic fulcrum moved eastward: trade with the CESEE became increasingly important, FDI flows were directed to the region, and Austrian banks entered the newly-opened markets (Figure 1).1 In many host countries, rapid credit expansion fueled economic growth but also a domestic demand boom and large current account deficits. In addition, credit was largely denominated in foreign currency, creating vulnerability to currency depreciation. After global money markets froze following the Lehman bankruptcy, the boom in the CESEE came to a halt, and Austrian banks faced both a liquidity squeeze and deteriorating credit portfolios. Government intervention was necessary to support aggregate demand and stabilize the banking system, while a number of CESEE countries obtained support from international financial organizations and the Vienna Initiative, whereby foreign banks jointly committed to maintain exposures.


Selected European Countries: Yearly Changes in Credit-to-GDP, 2002-2010

(in percentage points)

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Source: WEO, IFS, and IMF Staff calculations. Regional
Figure 1.
Figure 1.

Austria: Expansion to the East

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Sources: OeNB; IMF; DOT; and IMF staff calculations.1/Data cover loans to households and non-financial corporations only.

4. A rebound in external demand, brought about a quick recovery in 2010. In contrast with other countries, in Austria private consumption and employment held up quite well during the recession (Figure 2); when external demand (especially from Germany) rebounded in the second half of 2010 the stage was set for a rapid recovery, and GDP growth reached 2.1 percent in 2010.2 The current account registered a surplus of 2.7 percent of GDP, reflecting continued strong performance in services (mainly tourism and business services) (Figure 3). Outward FDI recovered somewhat in 2010, but remained still well below pre-crisis levels. The real effective exchange rate remains broadly within CGER norms.3

Figure 2.
Figure 2.

Austria: Macroeconomic Developments

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Sources: Austrian authorities; IHS; WIFO; ECB; Haver; WEO; REO; and other IMF staff estimates.
Figure 3.
Figure 3.

Austria: External Sector

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Sources: Austrian National Bank; Haver; IMF; DOT; and WEO; and IMF staff calculations.

III. Outlook and Risks

5. Supported by strong external demand, output growth will accelerate in 2011 and moderate thereafter, as the cyclical recovery will have run its course. Continuing the strong pace set at end-2010, in the first quarter of 2011 GDP grew by 0.9 over the previous quarter, surprising to the upside and triggering upward revisions by forecasters. Growth was led by exports, re-stocking, and equipment investment, while construction activity remained feeble and private consumption was subdued, reflecting declining real disposable incomes. The last readings of confidence indicators point to a slowdown in the remainder of the year. Both staff and the authorities agreed that 2011 GDP growth would be strong, with staff a bit more optimistic (3.3 percent) than the central bank (3.2 percent) and the two leading research institutes (both 3 percent).4 There was also agreement that growth will moderate to around 2 percent in 2012. Staff viewed potential output as only marginally affected by the crisis, with the output gap all but closed next year.

6. The food and energy price shocks, higher excise taxes, and the strong economy have pushed up consumer prices. In recent months, inflation in Austria has exceeded the euro area average: in June 2011, headline HICP inflation registered at 3.7 percent while core inflation was 2.8 percent, about one percent above the euro area indicators. The authorities assessed that indirect tax increases at the beginning of the year accounted for 0.4 percentage points of the differential, and reckoned that it was too early to tell what might explain the rest. Staff suggested that demand pressures from the strong recovery may be an additional contributing factor, and that a reversal in commodity prices, the expected tightening of monetary conditions in the euro area, and mildly contractionary fiscal policy may help contain inflationary pressures going forward if wage settlements for 2012 remain moderate.

7. The cyclical recovery is helping the fiscal balance, but current medium-term consolidation will not reduce debt significantly. During 2007-10 the deficit widened from 0.9 percent to 4.6 percent of GDP, while the public debt rose by almost 12 percent of GDP (Figure 4). The government’s multi-year fiscal consolidation plan would cut the deficit back to below 3 percent by 2013 (in compliance with the EU excessive deficit procedure for Austria) and further to around 2 percent in the medium term through a combination of tax increases and expenditure cuts. With growth in 2011 better than expected but budgetary implementation risks in particular at the subnational level, staff projects the deficit to decline to 3.4 percent of GDP this year and the structural deficit to stabilize at about 2 percent of GDP in the medium term, with debt remaining above 70 percent of GDP.

Figure 4.
Figure 4.

Austria: Fiscal Developments and Outlook

(In percent of GDP, if not indicated otherwise)

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Source: Authorities; WEO; IMF staff calculations and projections.

Staff Baseline and Authorities’ Adjustment Scenario

(percent of GDP unless indicated otherwise)

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Sources: Austrian Stability Program 2010-14; Strategiebericht Bundesfinanzrahmengesetz 2012-15; and IMF staff projections.

includes implementation risks, in particular at subnational level; furthermore, based on current macroeconomic staff projections and 2010 GDP outcome.

based on authorities’ April 2011 macroeconomic projections and estimates (including for 2010 GDP).

8. In the banking system, profitability is improving despite growing NPLs, and lessons from the crisis are being distilled.5 NPL ratios are high in CESEE subsidiaries, albeit with notable regional differences, while loans in Austria are performing relatively well (Figure 5). The large banks and most medium-sized banks were profitable in 2010 despite continuing significant provisioning costs. Interbank interest rates have normalized; share prices and CDS spreads for the large banks have recovered, but not returned to pre-crisis levels (Figure 6). With acute crisis management over, the banks and the authorities are turning to address several important challenges: reducing bank reliance on government capital; substantially strengthening the quantity and quality of capital to boost confidence in the banking system and build larger buffers to absorb shocks; adapting liquidity management to address shortcomings highlighted by the crisis; reducing excess capacity resulting in chronically low profitability in the Austrian market; and improving coordination of supervision across jurisdictions.

Figure 5.
Figure 5.

Austria: Banking Sector, 2010

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Sources: Banks’ annual reports; OeNB; and IMF staff calculations.1/Austrian banks are shown in yellow and non-Austrian banksare shown in blue. The yellow bar at the extreme right represents the Austrian banking sector on an unconsolidated basis, except for ROA and Tier ratio where it refers to Austrian-owned bankson a consolidated basis. Return on assets includes profit attributable to noncontrolling interests. The set of “large European banks” includes 2 Belgian banks, 4 French banks, 4 German banks, 5 Italian banks, 2 Dutch banks, 1 Norwegian bank, 5 Spanish banks, 3 Swedish banks, 2 Swiss banks and 5 British banks.
Figure 6.
Figure 6.

Austria: Selected Financial Market Indicators 1/

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Sources: Thomson Financial/DataStream and Bloomberg.1/Data through June 23, 2011.

The Authorities’ Consolidation Plan

In connection with the federal budget for 2011, a broad array of revenue and expenditure measures was decided and enacted. On the revenue side, these included a bank levy and higher mineral oil taxes. On the expenditure side, expenditure reductions spread across several categories were complemented by simultaneous increases in priority areas, such as education and R&D.

The authorities estimate the impact of these measures, defined as difference to the no-policy-change revenue and expenditure of the same year, as follows:

The Authorities’ Consolidation Measures

(In million euro, unless indicated otherwise)

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Source: Austrian Stability Program 2010 to 2014.

including tax shares of subnational levels.

Mainly subsidies.

Mainly personnel, goods and services, and investment.

Additional spending in priority areas (e.g. education and R&D).

In addition to these measures at the federal level, the authorities’ general government deficit targets assume compliance with the following subnational headline deficit targets stipulated in the recently renegotiated domestic stability pact (in percent of GDP): 0.75 in 2011 (following 1.2 in 2010), 0.6 in 2012, and 0.5 in 2013-14. Furthermore, the authorities assume a balanced social security budget throughout the period (after a surplus of 0.2 percent of GDP in 2010).

9. Risks to the macroeconomic outlook are mainly to the downside, and relate primarily to a possible widening of the crisis in the euro area periphery. While direct exposures of Austrian banks to Greece, Ireland, and Portugal amounted to only 2.1 of GDP at end-2010, staff argued that the main risk to the Austrian economy stemmed from possible spillovers from generalized financial instability in the euro area, and the authorities shared this assessment.6 Turmoil could spill over to Austria, especially should it affect wholesale funding markets, banks in the euro area core, or CESEE countries where both Greek and Austrian banks have a significant presence. Adverse spillovers to Austria could also materialize should the crisis engulf Italy, as Austria’s second largest bank is a subsidiary of an Italian bank and the direct exposure of Austrian banks to Italy amounts to 5.9 percent of GDP. Further appreciation of the Swiss franc through safe-haven flows might hurt Austrian banks’ loan portfolios in some CESEE countries and Austria, where loans denominated in the Swiss currency are widespread. Finally, a new economic downturn in the euro area might curtail growth in the CESEE and lead to second-round effects on credit quality. Staff also viewed as downside risks renewed food and energy price shocks and their impact on real incomes in the CESEE, while upside risk could stem from a stronger-than-expected recovery of domestic demand in the euro area or the CESEE.

IV. Policy Discussions

A. Fiscal Policy: Speeding up Debt Reduction by Increasing Expenditure Efficiency

10. Staff and the authorities concurred that current consolidation plans will not reduce debt significantly, and staff considered this unsatisfactory in light of risks. Even with higher growth and full implementation of the authorities’ plans (including by sub-national governments), general government debt would still be at the current level of 72 percent of GDP by 2015 and only slightly below 70 percent by the end of the decade. In the staff baseline scenario, which is less optimistic about implementation (in particular of the deficit targets at subnational level), debt stays above 70 percent of GDP throughout the period. Furthermore, a number of factors, not taken into account in the baseline scenario, pose risks to the debt level in the coming years: first, there might be further debt additions from the banking sector rescue; second, roughly one third of the public enterprise debt that is not part of general government (i.e., of currently some 12 percent of GDP) could be reclassified and added to general government debt in 2014, when revised national accounting rules enter into force; and, third, projections for the cost of an aging population may turn out substantially higher than currently envisaged, in particular in the health care area.7 More generally, the large and internationally exposed banking sector and the risk of renewed turmoil in European financial markets would argue for expanding fiscal buffers.


Austria: General Government Debt, 2007-2020

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Sources: Austrian authorities; and IMF staff projections.

Public Enterprise Debt 2005-2010 1/

(In billion euro unless indicated otherwise)

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Source: Federal Ministry of Finance.

Non-financial public enterprises


11. Hence, staff urged for stronger consolidation measures of at least ½ percent of GDP annually, starting with the 2012 budget, until the structural deficit reaches zero. Barring materialization of the aforementioned risks, this would pare debt back to pre-crisis levels around the end of the decade, be in closer compliance with EU requirements for structural and debt adjustment, and strengthen private sector confidence domestically and abroad.8 Furthermore, an even stronger consolidation in the 2012 budget would be justified in light of the rapid economic recovery and the possible need to contain current inflationary pressures, should they prove more persistent than expected.

12. The authorities viewed current consolidation plans as adequate, and further efforts as not politically feasible in the short-term. The authorities considered that stronger-than-envisaged growth will likely lead to significantly better deficit outcomes. They also pointed to the protracted and difficult negotiations on the current multiyear package (the 2011 budget was not approved until December 2010) as a reason for not wanting to reopen the issue. All in all, the authorities were not inclined to take additional consolidation steps in the 2012 budget, or even before the next national parliamentary election in 2013.

13. Staff recommended expenditure rationalization in three main areas: early pensions, health care, and subsidies. Staff took the position that consolidation should preferably take place through expenditure cuts rather than revenue-raising measures, as Austria’s revenue-to-GDP ratio is already high in international comparison. Three areas where expenditure exceeds levels in peer countries and ample scope for rationalization exists are especially amenable to reform (Annex 4):

  1. Pensions and other benefits fostering widespread early labor market exit are no longer affordable and ongoing reforms should be strengthened. The early retirement scheme for long-term insured (“Hacklerregelung”) should be fully abolished in 2012 and eligibility for disability pensions further reduced, including by broadening the scope of alternative occupations against which disability is assessed. All other avenues to early inactivity for older workers without fair benefit reduction must also be closed rapidly to avoid substitution across different avenues. In parallel, job opportunities for older workers need to be improved.

  2. The large efficiency gains that are possible in the health care sector should be promptly reaped. Hospital planning should be enforced on a nationwide scale to optimize size, degree of specialization, and distribution of hospitals across Austria’s territory. To that end, hospital financing should be pooled at the federal level and disbursements linked to clear performance criteria. In parallel, outpatient treatment and prevention should be strengthened and better integrated.

  3. Reducing the comparatively high level of subsidies requires restructuring and cost savings at public enterprises. This relates in particular to Austrian Railways (OeBB) where operating costs, pensions, and infrastructure investments offer scope for rationalization. The basis for subsidy cuts in other areas should be laid quickly by implementing comprehensively the authorities’ initiative to develop a database on subsidies and transfers. This would enhance transparency and open the way to a broad re-evaluation of spending in this area, clarifying priorities and eliminating redundant subsidies.

The authorities broadly agreed with these expenditure reform priorities, and noted that a number of measures have already been enacted together with the 2011 budget in particular as regards early pensions. They also pointed to different working groups studying some of the above issues, but left it open whether and when specific recommendations and decisions might emerge from this work.

14. While recognizing that fiscal federalism in its current form is too complex and hampers expenditure rationalization efforts, the authorities were lukewarm to staff’s calls for a comprehensive revamping and an ambitious timetable for reform. Austrian fiscal federalism is characterized by a disconnect between spending and financing responsibilities in key areas, such as health and education; in addition, spending responsibilities in some areas are excessively fragmented across levels of government. Expenditure rationalization would therefore benefit from a reconfiguration of tasks across government levels and better alignment between spending decisions and their financing (Annex 5). Staff proposed that a comprehensive fiscal federalism reform to address these problems be agreed upon before the negotiations on the next fiscal equalization law. With preparatory work already far along, this goal should be achievable and would further cement investor confidence in Austria’s consolidation drive. While the authorities did not rule out this idea and had commissioned studies on the issue, a concrete timetable for following-up on this work and initiate reforms had not yet been decided.

15. In the staff’s view, fiscal federalism reform would also help achieving compliance with the domestic stability pact, which would furthermore benefit from enhanced budgetary planning. The domestic Austrian stability pact has recently been revised and foresees a reduction of the deficit of sub-national governments from 1.2 percent of GDP in 2010 to 0.5 percent in 2014. Staff pointed out that subnational deficit objectives have consistently been missed in the past, while the authorities were more optimistic about the fulfillment of the current targets, also in light of the stricter sanctions for non-compliance envisaged under the new pact. Staff also suggested that better compliance could be fostered by more ex-ante budgetary coordination and harmonization of planning instruments across government levels, and that medium- and long-term sustainability analysis should become an integral and prominent part of planning at all levels so as to strengthen awareness of debt dynamics and help control the costs of aging. This analysis could be used to derive long-term expenditure target paths for crucial expenditure categories.

B. The Financial Sector: Managing Credit Risk and Building a More Stable System

16. Staff reviewed with the authorities and the banks strategies to deal with NPLs in the CESEEs. As growth has resumed in the region, NPL ratios are expected to peak this year. To deal with the large stock of problem loans, banks have put in place or strengthened loan collection and restructuring departments in their CESEE subsidiaries; some banks also report sales of NPL portfolios to local recovery specialists. The authorities estimate that, as of end-2010, the top six Austrian banks had restructured loans corresponding to about 5 percent of their total risk exposure. At around 42.5 percent, the ratio of provisions to NPLs in the CESEE subsidiaries is low compared to that of Austrian operations (70.8 percent), and the authorities expect it to increase going forward as new flows of NPLs slow down. Staff and the authorities agreed that the extent of ‘evergreening’ remains uncertain, complicating the assessment of the future evolution of NPLs.

17. In Austria, while Swiss-franc denominated loans are performing well so far, they may pose a risk in the medium-term. Uncharacteristically for an advanced country, Austria has a sizable share of loans denominated in foreign currency. These loans, mostly Swiss franc mortgages, grew in popularity during the 2000s when the exchange rate was relatively stable and the interest rate on the Swiss currency was attractive. Following the financial crisis, however, the Swiss franc appreciated by over 20 percent vis-à-vis the euro, increasing the value of the obligations. So far, these loans are performing well, in line with domestic currency loans. This may reflect relatively conservative lending standards in the Austrian mortgage market but also the nature of the contracts, whereby loans are tied to repayment vehicles and have bullet maturity. With large mortgage vintages beginning to mature in 2017, repayment problems may surface down the road if exchange rate developments remain unfavorable. After discouraging foreign-currency lending through a number of measures beginning in 2003, supervisors took stronger action in 2008, effectively prohibiting new foreign currency lending to unhedged retail customers, and are now pushing banks to develop strategies to reduce the stock. Staff agreed that such measures were appropriate.


Share of Foreign Currency loans

(in percent of total loans)

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

18. The crisis is fostering restructuring among medium-sized banks, which could be an opportunity to reduce chronic excess capacity in the market. Fragilities remain among medium-sized banks, one of which was nationalized during the crisis. The restructuring plan for this bank is under examination by the European Commission. Another medium-sized bank is thinly capitalized and failed the recent EBA stress test, but the announced sale of most of its foreign subsidiaries and further deleveraging should help make it more stable. Another, smaller nationalized bank has been restructured, with problem assets placed in a separate entity. The mission expressed hope that the post-crisis restructuring would reduce chronic excess capacity in the Austrian market, where interest margins are among the lowest in the euro area, so that banks would be less dependent on profits from foreign operations. The authorities were optimistic that this would happen.

19. Stress tests performed by the OeNB suggest that the Austrian banking system would be robust to a deterioration in credit quality triggered by a large negative growth shock. The OeNB conducted a stress test of the Austrian banking system in the spring of 2011 and published the results in its latest Financial Stability Report. In an adverse scenario more severe than that envisaged by the 2011 EBA stress test, the Core Tier I capital ratio (defined as in the 2011 EBA stress tests) declined from 9.2 percent to a still comfortable 8.5 percent in the aggregate at the end of the two-year projection horizon, and remained above 7 percent in each of the three largest banks.

20. Banks and supervisors are distilling the lessons from the crisis, and changing risk management and supervisory practices accordingly. Both banks and supervisors are more attentive to liquidity management, a major worldwide source of weakness during the crisis. A new system established in late 2008 allows supervisors to perform weekly stress tests for liquidity and funding risk. Implementation of the new Basel III liquidity regulation will also be instrumental in this regard. Banks report that internal models did not adequately reflect aspects such as the likelihood that host country authorities would restrict intra-group liquidity and capital transfers during times of distress, the downward flexibility in nominal wages and its effects on loan affordability indicators, and the risk of political intervention ‘legitimizing’ nonpayment of loan installments in crisis times. Staff welcomed the intention to capture these events in future liquidity and risk models, and noted that supervisors nonetheless need to remain vigilant. Newly-created colleges are coordinating the supervision of banking groups operating across multiple jurisdictions and will work towards joint risk assessments at the group level for the first time this year.

21. Rapid progress toward achieving higher bank capital standards and early exit from government support should take precedence over shareholder remuneration or further cross-border expansion. With large NPLs, risks from possible heightened turmoil in the euro area, and large cross-border exposures, banks need to urgently build up high-quality capital to bolster confidence and improve future loss absorption capacity. In addition, while the government guarantee program for bank liabilities has expired, capital injections have not been repaid yet, though two banks (one large and one medium-sized) have declared their intention to begin repayment soon. Staff emphasized that shareholder remuneration and cross-border expansion plans should come only after capital build-up and exit from government support. The authorities agreed that capital strengthening was a priority for Austrian banks (also because many competitors in CESEEs are better capitalized), but noted that dividend suspension was not a condition for receiving government aid and exit should be conditional on a strong capital position.

22. A strategy to address the too-big-to-fail (TBTF) problem needs to be put in place, including through higher capital buffers for systemic banks, using the flexibility provided by the forthcoming EU-wide rules. The recent crisis has raised the question of how to curb potential future fiscal contingent liabilities from bank rescue operations.9 The authorities are exploring options specifically targeted to the vulnerabilities of the Austrian banking sector. The mission welcomed this initiative and emphasized the need to build up stronger buffers against future risks and avoid some of the imprudent lending behavior observed in the past. Given the specific risks posed by Austrian systemic banks (large size relative to the country GDP, significant cross-border exposure concentrated in a single region, high NPLs), capital add-ons for systemic banks would provide needed additional loss-absorbing buffers in bank balance sheets. Limits on parents’ funding of subsidiaries could be calibrated to bind in periods when intra-group loans fuel excessive credit growth in host countries, as was the case in a number of CESEEs in the mid-2000s. They could thus be useful to avert future unsustainable credit booms, but would not impede beneficial international financial integration. This instrument would have to be coordinated with host country supervisors. Staff and the authorities also agreed that an EU-level bank resolution and burden-sharing mechanism would be the first-best solution for Austria in the medium-term. Staff also welcomed as a useful step forward the establishment at the end of June 2011 of a cross-border financial stability group with authorities from most new EU member states where Austrian banks operate, with the objective to improve crisis prevention and management.

23. The reform agenda should include stronger early intervention powers for supervisors and revisit the institutional framework for bank supervision and regulation, including with respect to macro-prudential policy. In the past, staff called for legislation to strengthen supervisors’ early intervention powers and, more broadly, improve the bank resolution framework. The authorities agree that this is an important part of the reform agenda and are awaiting a proposal on a harmonized set of tools at the EU level to move forward. This proposal is expected before the end of the year. In Austria, responsibility for both on-site and off-site bank supervision resides with the OeNB while enforcement powers are assigned to the Financial Market Authority (FMA). While the authorities and the banks report much improved coordination between the two agencies, the benefits from this division of labor remain unclear. A review of the supervisory architecture would be an important topic for the next FSAP update, which the Austrian authorities have requested for FY 2013. This review would also be an opportunity to discuss in depth the design and implementation of macro-prudential policy, for which a proper legal framework appears to be lacking according to the OeNB and the FMA.

24. Significant progress has been achieved since the Financial Action Task Force (FATF) identified strategic deficiencies in 2009. The February 2011 FATF follow-up report was very positive in light of the substantial package of legal measures enacted in June and July 2010. Upcoming actions will focus on effective implementation of the new legal provisions, including the drafting of new or updated FMA circulars, training of reporting entities and supervisors, as well as on-site inspections.

C. Structural Issues: Enhancing Labor Utilization and Human Capital

25. Staff stressed two keys areas of structural reform to raise potential growth: labor markets and education. Overall, the employment rate in Austria is high by OECD standards, but there is room for improvement. As discussed above, Austrian workers exit the labor market at a relatively young age burdening the public pension system but also depriving the economy of a valuable factor of production. Closing avenues to early labor market exit and enacting policies to encourage employment of older workers would increase long-run growth potential. In addition, employment levels among the low skilled could be raised and education reform could enhance human capital.

26. The authorities acknowledged that “tax wedges” were high, and saw measures in this area as part of a possible more comprehensive tax reform after the next elections. Employment rates among low-skilled workers are modest (Figure 7). For instance, immigrant workers, who are disproportionately low skilled, have an unemployment rate of 8.5 percent, compared to 3.1 percent for the native population. While low-wage workers do not pay income taxes, social security contributions are high in international comparison, pushing labor costs beyond the productivity of many low-skilled workers, thereby curtailing labor demand. Staff pointed out that a reduction in social security contributions at the low end of the wage distribution (coupled with offsetting measures to make it budget neutral) would increase employment of low-skilled workers and, through it, potential output. The authorities noted that tax reform is likely to be prominent in the electoral platform of the major political parties ahead of the 2013 elections, and labor taxation issues would be debated in that context.

Figure 7.
Figure 7.

Austria: Labor Market Performance

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Source: Eurostat.

27. Staff also called the authorities’ attention to the large school achievement gap for immigrant and first generation children, now about 20 percent of the population. Unfavorable educational outcomes for this segment of the population increase the stock of low-skilled workers going forward, leading to lower employment rates and limiting human capital accumulation. Policies to close this gap are important also in light of potentially large new immigrant flows following the elimination of the remaining restrictions on labor movements with countries that joined the EU in 2004 (Annex 6). The authorities acknowledged better integration of immigrant children in the school system as a long-standing challenge.

28. Both staff and the authorities saw tertiary education reform as key to accelerate human capital accumulation. Staff observed that for a high-income country like Austria, continued economic growth requires moving up with the technology frontier. While private sector R&D activities are strong (and generously supported by the government), the accumulation of human capital, a necessary input to R&D activities, lags behind. In Austria only 18 percent of the population has a tertiary degree or equivalent compared with 26 percent in high income OECD countries, consistent with low rates of return on tertiary education (particularly for women) in Austria. The quality of university education is hampered by liberal admission policies causing overcrowding and high drop-out rates, and by a lack of financial resources. A 2004 reform gave more financial and hiring autonomy to universities while increasing their accountability. However, admission policies remain liberal, and enrollment continues to exceed capacity in several disciplines. The authorities recognize that policy initiatives to raise tertiary attainment are crucial to raising long-term growth. The introduction of entrance admission tests (as in medicine, where there has been a sharp fall in drop-out rates), policies to attract enrollment in engineering and natural sciences, and measures to obtain private funding for education are possible policies under discussion.10

V. Staff Appraisal

29. The crisis, though short-lived in Austria, has highlighted old challenges and created new ones that must now be addressed. While Austria’s fiscal position compares favorably with other euro area countries, the growth of public debt needs to be put into reverse to better face risks and cost pressures. The banking sector requires more, high quality, private capital, and, as the CESEE convergence process resumes, expansion needs to become more prudent. To foster medium-term growth, increasing employment of low-skilled and older workers and building up more human capital are key priorities.

30. To put the public finances on more solid ground, additional consolidation measures are needed starting with the 2012 budget. Total measures of at least ½ percent of GDP per year, until the fiscal accounts are structurally balanced, would bring the debt-to-GDP ratio on a clear downward trajectory in the medium term. An even stronger effort in the 2012 budget is warranted in light of the excellent economic performance, rapidly disappearing slack in the economy, and inflationary pressures. Priority should be given to pension, health care, and subsidy reform—areas where government intervention can be made more efficient and supportive of long-term growth.

31. A broad reform of fiscal federalism would underpin consolidation efforts. Incentives for an efficient use of public resources are weakened by a strong disconnect between spending and financing responsibilities and the sharing of spending mandates among different levels of government. A comprehensive fiscal federalism reform to address these problems should usefully be agreed upon before the next negotiations on the fiscal equalization law.

32. The banking sector’s return to more normal levels of profitability creates the conditions for a further build-up of high-quality capital and exit from government support. Taking advantage of improved financial results, banks should move quickly to strengthen their capital base, increasing both the quantity and quality of their capital and exiting government support. This should take priority over shareholder remuneration and further cross-border expansion. The ongoing restructuring of some banks is an opportunity to address overcapacity in the Austrian market.

33. During the transition to EU-level bank resolution mechanisms, measures should be taken to address the risk posed by systemic banks. With a large, internationally active banking sector, Austria has much to benefit from an EU-wide bank resolution and burden-sharing mechanism for internationally active banks. Until a new framework is in place, the risk that systemic banks pose to Austrian taxpayers should be reduced through macro-prudential measures, including tighter capital requirements and, possibly, macro-prudential constraints on intra-group funding models to prevent future credit booms. In general, greater supervisory vigilance of lending activities, accompanied by pre-emptive action, is necessary wherever financial deepening can quickly turn into an unsustainable credit boom. In this respect, the establishment of a cross-border financial stability group with authorities from most new EU member is welcome.

34. Policies to foster labor market participation by low-skill workers and human capital accumulation would increase long-term growth. High social security contributions are an obstacle to the employment of the low-skilled and should be reduced (in a budget-neutral way). Measures to close the large educational attainment gap of children with an immigrant background, some 20 percent of primary school pupils, would improve average skill levels and productivity growth. Reform of the university system, which is burdened by low graduation rates and has low enrollment in engineering and the natural sciences, could usefully include stricter admission criteria. These would reduce overcrowding and drop-out rates, thus making better use of existing resources, and could be used to steer students toward disciplines complementary to R&D.

35. It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

Table 1.

Austria: Selected Data, 2007-12

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Sources: Austrian authorities; Datastream; and IMF staff estimates and projections.
Table 2.

Austria: Medium-Term Macroeconomic Framework, 2007-16

(in percent of GDP unless indicated otherwise)

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Sources: Austrian authorities; and IMF staff estimates and projections.
Table 3.

Austria: Balance of Payments, 2007-16

(In percent of GDP)

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Sources: Austrian National Bank; WIFO; and IMF staff projections.
Table 4.

Austria: General Government Operations, 2007-16

(In percent of GDP, unless indicated otherwise)

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Sources: Authorities and IMF staff projections.
Table 5.

Austria: Financial Soundness Indicators for the Banking Sector, 2006-10 1/

(In percent)

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Source: Austrian National Bank.

Unless otherwise indicated, figures refer to the whole banking system (i.e., including foreign owned banks) on an unconsolidated basis (i.e., without subsidiaries abroad)

Figures refer only to Austrian-owned banks on a consolidated basis (i.e., with subsidiaries abroad)

Comparability in 2008 and 2009 is limited due to changes in reporting requirements or introduction of new reporting schemes.

Annex 1. Potential Output in Austria: Structural Shifts1

This Annex derives an estimate of potential output in Austria and selected euro area countries using a production function approach to shed light on the determinants of medium-term growth in the country.

Methodology: Potential output in Austria is estimated using a production function approach, in which trends in labor force participation, worked hours, and employment are estimated separately. The starting point is a Cobb-Douglas production function with constant returns to scale,


where Y is real GDP, A is total factor productivity (TFP), K is the stock of physical capital, H is total hours worked, and α is the share of GDP paid to capital, set at 0.3 for Austria based on historical data and previous studies.2 Total hours worked are:


where WAP is working-age population, LFPR is the labor force participation rate, ER is the employment rate, and AHW is average hours worked per worker. Taking logs of (1), and denoting the logs by lower case,


TFP can be derived as a residual from (2):


To derive potential output growth, an HP filter (assuming a smoothing parameter of 100—the usual value for annual frequency data) is used to smooth the factor inputs that exhibit cyclical behavior, namely the labor force participation rate, the employment rate, and average working hours.3 Since HP-filtered data are sensitive to end-point conditions, the sample period is artificially prolonged through a path for TFP and factor inputs reflecting a recovery from the 2009 recession. The data are then HP-filtered using the extended sample. The smoothed or trend values are denoted by bars. These values are used to derive the trend in total hours worked H as:


TFP is also smoothed with an HP filter. Finally, trend total hours, capital, and trend TFP are combined to compute potential or trend GDP as follows:


Potential growth can be broken down into three components: TFP growth, capital accumulation, and growth in worked hours:


Results: Using the production function approach to estimate potential output in Austria during 1991-2010 the following stylized facts emerge:

a. The average trend GDP growth rate has dropped from 2.3 percent in 1991-2000 to 2.0 percent over 2001-2010.

b. The global financial crisis did not have a sizable effect on the level of potential output or its growth rate in Austria.


Austria: Average Trend Growth in GDP and Its Components: 1991-2010

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

c. The rate of capital accumulation slowed down markedly from 3 percent in the early 1990s to about 1.5 percent in recent years. There was a less pronounced decline in trend growth in TFP from 1.2 percent during 1991-2000 to 0.8 percent over 2001-2010. The trend growth in total hours worked, on the other hand, increased from 0.4 percent to 0.9 percent over the same period, owing mainly to an increase in labor force participation.

These patterns of growth seem to share some but not all features with those of other euro area countries, such as Germany, Italy, or France. While the trend growth rate declined in all the four countries, in Austria it remains the highest. In all countries, improved labor utilization helped support potential growth, though in Germany this process started only in 2006. The deceleration in capital accumulation observed in Austria is also visible in Germany and Italy, but not in France. In the latter country, as in Italy, there was a sharp slowdown in TFP growth.

One possible interpretation of the shifting patterns of growth in Austria is that increased economic integration with relatively-capital poor CESEEs resulted in a reduction in the trend increase of the capital/labor ratio in the Austrian economy. This interpretation is consistent with the observed deceleration in capital accumulation in Austria, as well as the increase in FDI toward CESEEs. In addition, slower growth in capital intensity would also slow down labor productivity growth and, hence, equilibrium real wage growth. Indeed, in Austria average real wage growth decelerated from 3.7 percent in 1991-1999 to 0.7 percent in 2000-2010.


  • Estevao, Marcello, and Evridiki, Tsounta, 2010, Canada’s Potential Productivity and Output Growth: A Post-Crisis Assessment, International Productivity Monitor, Number 20, Fall 2010

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  • Gnan, Ernest, Jurgen Janger, and Johann Scharler, 2004, Determinants of Long-Term Growth in Austria—A Call for National Growth Strategy, Monetary Policy and the Economy, Q1/04

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  • Koman, Reinhard, and Dalia Marin, 1999, Human Capital and Macroeconomic Growth: Austria and Germany 1960-1997, An Update, mimeo.

Annex 2. Recent Developments in the Banking Sector1

Austria’s financial sector is dominated by traditional retail banks. Financial stability concerns are mainly related to credit risk in the banks’ large loan portfolios in the CESEEs, where NPLs have mounted following the 2009 financial crisis.

A. Profitability has Improved, But Credit Quality in the CESEEs Remains Problematic

Total consolidated bank assets amounted to around EUR 1.15 trillion at end-2010, stable from 2009, while the capital-to-assets ratio increased to 7.5 percent from 7 percent in 2009 (Table 5). The net interest margin in the Austrian market was 1 percent—among the lowest in the euro area—reflecting long-standing overcapacity. The loans-to-deposits ratio in the Austrian operations remained close to 130 percent, as loan growth remained subdued and deposits stagnated. Loans-to-deposits ratios in CESEE subsidiaries were also broadly stable. Overall profitability improved, with the aggregate ROA rising to 0.5 percent in 2010 from 0.2 percent in 2009, as operating income remained strong while credit risk costs declined by 30 percent.

Austria: Large- and Medium-Sized Banks’ Selected FSIs, 2010

(in percent)

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Source: OeNB; and IMF staff calculations. ROA excludes profit attributable to non-controlling interests.

NPL ratios in CESEE subsidiaries are high, particularly in non-Russia CIS countries, where over one quarter of outstanding loans is non-performing, and in Southeastern Europe, where the NPL ratio is over 12 percent. Loan portfolios in Russia and Central Europe are performing better. NPL ratios are expected to peak in mid-2011, as the growth outlook is generally positive in CESEEs; pockets of macroeconomic weakness remain, however, particularly in Croatia and Romania.2 Furthermore, coverage ratios (provisions/NPLs) suggest that some banks may need to continue adding to their provisions even as NPL growth slows down.

The quality of loan books is subject to a non-negligible degree of uncertainty for several reasons. First, the amount of loan “evergreening” is difficult to quantify, and the treatment of performing restructured loans in provisioning rules may not fully reflect their higher probability of default. Second, foreclosing real estate has proven challenging as a result of official or unofficial administrative barriers and lack of market liquidity. Third, anecdotal evidence suggests that in a few countries a weak legal system is hampering loan recovery.

In response to the shock to the quality of their loan book, banks have been strengthening debt work-out and collection strategies, focusing first on early collection as well as loan restructuring and, more recently, on late collection and collateral recovery. In parallel, the OeNB and the FMA have stepped up their monitoring activities and are in intense dialogue with all large credit institutions regarding credit risk developments and loan work-out strategies in CESEEs.

Despite sizable exchange rate depreciation in some countries, foreign currency loans in CESEEs are generally not performing worse than local currency loans in the aggregate. In the CESEEs, 47.6 percent of loans by Austrian banks’ subsidiaries were in foreign currency at end-2010, higher than the average of other competitors in the region. Cross-border loans were predominantly in foreign currency (77 percent at end-2010). Available evidence does not point to significantly higher aggregate NPL ratios for foreign currency loans, likely because these loans are disproportionately in the secured category which is performing relatively better. Nonetheless, the large stock of foreign currency loans is problematic as it limits policy responses during crises (for instance, by making currency depreciation more costly) and makes domestic demand less resilient following an external shock.

NPLs on exposures booked in Austria are low, but the large share of Swiss franc-denominated loans is a cause for concern. Recent exchange rate developments have adversely affected 30 percent of household loans that are denominated in foreign currency (mainly Swiss francs mortgages). So far, only a small share of these mortgages is non-performing, but this might change should the Swiss franc continue to appreciate strongly, as it has done since 2009. Furthermore, since most of these loans are linked to investment vehicles and have bullet maturity, the full impact of the appreciation will be felt only when sizable loan vintages mature starting in 2017. Following strong supervisory measures—but also unfavorable exchange rate movements acting as a deterrent—the stock of household foreign-currency loans (adjusted for exchange rate movements) is now on a declining trend.

B. Capitalization is Comfortable on Average, but Some Medium-sized Banks Are Weak and Capital Quality Needs to Improve

The average CAR in the banking system stood at 13.2 and the Tier I CAR at 10.0 at end-2010, well above the current regulatory minima. Tier I CAR ratios for the three largest banks were also significantly above regulatory minima but slightly below the average of European peers (Figure 5). However, the quality of capital is unlikely to be sufficient given new emerging international standards.3

Among medium-sized institutions, one bank which was nationalized in 2009 reported large losses in 2010 as a result of write-downs on its CESEE portfolio. A restructuring plan has been drafted and is under examination by the European Commission. A second troubled medium-sized bank returned to profit in 2010, but relies heavily on government capital. This bank failed the recent EBA stress test and is planning further significant deleveraging. Finally, a smaller bank taken over by the government has been restructured, and its impaired assets transferred to a separate entity; however, the medium-term viability of the new institution remains to be demonstrated.

During the crisis, the Austrian government injected participation capital (a form of non-voting shares) into five of the six largest banks in the amount of €5.88 billion. One large bank has begun the administrative process to repay the injection, and a medium-sized bank is planning to make a partial repayment to avoid conversion of the participation capital into ordinary shares.4 The other large bank received shareholders’ authorization to repay the government but has not announced yet the timing of this operation. In the meantime, it has resumed paying dividends at pre-crisis levels and has acquired a bank in the CESEEs.

Besides repaying the government, banks need to improve the quantity and quality of their capital to meet new international standards, as incorporated in the forthcoming CRD IV directive that will enact the Basel III agreement in the EU. Key issues for Austrian banks will be the recognition of controlling interests and participation capital in the EU legislation (see table below). The capital gap is particularly large for some medium-sized banks. The implementation of Basel II enhancements on capital requirements for market risk by the end of 2011 will contribute to increase risk-weighted assets.5

Austria: Large and Medium-Sized Banks’ Tier I Capital and Selected Components, 2010

(in percent of risk-weighted assets)

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Source: OeNB; and IMF staff calculations.

A sizable share of non-controlling interest capital is likely to be recognized as Core Tier I capital under forthcoming new capital rules.

The OeNB regularly performs stress tests to assess the resilience of the banking system. The latest test included a downside macroeconomic scenario with a sharp negative shock to investor confidence leading to a cumulative GDP shortfall of 5.8 percentage points in Austria and 4.7-7.8 percentage points in CESEE sub-regions relative to the baseline scenario over a two-year simulation period. In this refinancing crisis scenario, the aggregate Core Tier I ratio of the banking system declined from 9.2 percent to 8.5 percent.6

Banks exhibit solid liquidity and have reduced their dependence on Eurosystem operations. The net funding gap (cumulated over 12 months, before money market operations) has remained stable around €40 billion while the counterbalancing capacity exceeds €80 billion. These indicators are monitored and stress-tested weekly by the OeNB using data from a forward-looking liquidity reporting system introduced at the beginning of the crisis. The net position of the Austrian banking system in the unsecured money market remains in a range of 1 to 1.5 percent of total assets, while the share of the Austrian banks in the outstanding amount of Eurosystem tender operations has decreased significantly. At the beginning of May 2011, Austrian banks owed €5.7 billion to the ESCB while the pre-crisis average was about €10 billion.

Annex 3. Spillover Risks from the Euro Area Periphery to Austria1

Though spreads on Austrian government debt are higher than before the financial crisis, recent financial tensions in the euro area periphery have not prompted financial markets to price in an extra risk premium for Austria so far. This Annex examines the correlation between sovereign bond spreads for Austria and spreads for the three euro area countries that have received international financial assistance, Greece, Ireland, and Portugal (the EA3). This exercise is a test of whether markets expect that increased risk in those countries would spill over to Austria.

After increasing sharply for a brief period in early 2009, over the past two years the Austrian sovereign spread has been trending downward while EA3 spreads have risen substantially.


10-year Government Bond Spreads in Austria and the EA3

(Basis points)

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Sources: Bloomberg; Datastream; and IMF staff calculations.1/ Simple average for Greece, Ireland, and Portugal.

Changes in financing conditions in Austria seems to be more closely correlated with indicators of global risk appetite, such as the VIX, than with EA3 risk.


10-year Government Bond Spread in Austria and VIX

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Sources: Bloomberg; Datastream; and IMF staff calculations.

To estimate the relationship between Austrian and EA3 perceived sovereign risk more rigorously, we regress changes in sovereign bond spreads in Austria on changes in spreads for similar bonds in the EA3 (and a constant term) during a moving window over 26 weeks. In the regression, global financial market conditions including the TED spread, the VIX, and their interactions with the crisis occurrence are controlled for. The results show that Austrian spreads have become considerably less sensitive to EA3 spreads in recent months, particularly since the spring of 2010, when the international assistance package for Greece was put together. Thus over the past year, financing conditions in the EA3 affected Austria only to the extent they registered on a global scale. This suggests that, while it is unlikely to be affected if market concerns remain confined to the EA3 countries, Austria would likely suffer should these concerns lead to generalized market turmoil.


Dynamic Response of Changes in Costs of Funding in Austria to Changes in Costs of unding in EA31/

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Sources: Bloomberg; Datastream; and IMF staff’s analysis.1/Dynamic response is the regression coefficient from regressing changes in costs of funding in Austria on counterpart changes in other regions together with a constant term based on a moving window over 26 weeks. Costs of funding refer to sovereign bond spreads. Changes in costs of funding are also controlled forglobal financial market conditions including TED, VIX, and their interactions with the crisis occurrence.

Annex 4. Options for Government Expenditure Rationalization in Austria1

International comparison suggests that the following three areas offer particular scope for efficiency gains and rationalization: early labor market exit (Section A), health care (Section B) and subsidies (Section C).

A. Early Labor Market Exit

In Austria, early labor market exit occurs mainly through early retirement, disability, special old-age part-time arrangements, and specific unemployment benefit rules for workers with retirement options in sight. While the statutory retirement age is 65 years for men and 60 years for women (with stepwise equalization to 65 scheduled from 2024 onwards), the average age at which either a disability or an old-age pension is drawn is much lower. For members of the social security system it was 59.1 years for men and 57.1 years for women in 2010. This is the second lowest age in the OECD. Specifically, the average entry age for invalidity pensions was 53.5 years for men and 50.1 years for women, and for old-age pensions it was 62.6 years for men and 59.3 years for women. The latter contributes to rendering Austria’s share of old-age expenditure in GDP one of the highest in the euro area, while the old-age support ratio compares rather favorably (see text figure below).

The authorities consider closing the gap between the statutory retirement age and the average effective pension age a reform priority and have recently enacted the following main measures:

  • Restrictions on the penalty-free early retirement of workers with long contribution periods (Hacklerregelung). In particular, effective in 2011, the price for the frequently-used purchase of imputed contribution years needed to fulfill the minimum insurance period of 40 year for women and 45 years for men was increased; and, effective in 2014, the minimum qualifying age will be raised by two years (to 62 for men and 57 for women, with further stepwise increases to 62 thereafter). Also by 2014, the purchase of imputed contribution times will be abolished. The “Hacklerregelung” was introduced in 2006 and extended in 2008, offsetting earlier attempts to reduce early retirement in the context of the pension reforms of 2003 and 2004.

  • Eligibility criteria for disability pensions were tightened. Specifically, rehabilitation efforts before a pension can be drawn were strengthened. However, the range of alternative occupations against which disability is assessed remains narrow. The authorities are also introducing workplace measures to gradually enhance the prevention of disability cases.


Old-age Spending and Support Ratio, 2009

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Sources: Eurostat; and OECD.

Austria: Disability Pensions, 2000-2010

Citation: IMF Staff Country Reports 2011, 275; 10.5089/9781463902841.002.A001

Source: National authorities.

However, there are still other schemes that may bias incentives towards early inactivity and may now be taken up more frequently. Examples for other possibilities to exit the labor market before the statutory retirement age are:

  • The “regular” early retirement scheme (“corridor pensions”) with eligibility from age 62 (only relevant for men as the statutory retirement age for women is 60);

  • Early retirement pensions for workers with particularly heavy working conditions during part of their work history, with eligibility from age 60 (again, not relevant for women). If they also have a long contribution period, these workers will be able to continue to benefit from the current rules of the “Hacklerregelung” beyond their phase-out date of 2014;

  • Subsidized old-age part time work arrangements, which are accessible up to seven years before the statutory retirement age with a salary cut that is less than proportional to the work-time reduction. The arrangement can be “front-loaded,” i.e. it is possible to work full-time in the first half of, for instance, a five-year period, while reducing the working time to zero in the second half;

  • Extension or increase of unem