Reflective times: as central Europe has grown up, the city’s relationship with rival hubs have altered
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Vienna’s long-held ambition to be the business hub for central Europe has taken some hard knocks over the past 12 months. While it has not ended the dream, businesses and policy makers have been forced to redefine what the goal should be.

Since the collapse of communism in the neighbouring countries of central and eastern Europe (CEE) in 1989, Vienna has seen itself as the natural headquarters for international companies seeking to enter the region, as well as a financial services hub for CEE countries as they opened up to the rest of the world. Vienna developed banks, insurance companies, asset managers, pension funds, lawyers and other advisers who were experts in the region. But as central Europe has grown up, Vienna’s relationship with rival hubs such as Warsaw has altered.

“We have established sound relations based on co-operation,” says Michael Häupl, Vienna’s long-serving mayor. “The role that Vienna plays in the process has changed. We are now one of many equal partners.”

Michael Höllerer, managing director of Raiffeisen Capital Management, says the big hub dream is over but adds: “Vienna is still the gateway. We have some functions that are still essential for doing business in CEE.”

Wiener Börse (the Vienna stock exchange) and the two big locally owned banks, Erste and Raiffeisen Bank International (RBI), have led Austria’s charge into the region but in the past 12 months all have suffered serious setbacks.

In September the stock exchange’s planned merger with its main rival Warsaw to create a dominant regional player was torn up by the Polish exchange’s new management. Vienna now sees its role as more of an IT and data service supplier than as a stock market for the region.

Erste and RBI have had to trim their expansion plans after running into bad loan problems with some of their regional operations at the same time as regulators are demanding higher capital buffers. Erste has ruled out further acquisitions for 2015-16, while RBI is selling its Polish and Slovenian subsidiaries. “Austrian banks are redesigning their strategy to concentrate on core markets,” says Andreas Ittner, vice-governor of Austria’s national bank.

Vienna’s self-esteem also took a knock over the collapse of Hypo Alpe-Adria in 2009. In March the government halted payments on €11bn of the stricken bank’s debts and warned that it plans to be the first country to use the EU’s new “bail-in” mechanism to force creditors to share the pain. This has sparked lawsuits and rating downgrades for Austrian banks.

“The whole Hypo case has been very damaging to the reputation of Austria and harmful to the financial system of Austria,” says Andreas Treichl, chief executive of Erste, though he adds that it has also led to big improvements in local banking regulation.

These setbacks have come at a time when economic growth and business confidence remain weak because of the poor performance of Austria’s main markets in the eurozone and the CEE region, and which has not been helped by events in Ukraine. After initially weathering the storm, “the economic crisis has caught up with Austria,” says Mr Häupl.

GDP grew at 0.4 per cent in 2014 and this year the OECD predicts it will grow 0.6 per cent, with investment particularly weak. The forward-looking purchasing manufacturing index for May showed that Austrian manufacturing companies’ confidence was below the Eurozone average, at 50.3 compared to 52.2. Real wages have been stagnant or falling and unemployment has been creeping up from a low base, with the OECD forecasting it will average 5.8 per cent this year.

This weakness has led business leaders to redouble their criticism of the ruling coalition of the centre-left Social Democrats and centre-right People’s Party for not moving faster to improve the business environment.

The government has finally agreed to cut the country’s high income taxes from January next year, which could help boost economic growth to 1.9 per cent in 2016 and 1.8 per cent in 2017, according to the central bank.

However, to help pay for this, taxation for high earners and on capital gains and dividends was raised.

“There is a dangerous tendency not to take account of the kind of things that are important for multinational companies and their managers,” says Karl Sevelda, RBI chief executive. “If Vienna wants to remain a hub for companies in the region it has to be careful not to lose its advantages compared to CEE countries,” he adds.

Banks are also still angry about the tax on the sector and criticise the overall complexity of the taxation and regulatory system. “Today Vienna is becoming less attractive for banking and insurance,” says Mr Höllerer. “We have high administrative burdens, high taxes. It is really a problem.”

Nevertheless Vienna is still very successful at attracting investors and company headquarters, drawn in part by a quality of life that is the best in Europe, according to Mercer, the human resources consultant. Invest in Austria, the country’s foreign investment promotion agency, handled a record 276 investment projects last year, 131 of which came to Vienna.

Russians in particular have made Vienna their European base, attracted by its relative proximity to Moscow and the way they can blend in. This is transforming the city, with companies and the Viennese themselves moving out of the historical centre to purpose-built commercial and residential developments such as the new 25-hectare Quartier Belvedere, leaving wealthy foreigners such as Russian oligarchs to buy apartments at high prices.

The growth of Vienna’s population, which is expected to hit 2m in 2030, is causing social strains and zoning problems but has given the city a renewed sense of dynamism and lowered the average age of its inhabitants. Vienna university is the biggest German-speaking university in the world and the city is home to a wave of technology start-ups as it aims to reinvent its industrial base.

The city seems to be in the midst of transforming itself into a magnet for migrants and companies who are looking to expand beyond Austria’s borders — and who are looking both east and west.

Copyright The Financial Times Limited 2017. All rights reserved.
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