A worker operates in the blast furnace in Voestalpine AG's steel plant in Linz, Austria, on Wednesday, July 24, 2013
Battling to compete: high-strength sheet steel production at the Voestalpine plant in Linz © Akos Stiller/Bloomberg

During the Cold War, Voestalpine’s steel works in Linz, just 40km from the border with the Czech Republic, symbolised Austria’s role as a frontier state. Later, with the collapse of communism, eastern Europe’s economies became fast-expanding markets for Austrian banks and companies.

Today Voestalpine is on a different frontline. The steel company is battling to compete globally at a time when its home market risks losing attractiveness as a place to do business. “Austria is a highly developed stable country with a skilled workforce and a well-educated population — but, on the other hand, politics has lost speed and dynamism in the past 10 years, especially with respect to economic developments,” says Wolfgang Eder, Voestalpine’s chief executive.

From his Linz office, Mr Eder has a view across the steel works, which is the size of 750 football pitches, by the Danube river and originally built by the Nazis in the late 1930s. But these days Voestalpine is looking further afield, investing €550m in a Texas plant to provide raw materials for its European operations. “Austrian business is more international — and has internationalised faster than Austrian politics,” says Mr Eder.

As such, Voestalpine neatly captures the opportunities and challenges of doing business in Austria. Its unlikely success in a high-wage European economy, which has neither a sea port nor large traditional energy resources, highlights the country’s strengths, for instance, in industrial innovation, science and research. However, the frustrations of Voestalpine’s chief executive reflect concerns — shared by many Austrian politicians — that an accelerated reform agenda is crucial to maintain its international appeal.

In the past few years, record numbers of foreign companies have started operations in Austria, says Hans Jörg Schelling, finance minister. “So it can’t be so bad. But it could be better.”

Austria’s economy is expected by the European Commission to grow by a little under 1 per cent this year — respectable for an advanced western economy — although below the eurozone average. Exports have been helped by a weak euro. Unemployment, at less than 6 per cent, remains low. But it is projected to rise in 2015, while joblessness elsewhere in Europe is falling. A shadow has also been cast over Austria by the economic effects on eastern Europe of Russia’s stand off with the west over Ukraine.

Against that background, the costs of doing business in Austria have been thrown into stark relief. Last month, the World Economic Forum reported that Austria had fallen a further two places to 23 in its global competitiveness rankings. Neighbouring Switzerland was first.

As part of its programme of monitoring European economies, the EU’s executive has urged Austria to pursue further structural reforms — including steps to ensure the fiscal sustainability of the public pension system, and to stabilise healthcare costs, which are among the highest in the EU.

The government has embraced a reform agenda, including a tax package that will provide the equivalent of €5bn in relief to taxpayers. But progress in improving Austria’s fiscal performance has arguably been too slow.

A serious constraint has been the continuing scandal over Hypo Alpe Adria, the Carinthian bank Austria was forced to nationalise following the global financial crisis. A lengthy parliamentary inquiry into the collapse which followed an ambitious international expansion and could yet bankrupt the province of Carinthia, is still under way in Vienna.

Austria has not run a surplus on its public finances since the 1960s, says Agenda Austria, a pro-reform think-tank. The “tax wedge” — the proportion of labour costs accounted for by taxes and social security contributions — is one of the highest among industrialised countries, according to the Paris-based Organisation for Economic Cooperation and Development.


The amount of tax relief the government will provide this year

Franz Schellhorn, director of Agenda Austria, says: “Entrepreneurs are not sure that Austria is going to be the place to be in 15 years. In Germany you had a wave of reforms, which gave the sense that the country was moving forward. In Austria, that is not there — people do not think that we’re moving forward.”

A febrile political mood in Vienna has been created by Europe’s crisis over a wave of asylum seekers — many of whom have passed through Austria on their way to Germany or other European countries, such as Sweden. Historically, Vienna has long been a cultural melting pot, but the rightwing Freedom Party (FPÖ) has played on fears of uncontrolled inflows and seen its support surging, including in recent Vienna city elections. The loss of votes for Austria’s two coalition parties — the Social Democrats (SPÖ) and People’s party (ÖVP) — has fuelled tensions in the government.


The sum Austria’s Voerstalpine will invest in a Texas plant in the US

Heinz Fischer, Austria’s Social Democrat president, praises the work of non-government organisations in dealing with the inflows of people and argues that those who tried to make “political propaganda” out of the crisis have been put on the defensive. But without an effective Europe-wide response, “the mood may turn again in the direction of fear and dissatisfaction”, he told the FT.

Yet “migration is part of the history” of Austria since the second world war, according to Gertrude Tumpel-Gugerell, a former member of the European Central Bank’s executive board. In this special report, she writes: “When thousands of Hungarians left their country in 1956, Austrians helped in a spontaneous wave of solidarity. When in the summer of 1968 the dream of Spring in Prague was destroyed, a number of intellectuals moved to Vienna.”

Austria’s frontier role makes neighbouring emerging European economies natural long-term markets, especially smaller industrial companies that form its economic backbone. However, some are eyeing fresh markets.

For instance, at the Voestalpine steel works in Linz, the focus is on developing “downstream” business, including production of high-quality parts for Europe’s automotive industry. Voestalpine also manufactures 120m-long track pieces for high-speed railways, including the Beijing to Shanghai link. This shows Austria’s geographical proximity to eastern Europe is less relevant. “All large and successful companies in Austria are thinking globally, or at least about Europe overall,” says Mr Eder. “This sentimentality about historical links will be lost in a generation.”

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