SECTION III. ECONOMIC TRENDS AND OUTLOOK A. Major Trends and Outlook The June 12, 1994, public referendum produced a strong majority consensus for membership in the EU; Austria will become a member in 1995. Meanwhile, Austria participates in the European Economic Area (EEA), the common economic area between EU and EFTA inaugurated on January 1, 1994, which has adopted 60 percent of all EU regulations. After eleven consecutive years of growth, Austria's economy experienced a mild recession in 1993, contracting at a real rate of 0.3 percent. Growing private and public consumption was insufficient to offset the drop in equipment investment and exports. The Austrian economy is likely to grow about 2.0 percent in 1994, because the overwhelming approval for European Union membership will stimulate public consumption and investment. In addition, exports are growing again. In the medium-term, membership in the European Union, restructuring in response to competition from Central and Eastern Europe, sustained private consumption levels and dynamic export growth should boost economic growth to about 2.0 percent annually. Although the reforms in Central and Eastern Europe have had a stimulative effect, Austria's economy remains tied to Western European economic developments, particularly in Germany. Because of the close economic relationship with Germany, the Central Bank maintains a "hard Schilling" policy, pegging the Schilling (AS) to the German Mark. This policy is not expected to change. Austrian interest rates are expected to decline in 1994. Austria's "grand coalition" Government of Social Democrats and Conservatives faces electoral tests this year. Major economic policy decisions will tend to be deferred, pending the outcome of Parliamentary elections in October and the subsequent formation of a new Government. The new Government will have to deal with an array of economic issues, including cutting the budget deficit, reducing unemployment, implementing social reforms, fostering industrial restructuring and improving Austria's attractiveness for foreign investors. U.S. exports to Austria rose six percent in 1993. Austria should remain an interesting market for U.S. exports and direct investment. Austria's membership in the EU will change the access of U.S. exporters to the Austrian market, as Austria adopts the EU's customs regime and trade policy. Some U.S. exports will be hurt, particularly data processing equipment, while others will benefit. As for U.S. direct investment in Austria, EU accession will have a positive impact, especially for those U.S. firms already positioned to market in the EU. In 1993, Austria's economy contracted 0.3 percent, after growing 1.5 percent in 1992. Increased private and public consumption could not offset the decline in exports and investment in equipment. Exports were adversely affected by recession in Western Europe. A slow economic recovery there and a continued weak German economy will result in a growth rate of less than 1.0 percent in 1994. B. Principal Growth Sectors Principal growth sectors in Austria are the service industry, including tourism, and the high-tech and automotive manufacturing industries. C. Government Role in the Economy The role of the government is important as Austria prepares to join the EU. The Government will have to implement decisions made earlier to prepare Austria for EU membership, including the privatization of state-owned industries and a renewed effort to cut the budget deficit to meet convergence criteria for the planned EU Monetary Union. Although the 1993 recession was mild, lower than anticipated revenues caused the federal budget deficit to balloon from the planned 3.0 percent of GDP to 4.7 percent, undermining plans to cut the deficit to 2.5 percent of GDP in 1994. A major tax reform taking effect January 1, 1994 seems well timed to stimulate the economy and generate revenues, but the 1994 deficit now targeted at 3.6 percent of GDP is likely to reach 4.0 percent. The Government will have to renew its deficit cutting effort in 1995, although it is unlikely that the 2.5 percent deficit goal can be reached before 1997/98. Thus, over the medium-term, the Government's fiscal policy options will be very narrow, with no scope for an expansion of social benefits as in past years and possibly even unpopular and painful cutbacks. Moreover, the new Government will confront the task of cutting the budget deficit in an economic environment offering only moderate growth compared to past years. In shaping its medium-term economic policy making, the new Government will have to deal with not only cyclical movements, but also, to an increasing degree, with the adverse effects on Austria's international competitiveness resulting from the opening of Central and Eastern European markets and currency depreciations in West European competitor countries. Although still relatively protected compared to other OECD countries, Austria's economy has become more liberal and open as Austria prepares to join the EU. Cross-border capital movements and market access for foreign bonds have been fully liberalized. Although the 1993 Business Code still requires all businesses to be registered, no licenses are required, with a few exceptions. Other laws and regulations have been amended to open up the economy. This more liberal economic policy stance will continue under the EU, as protectionist policies, subsidies and the like are dismantled. The Austrian National Bank (ANB) continues to maintain its "hard Schilling policy" by adjusting money supply and interest rates to peg the Schilling to the German Mark at an exchange rate at AS 7 equals DM 1. Thus, in tandem with the Mark, the Schilling continued to appreciate vis-a-vis many other European currencies in 1993. Austria will participate in the planned EU Monetary Union. The EU will have little impact on Austria's monetary policy. The Austrian National Bank has indicated that the Schilling will not be pegged to the European Currency Unit (ECU) should the ECU prove to be softer than the Mark. Interest rates declined significantly throughout 1993, with the rediscount rate dropping from 7.875 percent in January to 5.25 percent in December 1993 and further to 4.50 percent during 1994. Interest rates in general are expected to continue to decline modestly in 1994. Austria's foreign exchange regime is fully liberalized. D. Balance of Payments Situation Estimates for the 1994 balance of payments show a trade deficit of 97 billion Austrian schillings, a tourism surplus of 61 billion schillings and a surplus of 30 billion schillings due to other transactions and services. The estimated current-account balance for 1994 shows a deficit of six billion Austrian schillings. E. Trade and Investment Barriers Trade Barriers: The United States continues to enjoy good trade relations with Austria. There are no major political, cultural, tariff, non-tariff or other barriers that inhibit or restrict trade in U.S. goods and services. There are some administrative or technical barriers, which are subject to interpretation and can be considered non-tariff barriers. Operating instructions have to be in German, and certain products have to meet Austrian standards, which are requirements but not necessarily barriers to be redressed by negotiation or reciprocity. Investment Barriers: The Government has a special interest in any foreign investment which creates new jobs in high-technology sectors, improves productivity, or restructures and strengthens traditional industries without having a negative effect on the environment. There are no major investment barriers in Austria, but relatively complicated procedures for new investment projects exist which may be a burden for small investors. This results mainly from inflexible attitudes of provincial politicians and members of "green" movements. Large investors who establish plants in traditional industrial areas are rarely affected. F. Labor Force Austria's labor scene is tranquil, with only three strikes engaging not more than 0.6 percent of the entire workforce (vocational and technical school teachers) in 1992. The peaceful labor scene is often attributed to cultural and institutional factors, such as the "Social Partnership," the informal consensus building mechanism which brings together representatives of labor, business, agriculture and government to establish Austrian socio-economic policies. The partnership is credited with minimizing the level of strikes and for spreading the country's increasing wealth among the diverse social sectors. Since the national economic growth rate of 1.5 percent in 1992 was below the 3 percent real growth the previous year, the Austrian Trade Union Federation (OGB) was less aggressive in its wage demands, securing a 5.6 percent average pay hike for workers, compared to a 6.5 percent gain in 1991. Unemployment rose from 5.8 percent to 5.9 percent annually. (Use of OECD formula would yield an unemployment figure of 3.8 percent.) Austria can be expected to maintain the exceptionally smooth industrial relations it has enjoyed for several decades. Increasing competition following anticipated entry into the European Union and more open relations with Eastern Europe may weaken Austrian labor's bargaining position. Unions hope that higher wages through economic growth and a more highly trained and skilled work force will compensate for downward wage pressure generated by increased competition. The influx of workers from Eastern Europe remained a major issue for the OGB, but 1990 legislation restricting the number of foreign work permits went a long way toward placating Austrian workers fearful of low-wage immigrant competition. Organized labor supports broad social objectives. Among the joint goals are pension and health care reform. Stalled reforms and reduced trade union presence in the cabinet are to some extent indicative of labor's declining influence. Twenty percent of the 183 deputies in the national assembly are affiliated with the labor movement. Nevertheless, a drop in OGB membership from 55.1 percent of the work force in 1991 to 53.4 percent in 1992 probably indicates a longer term trend resulting from changes in the nature of Austria's economy and work structure. The number of jobs increased by 0.8 percent to 3,055,810 in 1992, compared to a 2.0 percent increase in 1991. A decrease of 0.4 percent was predicted for 1993. In the manufacturing sector, slack demand led to a net loss of 18,400 jobs. Job losses occurred particularly in the mining, metal-working and leather-making industries. These were offset by increases in other sectors. The number of jobs increased by 24,000 overall. Most of the new jobs were created in the service sector, particularly in trade, tourism, the public sector and in the construction business. Unemployment increased by 0.1 points to 5.9 percent in 1992. Using an OECD-like formula introduced by Austrian authorities in February 1993, Austrian employment figures for 1992 were 3.8 percent (WIFO calculations) or 4.0 percent (Chamber of Labor calculations). According to this method, 1991 unemployment was 3.5 percent (WIFO and Chamber of Labor calculations). The year-to-year increase in unemployment was limited by a restrictive policy on foreign labor. Annual work permits for foreigners are no longer extended automatically. In 1991, the number of foreigners hired grew by 21.6 percent. In 1992, this figure was 6.7 percent. Legislation in effect in 1991 limited foreign work permits to 10 percent of the labor force. In 1991 the number of foreign workers was 8.6 percent of the total work force. Refugees replaced immigration from eastern and central Europe as the dominant labor-related theme in 1992. The OGB continued to participate with the Government and relief organizations in providing shelter for Bosnian refugees. At the same time, the Government and the OGB were pressed by the public to allow part of the 70,000 refugees to work in Austria by issuing extra work permits for them. Overall, the number of registered foreign employees grew from 256,700 in 1991 to 273,000, or 9 percent of employed workers, in 1992. This does not include an estimated 100,000 foreigners working illegally in Austria, 40,000 to 60,000 of whom reside in Vienna. The overall number of foreigners living in Austria legally in 1992 was 562,037, a 45 percent increase since the Iron Curtain fell in 1989. Statistically, the number of jobs available has decreased since 1991. While 374 job seekers competed for 100 jobs in 1991, the figure increased to 438 competitors in 1992. The slower job growth affected women more than men. As in past years, the age group most affected by unemployment was 50 and above. Unemployment among workers of this age group increased by 21.3 percent. Overall, 63 percent of all jobless in 1992 were older than 50. The inability of the labor market to respond adequately to structural changes in the Austrian economy in part accounts for the continuing unemployment problem. The shifting of production of domestic manufacturing industries, such as textiles, to eastern European states has had a regional impact in eastern Austria. A "skills mismatch" and a reluctance to move has made it difficult for workers in such regions to take on jobs elsewhere. Under Austria's system of collective industry-wide contracts, a wage agreement negotiated by a union covers workers for that entire industry, non-unionized as well as unionized. Some critics of the OGB's wage bargaining policy argue that it again failed in 1992 to narrow the growing gap between high-income and low-income sectors. Since unions in Austria are based on industry or commercial affiliation rather than occupation or skill, a carpenter or machinist in the oil or chemical industries probably earns substantially more than his occupational counterpart in the textile or tourism industries. The OGB has made modest progress in raising annual minimum wages to AS 140,000 (US$ 12,000). There is no minimum wage in Austria, but salary structures arrived at through industry/ union collective bargaining have nationwide force of law throughout the industry. Unit wage costs in the manufacturing industry continued to rise, increasing by 2.2 percent in 1992 as compared to 1.6 percent in 1991. Labor costs compared with Austria's major trading partners in Western Europe and the United States rose by 0.9 percent (-3.0 percent in 1991). In 1992, Austrian labor costs averaged AS 232.85 (US$ 21.18) per hour in the manufacturing sector. In 1991, the average was AS 219.0, or US$ 18.80. Although wages in Austria are generally considered lower than in most other industrialized western European countries, Austrian employers' organizations point to the high percentages of employer-paid contributions that are part of overall labor costs. A February 1993 study by the Federal Economic Chamber - which represents employers - calculated these costs for Austrian employers at up to 102 percent of basic wages. Calculations by the Chamber of Labor, on the other hand, indicate supplementary costs including direct benefits, vacation, Christmas bonuses and severance payments amount to no more than 55 percent. The Chamber of Labor argues that even with an estimated 25 percent supplementary wage cost for "job absence," total supplementary wage costs are no higher than 79.6 percent. The Federal Economic Chamber's higher figure results from "disproportionately high estimates for job absences" and "voluntary employer-paid benefits," the Chamber of Labor argues. Links between the Austrian Trade Union Federation and the Austrian Government are traditionally very close. Cabinet members and key political actors are frequently union members, but the practice of nominating leading trade union officials to cabinet posts is no longer taken for granted. Many analysts see the loss of influence by organized labor as an inevitable outcome of a prosperity which is gradually replacing collectivist working class values with a middle class sense of individualism. Women comprise 41 percent of the working population, and 64 percent of women between 15 and 60 hold jobs. Despite substantial progress toward economic equality, the average wage earned by women remains 21 percent below that of working men. About 20 percent of women who are employed hold part-time jobs. A comprehensive legislative package securing equal rights for women went into effect January 1, 1993. A key element in the package is the inclusion of "equal pay for work of comparable worth." Other legislative cornerstones include monetary compensation to redress on-the-job discrimination, fines for sexual harassment and improved conditions for job re-entry after childbirth. A ban on night work for women remains in effect. G. Major Local & Third Country Competitors in Specific Sectors The following is a list of competitors in major industries: Industry Competing Nations Telecommunications Austrian companies owned by Scandinavian countries and Germany Electronic Components Germany, Japan, the Netherlands Aviation France, Germany Plastic Materials and Resins Italy, Far East Industrial Process Control Equipment Germany, Great Britain Security and Safety Equipment Germany, Western Europe Industrial Chemicals Austria, Germany, Western Europe Lab Equipment Austria, Germany Medical Equipment Austria, Germany Pollution Control Austria, Germany, Denmark, Switzerland Drugs/ Pharmaceuticals Austria, Germany, Switzerland, Great Britain H. Infrastructure Situation Austria has a completely modern, highly advanced system of communication and transportation. I. Major Infrastructure Projects Underway Telecommunications. In January 1993, the GSM (Global System for Mobile Communications) was established at the Vienna International Airport on a test basis. The GSM is a pan-European digital mobile radio communications network which will be operating across borders. The infrastructure is planned for use in Vienna beginning in the fall of 1994. This network will be connected to the digital exchange system OES in Austria. The Austrian PTT will invest $12 million in the first phase of construction. This pan-European network will create a highly competitive market, producing and increasing amount of cheaper, high quality equipment. Transportation. The Slovak Government is considering the sale of a 50 percent share of the Bratislava airport to the Austrian Flughafen Wien AG. Discussions could lead to the Austrian firm's investment of Austrian Schillings 200 million ($17,000) towards modernizing Bratislava Airport and training its employees. The Government is working on a rail project in the province of Tyrol to double capacity along part of Austria's most congested train route, the lower Inn River valley. The project will add two rail tracks to the existing two tracks, and will include some tunneling. Cost estimates for the project varies between USD 1.2 to 2.3 billion, and the Government of Austria expects financial help from the EU. Power Stations. Donaukraft AG has begun construction on the Kraftwerke Freudenau, a hydroelectric power station at the Danube in the Vienna area. Construction began in fall 1992 and is still underway. The firm estimates that the project will take 58 months to complete and will cost a total of Austrian Schillings 13 billion ($1.17 billion). Natural Resources. Negotiations for the construction of an oil and gas pipeline connecting Austria and the Slovak Republic have been delayed by a dispute between the companies concerned.