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Election May Nudge ‘Complacent’ Austria to Revamp Social System

Austrians may hand the nation’s ruling political coalition its narrowest victory since 1945 as disgruntled voters vent their frustration by backing protest parties supported by a billionaire and a building mogul.

The Central European nation of 8.4 million holds elections on Sept. 29. While polls show Chancellor Werner Faymann’s Social Democrats and People’s Party coalition ally likely to place first and second respectively, declining support may force them to seek a third party to clinch another five-year term.

“There will be an expectation for reform to ensure that Austria’s world-class quality of life and competitiveness are maintained,” Alfred Gusenbauer, Austria’s chancellor from 2007 to 2008, said in an interview. Parties backed by Austrian-Canadian billionaire Frank Stronach and former Strabag SE (STR) boss Hans-Peter Haselsteiner are drawing votes from people frustrated by the status quo, he said.

Even as Austrians enjoy Europe’s lowest unemployment and were named among the happiest people in the world by a United Nations study, citizens are questioning whether that life-quality is sustainable. This has led to discontent with the political order which has been a mainstay since World War II. So-called “grand coalitions” of Austrian socialists and conservatives have held power following two-thirds of national votes in the last 68 years.

Behaving German

“Austria isn’t doing badly but it’s not more than that,” Holger Schmieding, chief economist at Berenberg Bank in London, said in a phone interview. “It’s a bit too self-congratulatory and behaves as if it is Germany but the big difference is that Germany did reforms 10 years ago.”

Like Germany, which handed Chancellor Angela Merkel her third election victory on Sept. 22, Austria’s economy is driven by manufacturing exports, about a third of which go to its northern neighbor. Companies like high-quality steelmaker Voestalpine AG (VOE) and hydro-turbine maker Andritz AG (ANDR) are global leaders in their industries, even if not household names.

Unlike Germany, which began deep reforms to its labor and welfare policies more than decade ago under Social Democratic Chancellor Gerhard Schroeder, Austria has lagged behind in revamping its pension, health-care and school systems.

Austrian pensions consume 12 percent of gross domestic product, one of the highest levels among developed nations, its medical system is one of the world’s most expensive while only producing average outcomes and its schools do little to promote social mobility, according to the Organization for Economic Cooperation and Development.

Aversion to Change

“We’re doing so well that too many have become complacent and now have an aversion to change,” said Hannes Androsch, a former finance minister turned industrialist and investor, who last month published a best-selling book about Austrian politics titled The End of Complacency. Austria needs to “start dealing with our weaknesses right after the election,” he said in an interview.

Austrian debt costs have fallen to record lows, tracking those of Germany. The extra interest the country pays investors to hold Austrian instead of German debt spiked after the current coalition took office in 2008, briefly exceeding the spread paid by Italy, on concern eastern Europe’s economic downturn would harm Austria. The spread rose in 2011 on bank-bailout uncertainty before returning to its more normal level of around 40 basis points above German bunds this year.

Stronach Suffers

While Austria’s budget deficit and debt are lower than the euro-area average, government coffers are being squeezed by the 2008-2012 state bank bailouts for Hypo Alpe-Adria-Bank International AG, KA Finanz AG and Oesterreichische Volksbanken AG. (VBPS) Outstanding capital and liquidity measures extended to the banks are as much as 17 billion euros ($23 billion), or 6.5 percent, of the economy. Hypo Alpe may need another 8 billion euros in the next four years, the government has said.

While Austria has one of the highest total tax levels, the system is inefficient because it taxes labor too much, and land and wealth too little, Karl Aiginger, the head of the Vienna-based Wifo economic research institute, said in an interview. The tax code has also been criticized by the OECD, the European Commission and the International Monetary Fund.

“If you’re on top, the challenges are higher,” Aiginger said. “There are several factors which are not commensurate with that top position.”

Austria’s anti-immigrant Freedom Party and the Green Party will benefit the most from eroding support for the status quo, according to opinion polls compiled by Der Standard newspaper. The Freedom Party may gain 4 percentage points to reach 21 percent of the vote while the Greens may climb 5 points to win 15 percent. Pre-election polls showed voters would favor a three-party coalition including the Greens.

Faymann Leads

Faymanns’s Social Democrats are leading polls with 27 percent, followed by the People’s Party at 23 percent. Team Stronach, which has suffered from low approval of its leader’s debate performances, may win 7 percent, while Haselsteiner’s Neos may struggle to capture the 4 percent needed to enter parliament, according to polls.

“‘The grand coalition isn’t a merger of love, or even of convenience -- it’s a merger of necessity,” Austrian political scientist Anton Pelinka of the Central European University in Budapest, said in an interview. “The opposition parties just have to wait until the two main parties drown themselves.”

Austria’s polls close at 5 p.m. local time on Sunday with early election projection results due shortly thereafter.

To contact the reporters on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net; Jonathan Tirone in Vienna at jtirone@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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