Austria has had some lucky breaks and has used them with brio, says Barbara Beck (interviewed here). But what should it do for an encore?

The sound of success

The sound of success | Special report | The Economist

programmatic_workdayblocklist

neg_omd_exclusion

gs_interest_frequent_travelers

ibm_blacklist

chanel_neg

eu_general

neg_dit

gs_politics_misc

gs_politics

ssga_euro_elections_resiliency

fidelity_investment

gv_safe

The American-led financial order is giving way to a more divided one

Worlds apart

The global financial system is in danger of fragmenting

How crises reshaped the world financial system

The movement of capital globally is in decline

That spurs competition, innovation—and cross-border frictions

National payment systems are proliferating

Special report

Remember, remember

Sleeping with the enemy

Ungrateful Europeans

Mustn't grumble

A very superior rustbelt

Be happy, stay happy

gb_safe

gb_safe_from_high

gb_safe_from_high_med

pos_goldman_inclusion_2024

pos_israel-hamas_war

gs_genres

neg_fidelity_gmo

neg_morgan_stanley_2019_neg_keywords

gs_books

gs_entertain_music

HEISS umfehdet, wild umstrittenLiegst dem Erdteil du inmitten,Einem starken Herzen gleich(Hotly fought over, fiercely contested,You lie at the centre of the continent,Like a strong heart).

HEISS umfehdet, wild umstritten Liegst dem Erdteil du inmitten, Einem starken Herzen gleich (Hotly fought over, fiercely contested, You lie at the centre of the continent, Like a strong heart).

The words of the second verse of Austria's post-war national anthem, set to music that may or may not be by Mozart, at first seemed to miss the point. They were written in 1947 by an Austrian poet, Paula von Preradovic, because the old anthem had been pinched by the Germans. They would have been right for the pre-1918 Habsburg empire, but the world had just been divided by the iron curtain, leaving little Austria squeezed up against the Western side of the border with the communist East. It was at the centre of nowhere. 

 The anthem's prophecy took 40 years to come true, but it now seems spot on. The end of the cold war in 1989 and the recent entry of many of Austria's eastern and southern neighbours into the European Union have put the country back at the heart of the continent. That has proved an excellent place to be.

 Austria has benefited more from Europe's opening to the east than any of the other older EU members, in several ways. First, its trade with central and eastern Europe (CEE) has soared over the past decade and a half, helping to reduce its trade deficit to manageable proportions. Second, and more important, Austria's stock of direct investment in central and eastern Europe zoomed from next to nothing in the early 1990s to nearly €19 billion ($28 billion) in 2004, equivalent to 8% of Austria's GDP (see chart 1). 

 The kind of business Austria is doing in the region has also changed. Whereas a decade ago much of its investment was concentrated on manufacturing, now the biggest chunk goes on financial intermediation, property and services, suggesting that Austrian firms are doing lots of new kinds of business there. Austrian banks, in particular, are spreading their wings to the east (of which more later). 

 All this has meant higher growth and employment in Austria itself than would otherwise have been possible. In a paper published last year, Fritz Breuss of Austria's WIFO economic research institute attempted to quantify the effects on the Austrian economy of the eastern opening, together with those of Austria's EU entry in 1995, EU economic and monetary union in 1999 and the entry of ten new EU members in 2004. Some of the effects overlap, but in broad terms Mr Breuss reckons that in the past decade and a half the opening to the east has boosted Austria's real GDP by around 3.5%; that over the past ten years Austria's accession to the EU and its membership of the euro zone have added an extra 4.5%; and that over the next ten years the 2004 EU enlargement will yield a further 2%. The future gains may turn out to be bigger, because the new EU members are growing faster than the older ones. Further boosts might come from Bulgaria and Romania, which joined at the beginning of this year, and perhaps from other Balkan countries if and when they get in.

 Why has Austria been so much more successful in the region than other west European countries? It helped to be next door, even though after nearly half a century of separation the transport links across the old East-West borders were in a sorry state. It also made a difference that Germany, a natural competitor, was preoccupied with its own unification. Austrians reckon that “not being Germany” helped because their big neighbour can seem overbearing to smaller countries (including, sometimes, to Austria). 

But probably the biggest part of the explanation lies in Austria's own extraordinary history. For most of the past millennium it was a much bigger and more powerful country than it is now, as well as a more multilingual and multicultural one. Vienna still has the feel of an imperial capital, much grander than seems appropriate for a country with a mere 8m people. It is impossible to understand Austria today without knowing something of its past. 

During 640 years of Habsburg rule, from 1278 to 1918, the country waxed and waned as its borders shifted back and forth across Europe. There were plenty of battles, but also acquisitions by other means: some Habsburgs married well. The famous saying “Bella gerant alii, tu, felix Austria, nube (let others wage war; you, fortunate Austria, marry)” referred to the marital habits of the 15th-century Holy Roman Emperor Maximilian I and his family.

 In 1867 the emperor of Austria also became king of Hungary, in a dual monarchy known as “k.u.k.” (kaiserlich und königlich, or imperial and royal). In his book “The Man Without Qualities”, Robert Musil, an early-20th-century Austrian writer, satirised the country as “Kakanien”, a place stuck in a time warp, redolent of bureaucracy and twirly moustaches. Mention of Kakanien still makes Austrians smile.

In 1867 the emperor of Austria also became king of Hungary, in a dual monarchy known as “k.u.k.” (kaiserlich und königlich, or imperial and royal). In his book “The Man Without Qualities”, Robert Musil, an early-20th-century Austrian writer, satirised the country as “Kakanien”, a place stuck in a time warp, redolent of bureaucracy and twirly moustaches. Mention of Kakanien still makes Austrians smile.

 Austria's history reached its nadir in the first half of the 20th century. The treaty of St Germain after the first world war reduced it from a cosmopolitan empire of 50m to a small, German-speaking republic of 6.5m. The shock was immense, and was soon to be amplified by the Great Depression. The resulting political turmoil led to the catastrophic Anschluss (absorption into Germany), which wiped Austria off the map and turned it into a German province, the Ostmark (see article).

Austria's history reached its nadir in the first half of the 20th century. The treaty of St Germain after the first world war reduced it from a cosmopolitan empire of 50m to a small, German-speaking republic of 6.5m. The shock was immense, and was soon to be amplified by the Great Depression. The resulting political turmoil led to the catastrophic Anschluss (absorption into Germany), which wiped Austria off the map and turned it into a German province, the Ostmark (see <a href="https://www.economist.com/special-report/2007/11/24/remember-remember">article</a>).

 After the second world war, having regained its sovereignty under its 1955 state treaty with the Allies, Austria became more reconciled to its reduced role in the world. Although its links with its former empire had been weakened during the Nazi period—and became even more tenuous during the cold war—it continued to take a special interest in its eastern and southern neighbours and thought of itself as a mediator between East and West.

 The people on the other side of the border remain close cousins. Vienna's telephone book is full of names that hail from farther south and east, and many Austrian citizens still speak the languages that go with the names. It is said that half of them have relatives in the countries of the old Habsburg empire. They share the same culture and find it easy to do business together. They work just as hard as the Germans or the Swiss, but they are also more relaxed and less pernickety. 

 For the moment, the main difference between Austria and its neighbours to the south and east is that it is vastly richer. In fact, as the fourth-richest country in the EU measured by GDP per person at purchasing-power parity, it is better off than most of its western neighbours too. In recent years it has been growing faster than many of them, and it is set to maintain that lead for the next few years. 

 Twenty-first-century Austria seems comfortable in its skin. It has come to terms with being small and is beginning to see the advantages. Within the EU it may not carry the clout of a Germany or a France, but there are plenty of other small members with which it can make common cause. Its neutrality, forced on it after the second world war, has proved not only convenient but sufficiently flexible to suit changing circumstances. It generally gets on well with its western neighbours. Even an old argument over South Tyrol, a German-speaking province that was handed to Italy after the first world war, has been resolved. Relations with its eastern neighbours are not only mostly cordial but have also proved highly profitable. 

A predominantly Catholic country, Austria wears its faith lightly. When the pope came to visit in September, the crowds were welcoming but not ecstatic. Some commentators described him as “cool”. Austria's stance on social issues is relatively liberal: abortion and homosexuality were legalised in the 1970s, though gay marriage has yet to arrive. The country is proud of the fact that it recognised Islam as an official religion back in 1912. 

 Austria's system of proportional representation, which tends to produce coalition governments and often grand coalitions, may lack the cut and thrust of a first-past-the-post system, but it appears to reflect the wishes of its people. Its tradition of “social partnership” between employers and employees may seem opaque, but it has ensured a long period of social peace and moderate pay settlements. Its welfare state, though not as lavish as those of the Nordic countries, keeps its citizens fairly comfortable in adversity and allows many to achieve their ambition of “retiring well” (on 90% of previous net income for the average earner). The once excellent education system is showing signs of wear and tear, but remains good in parts.

 Trains, trams and buses generally run on time. The country's beautiful scenery of mountains, lakes and forests, looked after by an environmentally conscious people, offers a high quality of outdoor life, as well as bringing in lots of well-heeled tourists. And Austrians have no need to worry about nuclear mishaps on their soil: the only nuclear power plant, at Zwentendorf, was mothballed nearly 30 years ago. (Unfortunately neighbouring countries such as the Czech Republic have failed to take similar precautions.)

Indoor life benefits from generous state spending on culture, not just on Mozart and the Johann Strausses but experimental stuff as well. On a more quotidian level, Austrians are among Europe's most avid newspaper readers (though some of the mass-circulation press is unedifying). 

 Does all this make Austria an “island of the blessed”? Coined in 1971 by an earlier pope, Paul VI, this has become a—slightly ironic—catchphrase for everything that is good about the country: affluence, social justice, a harmonious society. Those blessings remain, but, as this special report will argue, Austrians should not take them for granted. In an era of globalisation there is no such thing as an island: a subprime crisis in America or a commodity boom set off by China will reverberate in the most remote Alpine valley, and new competitors pop up from nowhere. Austria needs to keep working at its luck. That is something its politicians should bear in mind. 

Weekly insights into a continent that is reshaping our world

Our weekly newsletter will help you make sense of the sweeping changes taking place across Africa

Exclusive insights into a continent that is reshaping our world

Analysing Africa

Get to grips with a region where capital, climate and geopolitics collide

Go deeper with our Middle East newsletter. Every week our correspondents delve into the political, social and economic stories of a region that is rarely out of the news.

Sign up to our Middle East newsletter

Middle East Dispatch

Follow the action in Latin America, from the depths of the Brazilian Amazon to the Mexican-American border

Every week our correspondents share insights on politics, economics and business from an increasingly complex region

Stay informed with our weekly Latin America newsletter

El Boletín

A sharp round-up of the most important US political news

Sign up for updates from our correspondents and data journalists, poll tracker and election-forecast model as the 2024 race unfolds

The US in brief

Inside Europe, from the front lines in Ukraine to the corridors of power in Brussels

Stay informed with our weekly Europe newsletter

Café Europa

Understand a vast and complicated country that will increasingly shape the future

Stay informed with our weekly India newsletter

Essential India

The best of The Economist’s defence coverage, in one place

The War Room

A weekly conversation about culture. Because culture is a serious business

Exploring trends and connections across entertainment, the arts and politics

Broaden your perspective with our weekly culture newsletter

Plot Twist

Analysing the challenges facing Britain and what needs to be done to overcome them

Stay informed with our weekly Britain newsletter

Blighty

Understand what the world makes of China—and what China makes of the world

Stay informed with our weekly China newsletter

Drum Tower

Your essential guide to global business and technology

From supply chains to semiconductors, The Bottom Line newsletter has you covered

Need to track the megatrends shaping business and technology?

The Bottom Line

Catch up quickly on the global stories that matter

Sign up to enjoy a mind-expanding mix of stories, delivered six days a week

Catch up quickly on the stories that matter

The World in Brief

A behind-the-scenes look at how we chose and designed this week’s cover

How we chose this week’s cover image

Cover Story

Exclusive insight from our correspondents in America

Exclusive insight and reading recommendations from our correspondents in America

Checks and Balance

A weekly fix of our mind-expanding science coverage

Curious about the world? Enjoy a weekly fix of our mind-expanding science coverage

Simply Science

Climate-change analysis that you won’t read elsewhere in The Economist

The Climate Issue

Expert analysis of the biggest stories in economics and markets

Money Talks

Taking you behind the scenes of our data journalism

Off the Charts

Long reads and life from 1843 magazine

The Extraordinary Story

The very best of our journalism, handpicked for you each weekday

A daily newsletter with the best of our journalism

Handpicked stories, in your inbox

The Economist today

Highlights from the latest weekly issue, introduced by our editor

The sound of success

Austria has had some lucky breaks and has used them with brio, says Barbara Beck (interviewed here). But what should it do for an encore?

From the November 24th 2007 edition