What Austria’s turbulent past tells us about the current economic and financial crisis

In 1930, unemployed Viennese protest in front of the Vienna State Opera after the economy crashed and inflation induced mass uncertainty. ©AP Photo
In 1930, unemployed Viennese protest in front of the Vienna State Opera after the economy crashed and inflation induced mass uncertainty.

©AP Photo

In 2012, ratings agency Standard & Poor’s lowered Austria’s overall credit rating to AA+, citing “significant weaknesses” in the country’s financial system.  The outlook was also weaker than expected and several banks, including the Erste Bank and Raiffeisen Zentralbank, had their ratings lowered to BBB+, a significant blow for a population and an economy that prides itself on its stability and ability to repay debts.

In fact, Austrians like to be as debt-free as possible. They love cash and hate credit cards – attitudes that can surprise internationals from countries where someone with no credit rating is regarded with suspicion. One secure investment for Austrians has always been property; the other has been the passbook account. Most Austrians still have very little in the way of retirement savings, according to sociologist Rainer Münz. It may be that they don’t think it’s worth it.

Consider the country’s history. Having had five currencies over the last century – the Habsburg Krone, following WWI the first Austrian Schilling, the German Reichsmark, the second Austrian Schilling (ATS) of the post-WWII Republic, and since 2002, the euro (€) – Austrians worry about how to keep their savings safe. In the transition to the common currency, gloomy predictions of inflation were common, and as it turned out, not unjustified: A price of 40 ATS often became simply €4, when at 13.79 ATS to €1, it should have been €2.90. It was easier to just move the decimal point, or “round up.” In the first few months, prices rose some 2.5%, although it felt like more. Furthermore, Austrian salaries failed to keep pace with the rest of the eurozone.

Volatility, Instability and Crisis

Following the armistice in November 1918, the tiny new Republic of Austria found itself in a dangerous currency crisis. The war had used up all of Austria’s reserves, and those who had invested in war bonds could not be repaid. This was “the grand seminal catastrophe of the twentieth century,” American diplomat George Kennan later wrote. For Austria, this was true not only in political but also in economic terms, as the young Republic relied on loans from its own National Bank to pay its debts.

These self-financed loans exacerbated an already strong decline in the -Krone. Four years later the currency in circulation had exploded to 14,000 times the prewar level. Local communities printed their own “inflation money,” scrip that was viewed as having more value than the national currency, while the Republic printed masses of paper money. The economic crisis reached its pinnacle in 1922 with a 2,500 percent inflation rate. In early 1923, the hyperinflation was brought to a halt with loans from the League of Nations and further alleviated by the introduction of the Austrian Schilling in 1924. Austria’s economy remained volatile , but the -hyperinflation of the 1920s was not the worst Austria would see. The real breakdown in the system occurred in 1931 with the collapse of Austria’s Creditanstalt Bankverein, Central Europe’s largest bank, which led to the financial collapse of all of Central Europe and to the major economic depression of the 1930s in Europe that had already begun in the United States in late 1929.

Then in March 1938, when Austria was annexed by Germany and the Reichs-mark was introduced, the National Socialists appropriated Austria’s gold reserves and took them to Berlin. This gold remained in Germany throughout World War II until 1945 when a portion was returned by the Allies to help restart the Austrian National Bank, reintroduce the Schilling, and boost the struggling post-war Austrian economy. The reintroduction of the Schilling was one of the great successes of the post-WWII era, and Austrians developed an immense love and trust in their new currency.

Turbulence then and now 

This volatile period in Austria’s past helps us better understand Austrian reactions to the current economic and fiscal insecurity that has plagued European markets since 2008.

how's austria doingThe beloved Schilling was never fully replaced by the euro. From the start, there was widespread mistrust, and many Austrians felt they had exchanged a strong currency for a weaker one. Subsequent debacles in the Irish, Spanish and Greek economies, followed by the worldwide financial crisis and the ensuing uncertainty in 2008, made Austrians even more wistful for their old currency.

This left Austrians undecided about where to put their hard-earned money. If you don’t trust the euro, where do you invest your funds? The majority have reverted to the old reliables of property and savings, while some have chosen precious metals. Uncertainty remains, however.

Other banking crises, too, have left their impact – like the rotten deals of BAWAG and Hypo-Alpe-Adria, not to mention the spectacular Bernard Madoff-Medici Bank scandal of 2011, in which Austrian collaborator Sonja Kohn, from her suite at the Sacher Hotel, channeled nearly half of the €51 billion in lost assets. A 25% share in Kohn’s Medici Bank was held by Bank Austria, which had helped her acquire her banking license. She was, the prosecutor said, “Madoff’s criminal soulmate.”

In the case of the Hypo-Alpe-Adria, wild expansion into the Balkans in the 1990s, followed by bad loans, and poor due diligence, led to extreme losses in one of the largest banking scandals in post-war Europe. The bank was sold by the state of Carinthia to Bayern LB in 2007 and then the financial crisis hit, causing massive losses. In 2009, Austria bought Hypo-Alpe-Adria back from Bayern LB for a token amount and nationalized it. The Republic of Austria has reportedly already poured more than €5 billion into the ailing bank

© SPÖ Presse und Kommunikation
© SPÖ Presse und Kommunikation

with the rescue expected to cost taxpayers as much as €3 billion more. Kurt Bayer was working for the European Bank for Social Development at the time. “Everyone said that Hypo-Alpe-Adria was doing business the other Austrian banks wouldn’t touch. There was no due diligence. Where was the financial market authority during all of this?” he wonders. “Directors were appointed by the major political parties; everything was based on Proporz, and they just looked the other way. Nowadays, you just cannot afford to do this anymore.”

As a result, “civil society is now stronger,” Bayer confirms. Still, “there is no public debate, no public discussion. Laws are written in the ministries, not in the parliament. Politicians use civil servants to advance their interests. And the money just disappears within a complex system.”

This hardly bolsters consumer trust in the banking industry, together with the roller-coaster ride of banks elsewhere in Europe, their cutting costs to -offset shrinking earnings, and the attempt by Bank Austria/UniCredit’s to unload its retirees into the Austrian state-run pension system to free up capital.

However, says Rainer Münz, Austrians really have little to worry about. Currently the government can borrow money at 0%  interest to finance a recovery and as long as inflation stays low, the economy will eventually come out of its slump. It is just a matter of holding on, says Münz. “This situation is not alarming. If interest were higher than inflation, then it would be alarming.” After all, Great Britain experienced a thirty-year recession after World War II, he says, and while the country did not thrive, it also did not go under.


Safeguards against Corruption

While few are alive today who remember the collapse of 1931, it remains in the national consciousness. Austrians are aware that calamity can strike again. Is it all a house of cards? The answer seems to depend on whom you talk to.

After 50 years of researching the Austrian market, anti-corruption expert Bayer sees the corruption as endemic to a system that is closely knit and protective. “The structure in the public sector is still that of the old Grand Coalition,” says Bayer. “They make all these deals. They don’t make any radical decisions. That explains some of the risk aversion of politicians and also of the population.”

On the one hand, he says, “a system of nepotism is more prone to corruption. On the other, it is consensus-oriented, which has advantages in tough times. In the long run, this is a positive thing.”

The situation has improved under the European Union. “The EU helps to get away from this insider dealing,” he says. “But you can still see it in the Salzburg case or the Hypo-Alpe-Adria deal. Modernization here has not been very successful.”

In the Salzburg case, a local civil servant, Monika Rathgeber, misappropriated funds and invested in dodgy schemes to help local communities and increase available resources, lying about their use – significant, says Bayer, “because it wasn’t really corruption.”

He puts it succinctly, “There are a lot of unsolved problems ahead, essentially budgetary tricks to circumvent EU rules. These are not considered government debt. Nobody is willing to clean it up. It’s not a very courageous system.” The two major political parties simply “try to prevent the other party from being successful and winning anything.”

The End of Isolation

For the optimists like Rainer Münz, the crisis is just a passing phase. For the pessimists like Kurt Bayer, it could become a lot worse. Liberal market rules, say some, make it easier for those with criminal intent to manipulate the system.

“Austria is not an isolated country anymore,” says Bayer. “There’s globalization.”

We must hope that banking safeguards will prevent a system collapse. Another major bank could fail; the risks taken by the Hypo-Alpe-Adria Bank make this very clear. Still, the central banks have been doing what they should, says Münz, namely keeping interest rates and inflation low. A 0% interest rate is still well below 2% inflation.

Although the tabloids are using the -current 5.8% unemployment to spread doom and gloom, the numbers are not so bad; higher than Germany but well below France, Italy and the 9.3% of 1933. After instability in the first half of the twentieth century, Austria enjoyed a period of growth and prosperity, culminating in its entry into the European Union in 1995, introduction of the Euro in 2002 and adoption of the Schengen Agreement in 2004, opening Austria’s borders to its EU neighbors. Now, all of this is being called into question.


Where is Austria headed?

Futurologist and mathematician John Casti paints a bleak picture: “Europe is in the process of collapsing, at least in the sense of the EU.” He has predicted seven shocks for Austria, ranging from winters with too little snow and a loss of tourism to a collapse of the German market with which Austria conducts 30% of its trade.

In fact, there is no single scandal that has undermined trust in banks and markets. The high profile corruption cases have only intensified Austrians’ long-standing mistrust of bankers. One is reminded of Bertolt Brecht’s quip: “Real criminals don’t rob banks, they found them.” The legacy of the 1920s and 1930s has left a lasting generational impact.

Is My Money Safe?

In the United States from 1946 to 1981, real interest rates were above inflation. Despite this being the opposite today, Austrians still haven’t changed. “Most Austrians spend what they earn,” insists Rainer Münz.

And they do not like stocks, which are, of course, coupled with risk. “Inflation does not disturb the saver,” he continues. “There just isn’t any interest.”

The present disarray in the markets reflects shifts in society as a whole. As new structures come, the ability of financial institutions, companies, and workers to adapt will be tested. How they deal with change will predict the outcome of these unstable years.

Of course, extreme events are not necessarily bad.  John Casti, citing economist Joseph Schumpeter’s idea of creative destruction, says “Success always begins with failure.”

In real terms, the current depression has been mitigated by Austria’s effective net of social safety programs, ranging from insurance on bank deposits to nearly universal healthcare, generous unemployment benefits, and mandated minimum welfare. Still, says Münz, “I don’t know how things are going to turn out.” Nor does Kurt Bayer. ”It is all very short-term oriented, and this creates the lack of confidence you see in the population.”

More broadly, the system does not inspire trust. The 2008 financial crisis has not led to any significant restructuring of the European banking sector. Even worse, says Bayer, “it has been propped up by taxpayers.”

Much has changed since the 1920s and 1930s or even the post-1945 period. Financial markets are a lot better regulated, and despite scandals and corruption, there is no buying of stocks on margin or a reliance on the gold standard. That said, both Austria and Germany are bringing their gold back from abroad. By the year 2020, the Austrian National Bank wants half of its 280 tons of gold reserves held in Austria, in the National Bank itself and at the Austrian Mint. The other 50 percent will be split between London (30 percent) and Zurich (20 percent). There may be trust in the markets; there is more in bringing Austrian gold home.

Still, present market volatility may not be as bad as it seems to the casual observer:

“I hate to defend the Austrian system,” admits Bayer, “but it’s still a very successful society.”